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Bosnia-Herzegovina Country Risk Report Q2 2015

Executive Summary
Core Views
Major Forecast Changes
Key Risks To Outlook
Chapter 1: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Post-Election Troubles Highlight Entrenched Political Failings
Political risk remains elevated in Bosnia-Herzegovina, as demonstrated by delays to government formation and cross-party disputes
in the months since the October 2014 election. Our core view is that the status quo will prevail, with ethnic divisions and cumbersome
political structures undermining efforts at reform. Committing to the EU's new proposal for faster integration would be an important
milestone for this year, but the path ahead remains full of political hurdles.
TABLE: Political Over vie w
Long-Term Political Outlook
Unity To 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. That
said, we expect the international community to remain firmly committed to Bosnia, which should prevent a relapse into large-scale
armed conflict.
Chapter 2: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Activity
Showing Economic Resilience, But Downside Risks Dominate
Preliminary GDP data and high-frequency indicators suggest that the Bosnia-Herzegovina economy was not as badly affected by
massive floods in summer 2014 as initially thought. As a result, we have revised up our full-year estimate from 0.2% to 0.5%, though
hold our target for 1.6% growth in 2015 due to ongoing weakness in domestic demand, elevated political risk, and regional headwinds.
TABLE: GDP By Expenditure
Fiscal Policy
Post-Floods Fiscal Slippage Not So Severe
Bosnia-Herzegovina's short-term fiscal outlook remains highly uncertain given political roadblocks, the impact of last year's floods, and
the influence of the (currently frozen) Stand-By Arrangement with the IMF. However, early indicators suggest that tax revenues were not
as badly-affected by floods as initially thought, and we have lowered our estimate for the 2014 budget deficit to 3.5%, from a previous
4.2%.
TABLE: Fiscal Polic y
Balance Of Payments
Current Account Deficit To Peak In 2015
Bosnia's current account deficit will creep higher in 2015 (to a forecast 8.2% of GDP) as regional headwinds weigh on external demand.
FDI inflows - vital to finance part of the deficit - will increase going forward, especially if the government commits to EU-mandated
economic reforms.
TABLE: Bala nce Of Payme nts
Monetary Policy
Inflation To Return In 2015, But Remain Low
After registering annual deflation of 0.9% in 2014, we hold our target for average inflation in Bosnia-Herzegovina at 1.5% in 2015. We
expect short-term price pressures to remain subdued against a backdrop of sluggish GDP and wage growth and falling fuel costs.
Though we expect food prices to rise again, we still note downside risks to our inflation forecasts.
TABLE: Monetar y Polic y
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. That said, while we do not expect Sarajevo to obtain EU membership by 202 3, we nevertheless maintain a relatively sanguine
outlook on the country's fundamental growth prospects.
TABLE: Long-Term Macroeco nomic Forecasts
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: Operatio nal Ris k Inde x
Availability Of Labour
TABLE: Emergi ng Europe - Availabilit y Of Labour Ris k
TABLE: Labour Force Emplo yme nt By Sector ('000)
TABLE: Top Ten Source Cou ntries For Migra nt Wor kers
Crime Risk
TABLE: Emergi ng Europe - Crime Ris k
TABLE: Crime Statistics, 2010-2013
Chapter 5: BMI Global Assumptions
Global Outlook
Weaker EMs To Weigh On Growth
Table : Global Assumptio ns
Table : Developed States , Real GDP Gro wtH, %
Table : BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, %
Table : Emergi ng Mar kets , Real GDP Gro wth , %

Bosnia-Herzegovina Country Risk Report Q2 2015

Core Views

Partisan maneovring, ethnic divisions, and complex governingstructures combine to make Bosnia-Herzegovina’s political systemlargely dysfunctional. With few signs that radical improvements areforthcoming in even after last year’s elections, we expect the countryto muddle through in the coming years, with frustrating delays tobadly-needed reforms.

The economy has shown considerable resistance to the catastrophicfloods that hit the country in summer 2014, with the downturn ingrowth and public finances not as severe as initially thought.

Budget policy will continue to be guided by the government’s Stand-ByAgreement with the IMF – which we expect to be extended beyondJune 2015 – though budget execution will still be affected by politicaldisputes.

Major Forecast Changes

We have adjusted our estimate for GDP growth in 2014 to 0.5%,from a previous 0.2%, after economic activity recovered stronglyfollowing floods.

We have reduced our forecasts for budget deficit in 2014 and 2015after tax revenues surprised on the upside. We estimate a shortfallof 3.5% in 2014 and target a deficit of 3.1% in 2015 (from a previous4.2% and 4.0%, respectively).


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