Better Credit Rating to BH

Standard & Poor's Rating Services today, on December 22, 2008, assigned 'B+' credit rating with stabile outlook to Bosnia and Herzegovina.

"This improved credit rating represents an encouraging factor, but it is necessary to work further on institutional and economic reforms, with maintenance of monetary stability", said the Governor of the Central Bank of Bosnia and Herzegovina Kemal Kozarić. 

In accordance with the Decision of the BH Council of Ministers on assignment of credit rating from another credit agency, the BH Ministry of Finance and Treasury signed in September this year, the Agreement with Standard & Poor's, and the Central Bank of Bosnia and Herzegovina (CBBH), as a fiscal agent, has coordinated and led the process of getting of the rating of BH.

The rating is supported by the economy's robust long-term growth potential as well as an institutional set - up that explicitly prioritizes external debt services payments and monetary stability based on a currency board arrangement. Also, the analysts say that prospects for further EU integration are a supporting ratings factor.

At the same time, the ratings on BH are constrained by the country's complex political system, with weak central government institutions resulting in political stalemates, a cumbersome fiscal management framework, a large administration and persistent and until recently, increasing current account deficits.

Important decisions, including over the budget, need to be taken unanimously by the entities and the state administration, which inhibits flexibility of decision - making. The complex institutional environment is mirrored in a large share of government spending to GDP at almost 50% of GDP in 2008 due to numerous levels of government, a high public wage bill and large social transfers.

The Standard & Poor's analysts estimate that the Republika Srpska has a better fiscal discipline than the Federation of BH. The recent creation of the National Fiscal Council is potentially positive for improving fiscal policy management.

The ongoing tightening of credit conditions and decline in external demand will lead, according to estimates of analysts, to a slowdown  in growth from past levels of 6% to about 2% in 2009. At the same time, the current account deficit should moderate to about 10% of GDP in 2009. The existing external imbalances make the economy vulnerable to shifts in credit flows at the world's market.

Monetary policy which is operated under a currency board arrangement shows as a good mechanism in financial crisis. Strict prudential requirements in place, such maturity - matching rules and minimum reserves, have strengthened the banking system's stability.

Creditworthiness could improve if Bosnia and Herzegovina makes progress on its constitutional agenda through institutional strengthening, EU integration and implementation of structural reforms combined with sound macroeconomic policies. Conversely, the ratings could come under pressure in the event of significant fiscal slippage or a weakening of external liquidity beyond current expectations.

Credit rating that Standard & Poor's assigned to Bosnia and Herzegovina is better for one level than the current rating that Moody's earlier assigned to Bosnia and Herzegovina and confirmed in September this year.   

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