CCI Report: Heavy Debt Burden in Budgets and Very Poor Credit Rating of BiH

SARAJEVO, (Patria) - The Centers for Civil Initiatives (CCI) recently published the "State of the Nation" report, which monitors the implementation and effects of reforms in Bosnia and Herzegovina. This report provides a comprehensive overview of information on the formal implementation of measures from the Reform Agenda, and the measurement of effects in various areas such as public finance, business climate, labor market, rule of law, social policy, etc.

One of the areas of analysis is the debt burden in budgets, as well as the credit rating of BiH.

CCI states in these reports that Bosnia and Herzegovina has contracts for the preparation and monitoring of its credit rating with two international agencies: Moody's Investors Service and Standard & Poor's. The Central Bank of BiH coordinates the preparation and monitoring of BiH's credit rating, and the first assessment was conducted in 2004 by Moody's.

Chart 1: BiH Credit Rating 

A country's credit rating can be simply explained as an assessment of a country's government's ability and willingness to service its debt, both on time and in full. Usually, letter grades are given for a country's creditworthiness. The closer the letters are to the beginning of the alphabet, the better the rating. In addition, plus (+) and minus (-) signs are added to the ratings, indicating a country's tendency towards a better rating (+) or a worse one (-), or no designation, which means the country is stable in a particular category.

At the beginning of September 2017, Standard & Poor's confirmed Bosnia and Herzegovina's credit rating with a B rating and a stable outlook. This rating falls into the category of countries with speculative and very speculative credit ratings. CCI explains that "numerically, on a scale of 21 positions, this rating is at the 15th place, which is in the lower third of the scale."

"When we look at the 131 analyzed countries that have been assigned a rating, only 18 countries in the world are ranked worse than BiH. Some of the countries with the same credit rating as BiH are: Ethiopia, Rwanda, Uganda, Burkina Faso. For comparison, Senegal, Kenya, and Papua New Guinea, which have a B+ rating, have a better credit rating than BiH. Some countries in the region (Albania and Montenegro) are in the same group, while Slovenia has an A+ rating, which means it is 9 levels above BiH. Chart 1 shows BiH's position relative to other countries," state CCI.

A credit rating, in addition to assessing a country's government's ability and willingness to service its debt, is accepted as one of the relevant criteria when assessing the risk for investments in a particular country. "The current level of indebtedness in BiH represents a serious threat to the country's economic stability, but also significantly affects the credit rating assessment. The excessive debt burden in the budgets of the entities, along with new borrowing solely to repay previous debts, has trapped the budgets and prevented governments from playing a significant role in economic growth. A consequence of the above is also a poor credit rating, which prevents our country from accessing financial capital markets under acceptable conditions, i.e., at interest rates lower than economic growth."

Chart 2: Debt servicing burden in the budget of the Federation of BiH 

"Charts 2 and 3 show the enormous burden of debt servicing in the budget revenues of the entity governments, with an upward trend, instead of a decrease, which was one of the priorities of the Reform Agenda. Also, the share of 58% and 65% of debt in the budget revenues of the Federation of BiH for 2016 and 2017, which is an extreme continuation of the trend from previous years, has practically trapped the budget and minimized the chances for real stabilization of public finances. On the other hand, the situation in RS is slightly better, where the percentage share of the debt burden was 44% in 2016, and it shows a slight improvement of 2% in 2017," the "State of the Nation" report states.

Chart 3: Debt servicing burden in the budget of RS 

CCI further states that the 31% (y/y) increase in external debt servicing obligations in the first half of 2017 burdened the budgets to such an extent that the contribution of public spending and investments to economic growth was negligible. Namely, budget inflows from the single account of the Indirect Taxation Authority, after settling external debt obligations, were slightly (0.6%) lower in the first half of the year compared to the same period last year, which left no room for improving the budget picture in BiH, according to the report of that non-governmental organization, reports Patria agency.