Bosnia

Business and economic outlook

Quarterly update July 2016
Final analysis by Nenad Pacek

Contents

Executive summary
Important facts
Economic fundamentals
Corporate sales and profit trends
Political update
Growth trends and drivers
Currency and the current account
Inflation and interest rates
Other economic and business issues
Forecast table

Executive summary (1)

2015 was a challenging year for business in Bosnia only 54% and 43% of
multinationals had revenue and profit growth in 2015 respectively (others
predominantly stagnated)
According to our June 2016 survey, 58% and 53% of firms expect revenue
and profit growth in 2016 respectively, both largely in single digits (others
predominantly expect flat business)
Just 55% of firms expect top-line growth in 2017, while 61% expect some
profit growth
Currently, 32% of firms doing business in Bosnia have difficulty collecting
receivables, the 3rd worst result in CEE, largely in the consumer goods
(25%), industrial B2B (33%), IT (50%) and pharma/health care (50%)
sectors
Also, 32% of companies reported consumer/customer down-trading to
cheaper brands which is the 8th worst rank in CEE (5% of firms also
reported higher staff turnover)
5% of multinationals doing business in Bosnia plan on cutting sales or
marketing costs as well as cutting headcount over the next 12 months,
while 16% of surveyed companies are considering changing
partners/route-to-market in the next 12 months

Executive summary (2)

Available economic indicators for the first months of 2016 are positive, but
potential threats (i.e. political instability and fiscal pressures) to economic
growth have remained acute
GDP will likely expand by 2.5% in 2016, driven mainly by domestic (largely
private) demand and exports (dependent on demand from the EU), with a
potential improvement in investments (still questionable and dependent
on political conditions)
Low global oil prices should leave a bit more money in consumers pockets
and this should support household consumption which is expected to
expand by 2-3% in 2016
But, high unemployment and stagnant wages will keep consumer spending
below potential despite some positive expectations and continued
improvement in retail sales
The execution of large infrastructure projects (including the power sector)
should gather momentum in the future this should keep gross-fixedcapital-formation growth at 4-5% in 2016-2017, but there are serious
downside (implementation) risks
Public spending will likely be sluggish in the future as international lenders
demand austerity

Executive summary (3)

In other words, this largely means cutting/freezing public-sector hiring and

wages as well as cutting other recurrent public expenditures
Upcoming austerity will weigh on economic growth and could also provoke
social unrest
On the other side, the IMF-deal should provide some stability as well as
easier access to international financial markets
But, since Bosnia is a dysfunctional country there is always a huge
possibility for reform implementation to be delayed which could lead to
freezing the IMF deal and cuts in other international financial support and
this would push Bosnia into even deeper financial trouble
There will be no reforms in the short-term, largely since political parties are
currently focusing on local elections scheduled for October 2016
We also stick to our scenario that political instability, slow reforms, a
dysfunctional political system, difficult relations between different levels of
government and internal disputes will continue to hamper economic
growth, endanger further international financial support, and additionally
delay Bosnias EU and NATO membership
In a base case, deflation of 1.2% should be registered in 2016 (deflation
was 1% in 2015)

Important facts (1)

Population of 3.5m (according to the 2013 population census) and declining

GDP per capita (PPP) is $10,490
GDP: $14bn (but there is a sizeable unofficial economy)
The country consists of two autonomous entities: the Muslim-Croat
Federation and the Serb Republic
Economically and politically highly fragile
Politically paralysed and dependent on foreign transfers
Remittances equal 10% of GDP
Registered unemployment is around 42% (28% using the ILO measurement),
and although many people are registered as unemployed they often work in
the grey economy (and the ILO measurement captures this)
More than 50% of young people are unemployed
The grey economy in Bosnia is one of the largest in the world as a share of
GDP
Mineral products, base metals, machinery and mechanical appliances
account for 50% of the countrys exports

Important facts (2)

Other exports include textiles, furniture and agricultural products

Main trading partners are Germany, Italy, Slovenia, Austria, Croatia and Serbia
Services account for 67% of GDP, industry accounts for 25% of GDP, while
agriculture accounts for 8% of GDP
More than 50% of the total work force is employed in the services sector
FDI is very limited, partly due to excessive bureaucracy and a segmented market
Progress on EU accession remains slow: a Stabilisation and Association
Agreement (SAA) was signed in 2008 and came into force in June 2015
Formal application for EU membership was submitted in February 2016 and the
Bosnian authorities expect Bosnia to have candidate status in 2017, but in reality
this could take much longer and will depend on domestic political reforms and
stability
Bosnias medium term growth prospects are harmed by a dysfunctional political
system, the reluctance of foreign investors to use the country as a cheap
manufacturing base and ongoing brain drain
The Dayton Agreement that ended the war is complicating the governance and
economic progress of the country as its three ethnic groups continue to oppose
working with each other

