Report Published: "Bosnia-Herzegovina Country Risk Report Q3 2016"

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 with the country's imminent EU membership application, we expect the country to muddle through in the coming years, with frustrating delays to badly-needed reforms.

Partisan manoeuvring, ethnic divisions, and complex governing structure combine to make Bosnia-Herzegovina's political system largely dysfunctional. With few signs that radical improvements are forthcoming even with the imminent EU membership application, 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, while increased global risks also pose a threat to the recovery.

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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 FDI inflows, which are needed to cover the relatively wide current account shortfall.

Major Forecast Changes

We have lowered our short-term forecast for real GDP growth in 2016 to 2.6%, from a previous 2.8%, due to global headwinds and the impact of the EU removing preferential trade tariffs for Bosnia's agricultural goods.

We have adjusted our forecast for the current account deficit in 2016 to 5.6%, from a previous 7.1%, due to the impact of lower commodity prices on the import bill, an improving outlook in some of Bosnia's major export markets, and growing revenues from tourism.

Sustained weakness in oil prices ensured another full year of deflation in 2015, and looks set to continue in the coming months. As such we have revised down our average inflation forecast for 2016 to 0.3%, from a previous 1.0%. Similarly we have revised down our inflations forecasts over the medium-term.

Key Risks

Bosnia's political environment could become even more unstable if the Republika Srpska (RS) entity pushes forward with attempts to secure de facto judiciary independence via a national referendum. In this scenario we would expect greater intervention from the OHR and the international community to prevent a breakup of the sovereign state.

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