London, 16 February 2018 -- Moody's Investors Service, ("Moody's") has
today affirmed Bosnia and Herzegovina's B3 long-term issuer ratings.
The outlook is stable.
The factors supporting today's affirmation are:
(1) Bosnia and Herzegovina's (Bosnia) resilient economic growth supports
its credit profile, although structural challenges, including
very high unemployment, weigh on economic strength;
(2) Ongoing political volatility impairs effective policy-making
and keeps susceptibility to political event risk high; and
(3) A moderate debt burden, mainly due to concessional creditors,
supports fiscal strength, although limited access to external financing
keeps Bosnia reliant on official support.
The stable outlook on Bosnia's B3 rating reflects Moody's
expectation that Bosnia will continue to meet the conditions for concessional
external financing, albeit with delays, which would provide
the needed financial and technical assistance to continue to gradually
progress the reform agenda.
However, significant reform progress will be hampered by ongoing
political disagreements which distract from a country-wide reform
focus and limit Bosnia's ability to address the notable structural
constraints needed to improve its credit profile, including material
improvements to the business environment, a strengthening of institutions
and addressing risks to debt sustainability at all levels of government.
Bosnia and Herzegovina's local-currency bond and deposit ceilings
and long-term foreign-currency bond and deposit ceilings
are unchanged at B3. The short-term foreign currency bond
and deposit ceilings are also unaffected by this rating action and remain
Not Prime (NP).
RATINGS RATIONALE
RATIONALE FOR RATING AFFIRMATION
FIRST FACTOR: BOSNIA AND HERZEGOVINA'S RESILIENT ECONOMIC GROWTH
The first factor for Moody's decision to affirm the B3 rating on Bosnia
and Herzegovina (Bosnia) is the country's resilient economic performance
despite a number of headwinds in recent years, including unfavourable
weather conditions and the country's volatile political dynamics.
Real GDP has grown by an estimated average 3.2% over the
past three years, with household consumption benefitting from remittance
inflows, an acceleration in bank lending and modest employment gains.
Furthermore, improved access to the European Union (EU) market,
through higher quotas for tariff-free exports including in the
agricultural sector, has supported double-digit goods export
growth in 2017. Similar to other Balkan countries, tourism
has been a bright spot with the number of foreign arrivals growing by
around 19% in 2017. Moody's expects real GDP growth
to continue to remain robust in the coming years (3.7% in
2018) supported by private consumption and improving regional growth prospects,
although the economy will still continue to grow below pre-crisis
rates.
However, there remain significant impediments to generating the
higher growth needed to help close the income gap with EU peers.
In particular, Bosnia's large and inefficient public sector
undermines the development of a competitive private sector. Importantly,
foreign direct investment, which remains below pre-crisis
levels, will continue to be restrained by the weak business environment,
reflected in Bosnia's scores on the World Bank Doing Business Survey
which are lower than regional peers, acting as a limit on potential
growth.
These factors partly explain the persistently high unemployment rate which
stood at 20.5% in 2017 according to the Labour Force Survey,
although local unemployment offices point to a much higher rate of around
39% as of November 2017. Employment gains, supported
by past labour reforms, have helped to reduce the very high unemployment
rate although this also reflects the substantial emigration of the working
age population, which declined by 3.3% in 2017 alone.
SECOND FACTOR: ONGOING POLITICAL VOLATILITY WEIGHS ON INSTITUTIONAL
STRENGTH
The second factor supporting the affirmation is the ongoing political
volatility which impairs the effectiveness of policy formation and implementation
in Bosnia, reflecting the complex structure of the government created
to protect the interests of the three major political groupings.
This is reflected in Bosnia's ranking in the bottom 25% among
Moody's rated universe on the Worldwide Governance Indicator for
effective functioning of the government.