Economic fundamentals

Economic fundamentals are mixed

Public debt is estimated at 45% of GDP, relatively low by international
standards
Foreign public debt is estimated at 31% of GDP
Gross foreign debt is elevated at 62% of GDP, indicating sizeable deleveraging
needs in the private sector
Foreign exchange reserves are 4.4bn and cover six months of imports
(sufficient)
The domestic currency is pegged to the euro and the currency in circulation is
being matched by foreign exchange reserves (in the currency board system)
The current-account deficit is high, indicating that the pegged currency is
significantly overvalued (and has been for a long time)
Bosnia needs the IMF to help fund its large current-account deficit as well as
the budget deficit, but any deals with the IMF (the most recent deal was agreed
in May 2016) require strict reforms whose implementation is quite tough

Corporate sales and profit trends for

2015-17

2015 was a challenging year for business in Bosnia only 54% and 43% of
multinationals had revenue and profit growth in 2015 respectively (others
predominantly stagnated)
Around 5% of multinationals had declining revenues/profits
According to our June 2016 survey, 58% and 53% of firms expect revenue and
profit growth in 2016 respectively, both largely in single digits (others
predominantly expect flat business)
Just 55% of firms expect top-line growth in 2017, while 61% expect some profit
growth
Currently, 32% of firms doing business in Bosnia have difficulty collecting
receivables, the 3rd worst result in CEE, largely in the consumer goods (25%),
industrial B2B (33%), IT (50%) and pharma/health care (50%) sectors
Also, 32% of companies reported consumer/customer down-trading to cheaper
brands which is the 8th worst rank in CEE (5% of firms also reported higher staff
turnover)
5% of multinationals doing business in Bosnia plan on cutting sales or marketing
costs as well as cutting headcount over the next 12 months, while 16% of
surveyed companies are considering changing partners/route-to-market in the
next 12 months

Corporate sales and profit trends

as expected in December 2015 and June 2016

Corporate sales and profit trends, by

sector (1)

In 2015, all consumer goods firms had revenue and profit growth, largely in single
digits
In both 2016 and 2017, 75% and 67% of consumer goods firms expect single-digit
revenue and profit growth respectively (others expect declining business)
Half of food/beverage firms had revenue and profit growth in 2015 (in single
digits), while 25% had declining revenues and profits (25% stagnated in
revenues/profits)
In 2016, all food/beverage firms expect flat profits
All surveyed food/beverage firms expect flat revenues/profits in 2017
In 2015, 60% of industrial B2B firms had top-line growth, while all firms had flat
profits
In 2016, 83% of industrial B2B firms expect top-line growth, while 50% of firms
expect profit growth, both only in single digits (the rest expect flat business)
40% and 60% of industrial B2B firms expect low-single-digit revenue and profit
growth in 2017 respectively (others expect flat business)
2015 was a poor year for business in the pharma/health care sector
Only 25% of pharma/health care firms had revenue and profit growth in 2015 (in
single digits)
Others (75%) had flat business

Corporate sales and profit trends, by

sector (2)

In 2016, 50% and 60% of pharma/health care firms expect an increase

in revenues and profits respectively, while others expect flat business
60% of surveyed pharma/health care firms expect top-line growth in 2017
But, 80% of firms expect profit growth (in single digits)
In 2015, half of IT firms grew their revenues, while half had flat revenues
In 2016, half of IT firms expect low-single-digit top-line growth (half expect
flat revenues)
But all IT firms expect low-single-digit profit growth this year (and in 2017)

Corporate sales and profit trends in

2015
based on December 2015 survey

Corporate sales and profit

expectations for 2016
based on June 2016 survey

Corporate sales and profit

expectations for 2017
based on June 2016 survey

Political update (1)

Following the October 2014 election, the central cabinet was formed in March
2015
The central coalition-government includes parties from all three major ethnic
groups whose cooperation is based on some general principles rather than on
clear and specific future policies therefore, it will be quite difficult to balance
demands from all included parties and the stability of the new cabinet remains
highly questionable
In addition to that, both entity governments are quite fragile and unstable as well
For the first time in a decade, the party (SNSD) of the Bosnian Serb leader Milorad
Dodik which holds power on an entity level has been excluded from participating
in the state executive, but a block of smaller (opposing) Bosnian Serb parties is
part of the new cabinet
We expect that the exclusion of SNSD from the central cabinet will keep the risk
of political instability acute and that SNSD and its leader Milorad Dodik will persist
in trying to destabilize central state institutions
Also, Milorad Dodik will likely continue to threaten with a referendum questioning
central judicial institutions and implementation of their decisions in the Serb
Republic
This referendum was initially scheduled for November 2015, but it was postponed

