1. EXECUTIVE SUMMARY

Political outlook 

Bosnia & Herzegovina remains deeply politically divided and political life is still dominated by the main ethnic parties and their nationalist rhetoric. 

A new International Monetary Fund (IMF) deal is expected in 2021, but so far politicians have failed to agree on the letter of intent needed to initiate the procedure for the loan deal. 

Macroeconomic outlook 

Bosnia is heading for a tough year in 2021 when it will have to find a way to start recovering from the economic crisis caused by the coronavirus (COVID-19) pandemic.

The country was hit seriously by the crisis with measures by the authorities aimed at softening the impact of the pandemic being assessed as ineffective.

Budget and debt outlook 

Bosnia’s state-level government has not yet adopted the budget for 2021. 

Public debt stood at 31.4% of GDP in 2019. It is expected to rise in 2020 and 2021 and start falling in the following two years.

Real economy outlook 

The worst hit sectors of the economy in 2020 were retail, manufacturing, transportation and accommodation.

Markets outlook 

Trading volumes are tiny on Bosnia’s two bourses, the Sarajevo Stock Exchange (SASE) and the Banja Luka Stock Exchange (BLSE).

 

2. POLITICAL OUTLOOK 

Bosnia remains deeply politically divided and political life is still dominated by the main ethnic parties and their nationalist rhetoric. 

This has stymied reform efforts as well as Bosnia’s attempts to secure international funding or move closer to EU accession. 

As expected, Bosnia is struggling to even reach a consensus on a letter of intent to secure a new, much needed, agreement with the IMF. If the authorities manage to agree, a deal could be signed in the first few months of 2021.

Although Bosnia wants to start talks on EU membership, the country’s smaller entity, Republika Srpska, is freezing the process, a situation that can only change if the nationalist Alliance of Independent Social Democrats (SNSD) loses power in the entity. Thus Bosnia has not yet received EU candidate status while its neighbours Serbia and Montenegro are already looking ahead to possible accession within the next few years. 

Meanwhile, Bosnia’s Muslim-Croat Federation is yet to form a government following the 2018 general election.

Struggling with the pandemic and economic crisis on top of the usual problems of poverty, unemployment and corruption, Bosnians rejected the ruling parties in the local elections in November 2020. 

Opposition parties made a major breakthrough, winning in the two largest cities for the first time in years. A coalition of moderate parties won three of the four mayor’s offices in the capital Sarajevo, with the Bosniak Party of Democratic Action (SDA) holding on to only one. In Banja Luka the opposition Party of Democratic Progress (PDP) took the mayor’s office from President Milorad Dodik's SNSD.

The result was a significant blow to the nationalist parties in Bosnia, which have not lost an important vote for years and faced few challenges to their rule.

However, this was not enough to end years-long political tensions or bring about stalled reforms. Dodik, the Serb member of Bosnia’s tripartite presidency, and other nationalist leaders are expected to continue their divisive rhetoric. Dodik has repeatedly talked of secession and possible unification with Serbia for Republika Srpska but this is expected to remain talk rather than action.

 

3. MACROECONOMIC OUTLOOK 

Bosnia faced its worst recession in 25 years in 2020 due to the coronavirus (COVID-19) pandemic, but could bounce back in 2021. The country will rely on domestic demand to start exiting the recession in 2021.

The World Bank has projected that the country’s economy will contract by 4% in 2020, but should return to 2.8% growth in 2021, supported by sectors oriented to the domestic market.

The European Bank for Reconstruction and Development (EBRD) expects that Bosnia’s economy will contract by 5% in 2020 and expand by 3% in 2021.

The IMF was significantly more pessimistic in its economic forecast for Bosnia, setting the contraction at 6.5% in 2020 due to the coronacrisis. Although the economic growth in 2021 should be robust at 5%, it will not fully compensate for the decline in 2020. In 2022, GDP should expand by 3.5%, according to the IMF.

Bosnia’s central bank had a moderately pessimistic projection that the economy will contract by 4.6% in 2020 and grow by 2.7% in 2021. In 2022, it should speed up growth to 3%. The central bank noted that the slow recovery is due to the severity of the second wave of the coronavirus and due to the lower than expected effect of the state aid.

