S&P Global: Federation of BiH maintains stable credit rating, but political tensions remain a hurdle

(Patria) - S&P Global Ratings has affirmed the long-term and short-term credit ratings of 'B+/B' for the Federation of Bosnia and Herzegovina (FBiH), one of the two constituent entities of Bosnia and Herzegovina (BiH). The outlook remains stable, as announced on May 23, 2025, Reuters reported.

The economic outlook of the Federation of Bosnia and Herzegovina faces limitations due to political conflicts within the country, which hinder political cooperation and investment. Slow progress in infrastructure projects, financed from the budget and state-owned companies, suggests that the Federation's debt burden will remain moderate.

The stable outlook reflects S&P's assumption that the Federation of Bosnia and Herzegovina will gradually address its significant spending needs without a substantial increase in debt. This is due to increased revenue from wage growth and access to European Union funding for infrastructure development.

However, S&P Global Ratings could lower the long-term rating if the leadership of the Federation of Bosnia and Herzegovina pursues an aggressive financial strategy, leading to a significant accumulation of debt in the Federation or its companies. The rating could also be lowered if there are disruptions in the Federation of Bosnia and Herzegovina's access to financing sources.

An upgrade would depend on positive developments in BiH's credit quality, as the Federation of BiH is currently rated at the same level as the country. An upgrade would also require improvements in planning, project management, and control over the Federation of BiH's potential liabilities, while maintaining sufficient liquidity.

The rating of the Federation of BiH is limited by regular escalations of political tensions between the Federation and Republika Srpska, and the country's central authorities. These political complications delay the country's progress towards EU accession and reduce investor interest in projects in the Federation.

Despite these challenges, the government is gradually addressing large spending needs by increasing social security contributions following a minimum wage increase. The debt burden will remain moderate, and the Federation's debt, supported by taxes, including the debt of its companies and municipalities, is projected to remain around 70% of consolidated operating revenues.

The economy of the Federation of BiH is relatively weak compared to Eastern European countries and faces significant demographic challenges. Real GDP growth is expected to accelerate to a solid 2.8%-3.0% annually during 2025-2027, in line with the national trend. The regional economy is diversified, with trade and manufacturing being leading economic activities.

Inflation is declining and is expected to fall to near 2% from 2025 onwards.
The institutional framework of the Federation of BiH is limited by frequent political tensions that question the balance of power between different authorities. Despite the Federation's autonomy in managing fiscal policy, its budgetary priorities are not fully realized in practice due to poor project management and loose control over state-owned companies.

Operating surpluses are projected for the next three years, given the constant pressure to increase social and pension benefits, as well as transfers to municipalities and state-owned enterprises. The 60% increase in the minimum wage from the beginning of 2025 will help the Federation of BiH increase revenues and meet its spending needs. Demand for infrastructure projects, particularly in transport, will result in a limited budget deficit of around 4% of total revenues.

The Federation of BiH benefits from access to necessary financing from multilateral organizations and commercial banks. The Federation of BiH's market access will remain satisfactory, unlike the currently limited access of its national competitor, Republika Srpska.

The internal liquidity of the Federation of BiH and access to domestic short-term financing should be sufficient to cover about 50% of annual debt servicing. The Federation of BiH maintains a cash reserve of at least 30 days of operating expenses and prioritizes debt servicing payments.