MOODY'S Annual Report on BH: No Changes Of Credit Rating

Moody's Investor Service published its Annual Report on Bosnia and Herzegovina for 2009, without  the credit rating changes. In 2006, this Agency assigned to Bosnia and Herzegovina the B2 credit rating with stable outlook, which has not changed so far.  

In its Annual Report on Bosnia and Herzegovina, Moody's Investor Service reports that this rating is based on the country's low economic and institutional strength, medium level of government financial strength and high susceptibility to event risk.

Moody's assesses BH economic strength as low due to the country's low wealth and the small and undiversified economy. Besides these negative issues, BH economy has managed to muddle through the global crisis, even better than a certain number of similar countries, a robust recovery is not expected in the near future. Moody's expects economic growth to slow from the buoyant rates experienced in the period from 2002 to 2008 as export demand from the major European economies is expected to be rather modest, while slower credit growth will hinder consumption and new investment.

BH 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.

Moody's expects the campaign for the general elections scheduled for October 2010 will hamper any improvements in governance. 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 Inetranational Monetary Fund in 2009. 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.

The Bosnian banking system has been relatively stable through the global financial crisis. As part of the IMF programme, the «Vienna Initiative» was applied to BH, whereby international banks operating in the country committed to maintain sufficient capital and liquidity at their subsidiaries. This programme has been especially important for reducing pressure on the balance of payments, as commercial banks owe around two-thirds of the country's private sector external debt.

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.

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