Exit of Great Britain from the EU Does Not Jeopardise Financial Stability of BH

Exit of Great Britain from the European Union does not have currently any immediate effect on the financial stability of Bosnia and Herzegovina, primarily on the stability of the banking sector. The stability of the Currency Board as the model of monetary policy in Bosnia and Herzegovina was never questioned and the Central Bank of Bosnia and Herzegovina (CBBH) continues its implementation. 

Publishing of the referendum results in Great Britain, where, contrary to the prevailing expectations, the citizens of that country voted the exit from the European Union, caused a shock to the financial markets. There was a sharp decline in market values of equity indexes in the financial markets worldwide, the fall in bond yields (rise in bond prices), the rise in price of gold and the depreciation of the British pound and Euro against major world currencies. In fact, as it is usually the case in times of great uncertainty and turbulence, there is flight to quality - investors are expressing an aversion to the increased risk and there is an increased demand for safe assets, such as the best quality government bonds, gold and safe world currencies. Great Britain’s voting the exit from the European Union also brought a great political uncertainty in Europe, which potentially can have further negative effects on the financial markets. 

From a macroeconomic point of view, Bosnia and Herzegovina could suffer some negative effects arising from Brexit to the extent that all the a.m. turbulences lead to a slowdown of the economic growth in the euro area. Having in mind that the Great Britain cannot be categorized as major trade partners of our country, it is not expected to have here more significant direct negative impacts arising from the fall in economic activity in it. 

Given the fact that the foreign exchange market recorded depreciation of euro, especially, against dollar, while keeping in mind the fixed ratio of the domestic currency against euro in the Currency Board arrangement, these trends may affect the depreciation of the nominal, and the real effective exchange rate of the convertible mark, which, in terms of domestic economy competitiveness in the world market is a positive fact, by itself. 

Except in an extreme scenario, we do not expect to have significant outside pressure on rise of inflation in the country, considering still strong influence of low food and energy supplies prices and the low level of inflation in the euro area. Moreover, the strengthening of the dollar contributes to the reduction in the naphtha prices, which to a certain extent, has even happen after the publication of news on Brexit. 

To summarize, at this moment, we do not expect stronger direct effects on economic and financial developments in Bosnia and Herzegovina. To the extent that political uncertainty and European financial markets uncertainty are reflected in the slowdown of economic growth in the euro area, this development may have certain negative effects on economic developments in the country. The current political uncertainty in Europe and instabilities in financial markets, with the potentials to have a negative macro-economic effects on the European/global economy, do not contribute to the environment for acceleration of economic growth in the country.