Political update (2)

Some officials also said that the planned referendum is unconstitutional and
that it largely violates the Dayton Agreement which stopped the war in
Bosnia in the 1990s
The referendum issue has also deeply concerned some EU officials
In May 2016, mass street protests (incl. supporters of Milorad Dodik on one
side and anti-Dodik protesters protesting against corruption and general
economic weakness on the other) took place in Banja Luka, the capital of the
Serb Republic
We stick to our scenario that political instability, slow reforms, a dysfunctional
political system, difficult relations between different levels of government and
internal disputes will continue to hamper economic growth, endanger further
international financial support, and additionally delay Bosnias EU and NATO
membership
The good news is that Bosnia submitted a formal application for EU
membership in February 2016, but it will still take many years (and reforms)
for the country to become an EU member state
There will be no real reforms in the short-term, largely since political parties
are currently focusing on local elections scheduled for October 2016 (in the
mid- to long term, reform implementation will be tough and slow)

Growth trends and drivers (1)

GDP growth decelerated to a preliminary 1.1% in 2014 (production approach CSO data)
from a revised 2.4% growth in 2013, lowered by the impact of floods which affected over
1m people and up to 25% of the land surface area inducing a significant slowdown in
economic activity
The latest GDP data (expenditure approach CSO data) suggest that GDP growth
decelerated to a preliminary 0.3% in 2014 from 1.7% growth in 2013
Whatever the correct number might be, economic activity certainly deteriorated in 2014
But growth rebounded in 2015 as the economy recovered from the 2014 floods
In 2015, GDP expanded by a preliminary 3.2% (production approach), largely driven by
retail trade (+6%), manufacturing (+5%), construction (+2%) and agriculture (+8%)
Available economic indicators for the first months of 2016 are positive, but potential
threats (i.e. political instabilities and fiscal pressures) to economic growth have
remained acute
In Jan-May 2016, industrial production rose by 4.1% yoy due to growth in the mining
(+5.5% yoy) and manufacturing (+6.3% yoy) sectors, while utilities (-2.2% yoy) declined
Over the same period, exports rose by 1.6% yoy, while imports declined by 1.2% yoy
The trade gap shrank by around 4.9% yoy
The retail trade index grew by a solid 7.4% yoy in Jan-Apr 2016 good for B2C firms

Growth trends and drivers (2)

Growing industrial production and exports are a good sign and this trend, if maintained,
should also help future employment and consumer spending to some degree
Also, tourist arrivals are still growing (+10 yoy in Jan-Apr 2016; also up by 22% in 2015)
Given generally rising insecurity due to global terrorist threats (allegedly, there are
Bosnians who have joined IS in Syria; it is assumed that there are also sleeper cells in
Bosnia, while there have been some recent arrests in Bosnia) tourism might suffer in
the future
GDP will likely expand by 2.5% in 2016, driven mainly by domestic (largely private)
demand and exports (dependent on demand from the EU), with a potential
improvement in investments (still questionable and dependent on political conditions)
Low global oil prices should leave a bit more money in consumers pockets and this
should support household consumption which is expected to expand by 2-3% in 2016
However, the adopted labour law (as demanded by the IMF see later) might
negatively affect short-term household consumption as consumers delay purchases due
to uncertainty, but in the mid to long term, labour reforms could attract more FDI and
increase competitiveness
Also, high unemployment and stagnant wages will keep consumer spending below
potential despite some positive expectations and continued improvement in retail sales

Growth trends and drivers (3)

In Jan-May 2016, around 75% of export revenues came from the EU, while the overall
economic situation in the EU remains critical for Bosnias exports and remittances
The execution of large infrastructure projects (including in the power sector) should
gather momentum in the future this should keep gross-fixed-capital-formation growth
at 4-5% in 2016-2017, but there are serious downside (implementation) risks
The Muslim-Croat Federation recently adopted a 2016-2018 public investment
programme
The programme includes 74 projects worth 7.3bn, but financing could be questionable
Difficult receivables collection and relatively sluggish local demand will remain
operational headaches for many multinationals in Bosnia during the next couple of years
Mid-term growth should average 2-3%, but risks are on the downside, particularly due to
the dysfunctional political system, fiscal consolidation as requested by international
lenders and strong dependence on international financial support (which could easily be
delayed)
Additional austerity, which is expected in the future, might also lead to labour unrest
the recently agreed-IMF deal should provide some additional stability, but it will also
lead to fiscal austerity and this will impact economic and business growth
If political stability increases and the EU and SEE outlooks additionally improve, more
support for growth should come from remittances and exports

