Credit Rating of Bosnia and Herzegovina Remains Stable

Standard & Poor's, the International Credit Rating Agency, published the first annual report on credit rating of Bosnia and Herzegovina.

In the context of global financial and economic crisis and downgrading rating trends of many governments, sustainability and stability of BH credit rating remaining at the same level, ‘B+' with stable outlook, assigned to BH on 22 December 2008, represents an encouraging and positive sign.

The report provides a thorough review of all the factors that enforce credit rating arguments. Clearly slowed down, but still on medium-term potentially strong economic growth, as well as European integrations perspective, with the priority relating to foreign debt servicing and monetary stability based on the currency board arrangement, constitute rating stability factors of BH, which, combined together, mitigate risks of global crisis market effects and impact on financial stability and public finances of BH. Risk in the financial sector of BH, although present, is of small intensity compared with the region. At the same time, in the context of significantly prudential analytical approach by rating agencies, the report provides prudent projections of economic growth and analysis relating to the serious political and economic challenges that BH is facing.

Acceleration of structural reforms would increase economic growth and export potential, and would also lead to the credit capability improvement. Considering that complex political and institutional system leads to frequent political blockades and makes decision-making process more difficult, further institutional capacity building and dialogue improvement in relation to the constitution are key issues. Although Fiscal Council establishment is regarded as positive fiscal policy mechanism, negative forecasts directly relate to the fiscal management framework, which is still fragile, and low fiscal flexibility, pressured by enormous public expenditure. Lack of fiscal discipline or weakening of external liquidity below the current forecasts, constitute the main risks for the rating of BH.

Monetary policy with the currency board arrangement has been assessed as powerful security and stabilizing mechanism in the financial crisis, and strict prudential measures, such as maturity match roles and adequate reserves, contribute to the banking system stability.

Forecast of stable rating of BH is being balanced on the potentially strong growth and improved perspectives of integration process into the EU, on one side, and risks for the economy in the light of crisis at the world credit markets, on the other side.

Upgrade of BH rating will directly correspond with the reforms dynamics and progress in the institutional capacity building and EU accession process and sound macroeconomic policies.

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