Capital Markets: Synopsis of the Current Economic Situation in BiH

Naturally, as already described, the current financial and economic crisis could not bypass BiH. Industrial production fell considerably, as did budget revenues, while the budget deficit and interest rates rose and the volume of trade and the value of indices on the BiH stock exchanges declined. The crisis did not have the same impact on the FBiH and the RS, mainly due to tardy preparation and reaction to it. As a result, by the end of 2008, the volume of industrial production in the FBiH was up 7.9% on the end of 2007.

In the RS, the volume of industrial production was 92.7% higher in the fourth quarter of 2008 than in the third one. Moreover, the volume of industrial production was 55.1% higher in December 2008 than in the previous month and 99.6% greater up on December 2007. In 2008, the RS saw the volume of industrial production grow some 16.8% on 2007.

Table 1: Major Economic Indicators for BiH: 2001-2008. (in % GDP, if otherwise not stated)

Source: Bulletin 2. 2009. CBBH, p. 16.

The table shows the continued growth of nominal GDP, which reached 24.7 billion KM. The rate of real GDP growth has varied, but the 6% average rate over the past three years is certainly remarkable.

The annual rate of growth of the Consumer Price Index (CPI) is also remarkable, in that it averaged 7.4% in 2008. This hike in prices was due to the extraordinary rise in energy and food prices on world markets in the first months of 2008. At the end of 2008, annual inflation amounted to 3.8%, significantly lower that the annual inflation rate in July (9.9%), which was mostly due to higher oil and food prices in the first three quarters.

The table also shows considerable growth in central government budget revenues and spending, as well as in loans to the non-government sector. Taken together, these indicators strongly suggest that BiH has seen positive economic growth in recent years.

At the end of 2008, the national annual net wage stood at 785 KM, 16% up on the same period the year before. Net wages were highest in the financial mediation industry, averaging 1,269 KM or 484 KM (61.7%) more than the national average net wage.

BiH's external debt is duly serviced. It amounts to 4.19 billion KM or 16.9% of GDP. Last year, the current account deficit was 3.6 billion KM, or 14.6% GDP, mostly due to the high foreign trade deficit, which was itself just less than ten billion KM. Another economic problem is the unemployment rate, which was 23.4% (measured by international standards). In 2008, foreign investment of 1.3 billion KM was also registered.

Over the past year, the trend for credit growth continued, but slowing down towards the end of the year, when total loans amounted to 14.5 billion KM, some 21.7% higher than at the end of 2007. Manufacturing enterprises registered credit growth of 27.7%, while personal lending increased 17.8%.

As the state agent with responsibility for transactions assigning the credit rating, the CBBH mediated between two international credit rating agencies and state institutions on assigning credit ratings to Bosnia and Herzegovina. Moody's Investor Service reconfirmed BiH's credit rating of B2 with stable prospects, while Standard & Poor assigned a B+ credit rating with stable prospects, one level better than Moody's.

The BiH financial system is neither sufficiently developed nor sufficiently diversified. According to some studies (GfK, 27.02.2006), only 9.5% of BiH citizens save with banks. A further 21.5% keep money at home, withdrawing it from financial flows. In June 2008, some 15,185 people worked in the BiH financial system, which is 2% of the total number of employed people. Out of this number, almost 11,000 persons were employed at banks.

The BiH banking sector consists of 31 banks, 21 in the FBiH, 10 in RS. Twenty are foreign or mostly foreign owned, eight are privately owned local banks, and three are state owned. Commercial banks have an approximately 16% capitalization ratio, which is significantly higher than in other European countries (ca. 12%).

Between 2008 and 2013, banking will indubitably maintain its leading position in the BiH financial sector and economic development. Capital markets can offer enterprises and other economic actors an alternative for financing and investment, however. Economic development and financial deepening will go hand in hand with greater financial flows through the capital markets. This may be significantly aided by a definite solution regarding the financial "package" - restructuring, better corporate management, a better institutional framework, and better regulatory supervision, on the one hand, and convergence-led development (i.e. oriented towards economic accession to EU), as well as by the entry of foreign investors.