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Moody's issues annual sovereign report on Bosnia and Herzegovina

January 07, 2010 | Moody's Investors Service

London, 07 January 2010 -- Bosnia and Herzegovina's (BiH) B2 government bond ratings are based on the country's low economic and institutional strength, medium level of government financial strength and high susceptibility to event risk, says Moody's Investors Service in its new sovereign credit report on BiH.


Moody's assesses BiH's economic strength as low due to the country's low wealth and the small and undiversified economy. Although the economy has managed to muddle through the global crisis with a relatively modest contraction, a robust recovery is not expected in the near future. "Moody's expects economic growth to slow from the buoyant rates experienced in 2002-08 as export demand from the major European economies is expected to be rather modest, while slower credit growth will hinder consumption and new investment," says Kenneth Orchard, a Vice President-Senior Credit Officer in Moody's Sovereign Risk Group.


BiH's institutions are weak by both global and regional standards. Institutional effectiveness suffers from a complex governmental structure and a lack of cooperation amongst the various levels of government, across entities and between political parties. "Furthermore, Moody's expects the campaign for the state- and entity-level elections (scheduled for October 2010) will hamper any improvements in governance in the short term," says Mr. Orchard. "Although failure to improve the governance structure and cooperation should not prevent gradual progress towards stronger institutions, the pace of progress is likely to be slower and more uneven than in other countries in the region."


Moody's assesses the quantum of government debt as moderate; it is mostly owed to official creditors at low interest rates. Fiscal adjustment capacity is limited by rigidities in expenditures and the large informal sector. A steep decline in government revenues and limited budgetary adjustment capacity forced the government to engage assistance from the IMF in Q2 2009, whereby the government received EUR1.5 billion of financing over three years in return to agreeing to a tough fiscal consolidation programme. However, the 2010 elections are expected to complicate the fiscal consolidation process because politically-sensitive social transfers to important political constituencies are a key focus for spending reductions.


Moody's expects political tensions to remain problematic in the short term and they will likely worsen during the 2010 election campaign. Although not Moody's central scenario, a severe deterioration in ethnic relations could eventually cause a rift that would temporarily affect the revenues used by the national-level government to make its debt service payments.


The stable outlook on the ratings balances the weak economic prospects and ongoing political tensions against modest debt servicing pressure and financial support from the IMF and EU. Furthermore, Moody's believes the authorities will be able to manage the fiscal impact of the global economic crisis so as to avoid a large and sustained increase in government debt.


The issuance of this credit report by Moody's Investors Service is an annual update to the markets and is not a formal action to alter the credit rating of the issuer.

Company: Bosnia and Herzegovina

Full company nameBosnia and Herzegovina
Country of riskBosnia and Herzegovina
Country of registrationBosnia and Herzegovina

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