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Bosnia-Herzegovina Business Forecast Report Q2 2011
Business Monitor International, March 2011, Pages: 36
Power-Sharing Agreement Remains Elusive
Bosnia’s economy is recovering, aided by an improvement in external demand, with a stronger bounce in growth expected in 2011. Going forward, keeping the IMF on board and tackling fiscal reforms will be key to anchoring investor confidence and paving the way for future growth. In the meantime, risks to the recovery will remain, chiefly the potential for a slowdown in the European recovery which would dent demand for exports. We also flag the emergence of imported inflationary pressures across Europe stemming from the unrelenting rally in global food and energy prices. For the time being, inflation remains fairly palatable in Bosnia. However, a further surge in commodity prices could see household purchasing power deteriorate further and pose a significant risk to the recovery.
The formation of a new government will remain the hot topic in 2011. So far, only the Republika Srpska has cobbled together a cabinet, with the Muslim-Croat Federation and central administration yet to install new governments. Even when a new power-sharing agreement is reached, we warn that political reforms will remain piecemeal given that the presidential and parliamentary elections left the political landscape still divided along ethnic lines. The highly fractious nature of Bosnian politics will remain a major hurdle for reform and economic growth over the longer term. Indeed, disparate political interests and ethnic divisions continue to hold back institutional development, which is key to unlocking greater economic and political convergence gains.
Bosnia’s current account deficit has fallen sharply since the nosebleed levels seen during the last cycle. However, we believe that the adjustment has largely run its course, with a more palatable shortfall likely to persist over the medium term, underpinned by import demand to support the development of domestic productive capacity. However, we stress that foreign financing will be key, with the ongoing political deadlock following the October 2010 election providing some cause for concern in the short term.
Mirroring developments in the broader economy, Bosnia’s banking sector should post a more solid rate of growth this year, following fairly anaemic activity in 2010. Robust rates of capitalisation and a return of depositor inflows has bolstered systemic stability and will pave the way for future industry expansion. Moreover, we stress that while the ongoing political stalemate could dent investor confidence towards the economy, the impact on banking stability is likely to be limited.
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