Private consumption is expected to contract by 5.3% in 2020 and rise by 2.7% and 2.2% in 2021 and 2022 respectively.

Government spending is seen rising by 4% in 2020. The growth should slow down to 2.8% in 2021 and to 0.7% in 2022.

Consumer prices turned to a decline in 2020, partly due to the low oil prices, and are expected to decrease by 0.8% by the end of the year, reversing the 0.7% annual inflation in 2019. Consumer prices should turn to 0.4% growth in 2021.

Bosnia's current account gap is predicted to expand to 4.4% of GDP in 2020 from 3.6% in 2019. It is expected to expand further to 6.1% of GDP in 2021.

Despite the crisis, Bosnia’s financial sector remains stable, although banks’ net profit has declined.

 

4. BUDGET AND DEBT OUTLOOK

The fiscal council of Bosnia’s state-level government adopted a framework for the 2021 budget in September 2020, setting it at BAM1.03bn (€526.6mn), giving a green light to the government to draft the budget. However, the budget has not been prepared yet. This is not a surprise as the Bosnian authorities are notorious for their huge delays in drafting budgets. The budget for 2020 was adopted at the end of July 2020.

Meanwhile, the two entities have already drafted their budget frameworks for 2021 but the Federation has not yet tabled proposals for budgets for 2021.

In the Federation, the government adopted a budget framework setting the revenue at BAM8bn, while spending is seen at BAM5.06bn.

Republika Srpska adopted its budget plan for 2021 in mid-December, setting the spending at BAM3.795bn.

Bosnia’s state-level government has analysed the sustainability of the country’s public debt, which stood at 31.4% of GDP in 2019. It is expected to rise in 2020 and 2021 and start falling in the following two years. However, the fiscal council has not provided further details.

 

5. REAL ECONOMY OUTLOOK 

The worst hit sectors of the economy in 2020 were retail, manufacturing, transportation and accommodation.

Unemployment — already among the highest in Europe — has moved up sharply due to the coronacrisis and is unlikely to start falling quickly in 2021 without reforms.

Investment is projected to contract by 13.3% in 2020 and return to growth in 2021, going up by 9.6%. In 2022, it should expand by 12.9%. Meanwhile, half of the foreign investors in the country have either cancelled or delayed investment plans for Bosnia due to the coronacrisis. According to data provided by the foreign investment promotion body, FIPA, 40% of investors have delayed plans for investments, while 10% have cancelled them.

Still, several projects are expected to progress in 2021.

In the energy sector, in November, Bosnia and Serbia signed a joint statement on the launch of construction of three joint hydropower plants on the Drina River. The deadline for construction of the three HPPs — Buk Bijela HPP, Foca HPP and Paunci HPP — is six years and the investment will reach €200mn. The three HPPs will have a total capacity of 180 MW.

Bosnia’s Republika Srpska has set up a special company to build the Buk Bijela HPP and two other hydropower plants.  A special company was set up to carry out the project. Serbia holds a 51% stake in the company, HES Gornja Drina, while Republika Srpska owns the reminder.

Turkish company Cengiz Insaat Sanayi ve Ticaret is expected to build a stretch of pan-European Corridor Vc that is estimated to cost around €208mn. The Turkish company will build the 5.5-km stretch from Poprikusa to Nemile within 42 months.

Bosnian car upholstery manufacturer Boxmark Leather, a unit of Austria's Boxmark Holding, launched the construction of a new production facility in the northeastern town of Lukavac in November 2020.

As the coronacrisis hammered the airline industry around the world, Sarajevo airport terminated its contact with Fly Bosnia, set up in 2017, due to unpaid debts in November. However, the airline’s owner, the Al Shiddi Group has since announced that it has leased three jets and will restart flights.

 

6. MARKETS OUTLOOK 

Bosnia has two bourses – the Sarajevo Stock Exchange (SASE) and the Banja Luka Stock Exchange (BLSE). They have tiny trading volumes and major events such as IPOs are very rare.