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Bosnia-Herzegovina Country Risk Report Q1 2016

Bosnia-Herzegovina Country Risk Report Q1 2016

Core Views

Partisan manoeuvring, ethnic divisions, and complex governing structures combine to make Bosnia-Herzegovina's political system largely dysfunctional. With few signs that radical improvements are forthcoming in even after last year's elections, we expect the country to muddle through in the coming years, with frustrating delays to badly-needed reforms.

The economic recovery is set to accelerate in 2016 and beyond, driven largely by household consumption and to a lesser extent fixed investment. Chronic unemployment and an under-developed infrastructure will remain impediments to even faster growth. Budget policy will continue to be guided by the IMF due to the government's reliance on external funding to cover its budget deficits.

This should ensure fiscal discipline, though has so far done little to address structural problems.

Political risks and business environment deficiencies will continue to weigh on foreign direct investment inflows, which are needed to cover the relatively wide current account shortfall.

Major Forecast Changes

We have adjusted our forecast for the current account deficit in 2015 to 7.3%, from a previous 8.1%, due to the impact of lower commodity prices on the import bill and an improving outlook in some of Bosnia's major export markets.

Sustained weakness in oil prices has kept inflation low for much of 2015, as such we have revised down our average inflation forecast for 2015 to -0.2%. Similarly, we have revised down our average inflation forecast for 2016 to 1.5% from 1.8% previously.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Political Infighting Will Continue To Undermine Reform Agenda
The political climate in Bosnia-Herzegovina will remain highly unstable as party disputes hamper efforts at reform in the two entities, and
st ate-level institutions continue to be undermined by ethnic tensions and separatist movements.
TABLE: POLITICAL OVERVIEW
Long-Term Political Outlook
Unity Will Prove Elusive Over Next Decade
Tensions between ethnic groups will continue to undermine Bosnia's EU accession prospects, development potential and risk profile
through the next decade, with a number of issues having the potential to result in a further deterioration in the political situation.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Growth To Gather Pace In 2016 And Beyond
We expect economic growth in Bosnia-Herzegovina to accelerate to 2.8% in 2016 and 3.2% in 2017 as consumer confidence recovers
and the improved regional outlook supports export growth.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
External Trade And Investment Outlook
Wide External Imbalance To Remain A Risk To Stability
Bosnia-Herzegovina's current account deficit is set to stabilise at around 7% of GDP in the coming years, leaving the country in need of
increased FDI inflows to cover the gap.
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP FIVE GOODS IMPORTS IN 2014
TABLE: TOP FIVE GOODS EXPORTS IN 2014
Fiscal Policy and Public Debt Outlook
Funding Dependency Will Anchor Fiscal Policy
The central government in Bosnia-Herzegovina will maintain fiscal discipline due mainly to its reliance on IMF and EU funds to cover
budget deficits in the country's two autonomous entities.
Structural Fiscal Position
Monetary Policy
Low-Inflation Environment To Persist In 2016
Bosnia-Herzegovina remains in deflation territory, with wage growth subdued and international fuel and food prices still comfortably
below last year's rates.
Monetary Policy Framework
Chapter 3: 10-Year Forecast
The Bosnian Economy To 2024
Political Tensions To Slow Economic Convergence
Bosnia's economic and political convergence will continue to be hampered by underlying inter-ethnic tensions in the country. Over the long term, divisions among the ethnic Serb, Croat and Bosnian political parties will continue to slow progress on a host of EU-related reforms.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: OPERATIONAL RISK INDEX
Education
TABLE: EMERGING EUROPE - EDUCATION RISK
Government Intervention
TABLE: EMERGING EUROPE - GOVERNMENT INTERVENTION
Chapter 5: BMI Global Macro Outlook
Global Outlook
Exit The Dragon
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %

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