MOODY'S Confirms BiH's Credit Rating, Predicts 5.5% GDP Decline

SARAJEVO, (Patria) - International rating agency Moody's Investor Service has confirmed the credit rating of Bosnia and Herzegovina, rated "B3" with stable outlook.

In explaining the decision to confirm the rating and stable outlook, Moody's analysts cite the following key assessment factors:
- Persistent structural challenges continue to affect medium-term growth prospects in Bosnia and Herzegovina, limiting the country's economic strength;
- Moderate debt levels and fiscal restraint in recent years provide fiscal space to respond to economic shocks such as the coronavirus pandemic;

Weak institutions, partly reflecting the complex governance system and political division, continue to hinder effective policy-making.

Moody's analysts expect the economy to be significantly impacted this year by the coronavirus pandemic due to containment measures, trade decline, and reduced remittances.
The impact is also present in tourism. The agency's report states that Bosnia and Herzegovina is projected to experience a 5.5% decline in real GDP this year, after recording a 2.9% growth in 2019, and that real GDP growth will be 3.5% in 2021.

Analysts further state that Bosnia and Herzegovina has maintained a cautious fiscal stance in recent years, recording a smaller budget surplus since 2016, which is mainly reflected in sustainable growth of indirect taxes, but also in expenditure restraint. Moody's expects Bosnia and Herzegovina to record a fiscal deficit of 4.6% of GDP this year, compared to a surplus of 2.2% recorded in 2019. The deterioration reflects the impact of economic contractions on the revenue side and the fiscal measures adopted by the authorities to mitigate the effects of the coronavirus on expenditures.

The third factor influencing the confirmation of Bosnia and Herzegovina's credit rating is based on institutional constraints. The complex governance system and political division hinder effective decision-making. At the same time, according to Moody's, the currency board arrangement provides an effective anchor for macroeconomic stability and enjoys a high level of credibility. Moody's expects Bosnia and Herzegovina to remain committed and consistent in implementing the currency board, as any interventions regarding the currency board would undermine this arrangement and potentially jeopardize future assistance from the International Monetary Fund (IMF).

The stable outlook for Bosnia and Herzegovina's credit rating reflects Moody's analysts' expectations that the country's credit rating will remain unchanged in the next 12 to 18 months, despite the expected economic and fiscal deterioration due to the coronavirus pandemic. Moody's expects liquidity and external risks to be largely mitigated by the support of international financial institutions, especially the IMF and the European Union (EU).

According to analysts, the credit rating could be increased if reforms are implemented that strengthen the country's governance and address long-standing structural economic challenges that increase medium-term growth prospects. Continued cooperation with the IMF and the EU would also contribute to this. On the other hand, analysts warn that the credit rating could be downgraded in case of fiscal deterioration, increased liquidity risks, as well as in case of stagnation or deviation from the reform agenda, including Bosnia and Herzegovina's strong integration into the EU.