Currency and the current account

As a direct consequence of the devastating floods in 2014 (damaged

infrastructure, interruption of supply chains, lower production of exporting firms,
rising imports, sluggish exports and a deteriorating trade gap), the currentaccount deficit is estimated to have widened to a preliminary 7.5% of GDP in
2014 (it was 5.3% of GDP in 2013)
In 2015, the current account is estimated to have narrowed to 5.6% of GDP
(preliminary and subject to revision), but it was only partly covered by FDI which
fell 44%
We expect that the current account gap will remain on a similar level in 2016, but
it should start widening in 2017-2018 when oil prices are expected to recover
The currency board is likely to be maintained at the fixed rate of 1.96 Bosnian
marka for one euro letting the overvalued currency depreciate in line with its
fundamentals would be devastating over 70% of all loans are denominated in
foreign currencies
The large current-account gap shows that the pegged currency is overvalued (it
has been for a long time), but we are unlikely to see the authorities abandoning
the currency peg the strong currency is hurting exporters
Very few countries in the world run a currency board and sooner or later most
have to abandon it (in this system the domestic currency in circulation always
has to be matched by foreign exchange reserves)

Inflation and interest rates

Deflation averaged 1% in 2015 (deflation was 0.9% in 2014), mostly

due to lower transportation, clothing and food costs
Given the impact of low oil prices, overall price pressures will remain
low in 2016 as well
In Jan-May 2016, consumer prices fell by 1.4% yoy
In a base case, deflation of 1.2% should be registered in 2016
Commercial banks end-April 2016 loan portfolio increased by 2.2% yoy
Over the same period, the bank deposit portfolio rose by 8.2% yoy
The fact that deposits are rising faster than loans is not encouraging for
economic growth
Total bank credit should grow by around 2-3% yoy in 2016
The ratio of non-performing loans at around 13.7% is quite high

Other economic and business issues

In May 2016, a 550m EEF-deal with the IMF was agreed

As usual, the IMFs strict requirements relate to fiscal consolidation, decreasing
public indebtedness, privatisation and implementing labour reforms
In other words, this largely means cutting/freezing public-sector hiring and wages as
well as cutting other recurrent public expenditures
Upcoming austerity will weigh on economic growth and could also provoke social
unrest
On the other side, the IMF-deal should provide some stability as well as easier
access to international financial markets
But, since Bosnia is a dysfunctional country there is always a huge possibility for
the reform implementation to be delayed which could lead to the freezing of the IMF
deal and cuts in other international financial support and this would push Bosnia
into even deeper financial trouble
We remind our readers that the Serb-Republic adopted a new labour law in late
2015 which was a major precondition to continuing talks with the IMF on a new loan
deal
The Muslim-Croat Federation adopted the labour law in July 2015, but due to
procedural errors the constitutional court sent it back to the parliament in February
2016 and the parliament approved a new labour law in March 2016
An 80m financing deal for the Corridor Vc project was agreed with EBRD
The World Bank will likely lend some $750m for faster reform implementation

Bosnia - forecast table, selected

indicators
2010 2011 2012
Real GDP (% change)

0.8*

Consumer prices, (%
average)

2.1

3.7

Budget balance (% GDP)

-2.4

Current account (% GDP)

-6.0

Marka/Euro (Average)

1.96 1.96

201
2014 2015 2016 2017 2018
3

0.9* -0.9* 2.4*

1.1

3.2

2.5

2.6

2.8

2.1 -0.1

-0.9

-1.0

-1.2

1.2

1.5

-1.2

-2.0 -2.2

-2.0

-2.3

-2.0

-1.8

-1.6

-9.5

-8.7 -5.3

-7.5

-5.6

-5.5

-6.5

-7.0

1.96 1.96 1.96 1.96 1.96 1.96 1.96

* Revised in July 2015, production approach, CSO data

Disclaimer, copyright, sources

2016 CEEMEA Business Group*
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Source: GSA Global Success Advisors GmbH and CEEMEA Business Group research
Basic data sources come from central banks, own intelligence network, CEEMEA Business Group corporate survey,
governments and other public sources. Interpretation, views, forecasts, business quotes and business outlooks by GSA
Global Success Advisors GmbH and CEEMEA Business Group.
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Contact: Nenad Pacek, President and Founder, GSA Global Success Advisors GmbH; Co-founder, CEEMEA Business Group
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