Ratings On Bosnia and Herzegovina Affirmed At 'B/B'; Outlook Stable
March 28, 2013 Standard & Poor's
Standard & Poor's Ratings Services
today affirmed its 'B/B' long- and short-term foreign and local currency
sovereign credit ratings on Bosnia and Herzegovina. The outlook is stable.
The affirmation reflects our view that the IMF Stand-By Arrangement (the
program) secured by Bosnia and Herzegovina in September 2012 will be an
important policy anchor. We believe that disbursement conditionality will
continue to help stabilize what we view as fragile public finances at the
entity level (the Federation of Bosnia and Herzegovina and Republika Sprska),
while also boosting the government's ability to meet its increasing external
Under the program, the entity governments have also implemented reforms to
improve the business environment (for instance, easing the process of starting
a new business), while reforms in the pension and healthcare sectors are
ongoing. Alongside the program, Bosnia and Herzegovina is receiving funds from
the EU's Macro-Financial Assistance program. The first tranche was disbursed
in February 2013, amounting to 0.4% of GDP. We note that the strained finances
of both the entities, coinciding with economic stagnation since the global
financial crisis, have increased the government's reliance on the IMF for
The ratings continue to be constrained by the domestic political environment,
which we believe will likely remain divided along ethnic lines and entity
boundaries. Tensions exist between the entities and the state-level
institutions and, increasingly, between the combined authorities of Bosnia and
Herzegovina and the international community. In our view, periodic events--as
recent changes to the Federation and Republika Sprska governments
illustrate--undermine confidence that political cohesion is developing.
Such events also detract from important issues. For instance, progress on a
key constitutional amendment to allow minorities to be elected to higher
government positions, a prerequisite for EU candidacy, has been pending since
a 2009 ruling by the European Court for Human Rights. Similarly, a census (the
first since the 1992-1995 war) has also been delayed following disagreements
between the entity governments. While we understand these issues have moved
further up the political agenda, their implementation remains uncertain.
Broadly speaking, we believe risks to IMF program implementation and delays to
reforms may persist given the complex institutional set-up and general
elections next year.
We expect economic growth to remain low, which will further challenge reform
implementation. We anticipate that, after contracting by 0.7% in 2012, real
GDP will increase by 0.5% this year. We do not expect nominal investment to
return to its 2008 peak until 2015.
Though the banking system--with reported Tier 1 capital equal to 14.1% of
risk-weighted assets at end-2012--appears well-capitalized, nonperforming
loans have reached 13.5% of total loans and may rise further. As a result, we
expect banks (mostly owned by Austrian and Italian parents) will continue to
be cautious in extending credit.
The ratings on Bosnia and Herzegovina are also constrained by external
vulnerabilities arising from persistent current account deficits, though
financing from the IMF and other multilaterals has reduced external funding
challenges. The currency board provides stability, but limits monetary
flexibility. Roughly half of deposits are denominated in euros.
The stable outlook balances our view of the IMF program's role as a policy
anchor against implementation risks posed by the complex institutional set-up,
the general elections in 2014, and the weak external environment.
We could lower the ratings if political uncertainties weaken external
performance, further dampen economic growth, or cause deterioration in
government finances, or if the government fails to meet IMF conditions thereby
jeopardizing disbursements. If we see delays in payments to official
creditors--as happened in January 2012 amid ambiguity over the extension of
temporary financing--we could lower the ratings by more than one notch.
In our opinion, if tensions between the two entities abate, and if their
relations with state institutions improve, this would gradually enable reform
implementation independent of international conditions. We believe this would
strengthen the business environment and pave the way for more sustainable
growth and better external performance. This could lead us to consider raising
Company — Bosnia and Herzegovina
Full nameBosnia and Herzegovina
Registration countryBosnia and Herzegovina