Importantly, weak government effectiveness is reflected in Bosnia's
ongoing delays in complying with the requirements under International
Monetary Fund (IMF) programmes. For example, Bosnia did not
complete its 2012-2015 IMF agreement and the completion of the
first review under its follow-up Extended Fund Facility was delayed
by more than 12 months largely due to political disagreements around excise
tax rises. Moody's notes that legislative bottle-necks
hinder the necessary approvals to release funding for budget support or
investment projects. In contrast, Bosnia's currency board
arrangement, supported by significant reserve coverage of Bosnia's
monetary liabilities, enjoys a high level of confidence and credibility,
providing stability to monetary policy and support to Moody's assessment
of institutional strength.
Furthermore, Moody's expects Bosnia's weakness in policy implementation
will slow its progress on the path of EU accession, which would
provide a framework to align the country's judicial, institutional
and policy environment closer to EU norms. In this regard,
Bosnia continues to lag behind regional peers, such as Serbia (Ba3
Stable) and Montenegro (B1 Stable), which have seen faster progress
towards EU accession in light of their stronger reform momentum.
At the same time, the very challenging political landscape keeps
susceptibility to political event risk high. The crystallisation
of these political risks have had damaging consequences, for example
the substantial delay in forming a government following elections in 2010
and again in 2014, and further challenges to government formation
cannot be excluded for the upcoming election period. Moody's expects
a focus on policies to promote entity interests or challenge the legitimacy
of state level institutions will continue to foster divisive politics
and strain relations with international partners, such that domestic
political risk acts as an overall constraint on the government's rating.
THIRD FACTOR: MODERATE DEBT BURDEN SUPPORTS FISCAL STRENGTH
The third factor for Moody's decision to affirm Bosnia's B3 issuer rating
is the moderate and relatively affordable debt burden, although
government finances continue to be reliant on IMF programme disbursements.
Bosnia's general government debt to GDP ratio, at an estimated 42.5%
in 2017, remains moderate and is below the median of B-rated
peers (57% in 2017). Importantly, the debt burden
has been on a gradually declining path since 2015 and Moody's expects
that modest budgets, helped by continued wage restraint, as
well as robust economic growth will support a further debt reduction in
2018 to below 41% of GDP. However, Moody's notes
that arrears from the health sector and state-owned enterprises
pose material contingent liability risks.
Bosnia's fiscal strength also benefits from a high degree of debt
affordability compared to most sovereigns, with its interest expense
to general government revenue ratio estimated at around 2.4%
in 2017, well below the median of its B-rated peers of around
10%. This reflects Bosnia's large concessional creditor
base, which has extended funding on very favourable terms.
However, Bosnia's limited access to private external capital means
it remains reliant on external financing support from multilateral institutions
such as the IMF. Indeed, recent delays in meeting IMF conditionality
has meant entity level governments have increasingly relied on more costly
domestic debt to meet short term liquidity needs. Nevertheless,
Moody's notes that financing conditions for the entity level governments
have remained manageable in 2017, helped by strong growth in tax
revenues and alternative sources of finance. Furthermore,
domestic issuances, when needed, have continued to be comfortably
met by domestic demand.
RATIONALE FOR STABLE OUTLOOK
The stable outlook on Bosnia's B3 rating reflects Moody's
expectation that Bosnia will continue to meet the conditions for concessional
external financing, albeit with delays, which would provide
the needed financial and technical assistance to continue to gradually
progress the reform agenda. However, significant reform momentum
will be hampered by ongoing political disagreements which distract from
a country-wide reform focus and limit Bosnia's ability to
address the notable structural constraints needed to improve its credit
profile.
For example, there has been a marked slowdown in progressing the
country's reform agenda in 2017, evidenced by the delay in
completing the first IMF programme review, and Moody's expects
the prospects for further important legislative achievements, demonstrated
during the early part of the reform agenda, to remain limited.
Notably, the political discourse in 2017 has likely been impacted
by the forthcoming October elections and Moody's expects this will
continue to pose a significant risk to reform momentum in the near term.
Nevertheless, Moody's expects the authorities' commitment
to progress EU integration, reflected in the EU candidacy application
in early 2016, will continue to provide an anchor for the country's
reform direction, supported as well by the European Commission's
(EC) recent adoption of its engagement strategy for the Western Balkan
states. However, Moody's expects progress on the path
of EU accession will continue to remain halting and slow given ongoing
political challenges to central government powers. For example,
the EC's technical questionnaire, a pre-requisite for
candidacy status, which is expected to be delivered to the EC by
the end of February 2018, has progressed far slower than for other
potential EU candidacy countries.
At the same time, Moody's expects that government financing,
an ongoing credit concern, will continue to remain manageable in
2018. Notably, the financing of entity level budgets will
benefit from the build-up of savings in 2017, ongoing expenditure
constraint as well as continued strong proceeds from indirect tax revenues
due to ongoing improvements in tax collection and robust economic growth.
Moreover, recent progress in mobilising significant funding opportunities
for Bosnia provide some upside risk to Moody's medium term growth
assessment. In particular, the recent agreement to raise
excise duties on fuels could allow significant funding directed to road
infrastructure investment. For example, the €70 million
(0.4% of GDP) already committed by the European Bank for
Reconstruction and Development (Aaa stable) for supporting the Bosnian
leg of the trans-European Corridor Vc road network, helping
to improve the road links within the country and with the EU. Furthermore,
recent foreign investments in the energy sector could help to stimulate
this important export sector. However, Moody's expects
ongoing capacity constraints and the very challenging business environment
will serve to limit the potential to leverage these opportunities over
Moody's rating horizon.
On the other hand, Bosnia's credit rating faces material downside
risks from the crystallisation of high political event risks, particularly
in an election year. For example, disagreements around amendments
to the Bosnia and Herzegovina Election Law in compliance with Constitutional
Court decisions could potentially hamper the implementation of the 2018
general elections and lead to a longer than expected delay in government
formation, halting progress on the reform agenda and placing concessional
external funding at risk.
WHAT COULD CHANGE THE RATING UP/DOWN
A streamlining of the policymaking process resulting from greater internal
consensus, improving Moody's political risk assessment,
would place upward pressure on the rating. In particular,
a more stable policy making environment resulting in a stronger reform
momentum that helps to strengthen institutions and address significant
economic constraints leading to a material increase in medium term growth
prospects, would be credit positive. Furthermore, ongoing
timely compliance with the IMF agreement, helping to addresses fundamental
aspects of fiscal reforms to ensure debt sustainability at all levels
of government, would be credit positive.
A negative rating action could occur in the event the country is not able
to meet the conditions to release concessional external financing disbursements,
increasing risks to government financing and its ability to roll over
forthcoming IMF repayments. In addition, a halt in the reform
agenda, including to deepen Bosnia's integration with the EU,
would also be credit negative, which may result from a longer than
expected delay in forming a government following the forthcoming elections.
Furthermore, a marked escalation in political volatility resulting
in increased concern for the country's future as one sovereign nation,
could also lead to downward rating pressure.
GDP per capita (PPP basis, US$): 10,908 (2016
Actual) (also known as Per Capita Income)
Real GDP growth (% change): 3.2% (2016 Actual)
(also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): -0.3%
(2016 Actual)
Gen. Gov. Financial Balance/GDP: 0.4%
(2016 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -5.1% (2016 Actual)
(also known as External Balance)
External debt/GDP: [not available]
Level of economic development: Low level of economic resilience
Default history: At least one default event (on bonds and/or loans)
has been recorded since 1983.
On 13 February 2018, a rating committee was called to discuss the
rating of the Government of Bosnia and Herzegovina. The main points
raised during the discussion were: The issuer's economic fundamentals,
including its economic strength, have not materially changed.
The issuer's institutional strength/ framework, have not materially
changed. The issuer's fiscal or financial strength, including
its debt profile, has not materially changed. The issuer's
susceptibility to event risks has not materially changed.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in December 2016. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating.
For provisional ratings, this announcement provides certain regulatory
disclosures in relation to the provisional rating assigned, and
in relation to a definitive rating that may be assigned subsequent to
the final issuance of the debt, in each case where the transaction
structure and terms have not changed prior to the assignment of the definitive
rating in a manner that would have affected the rating. For further
information please see the ratings tab on the issuer/entity page for the
respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Evan Wohlmann
Vice President - Senior Analyst
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Yves Lemay
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
