By Ivona Zametica, Raiffeisen BANK (Bosnia and Herzegovina), Gunter Deuber and Casper Engelen, RBI
When Bosnia and Herzegovina (B&H) was first exposed to the coronavirus pandemic the country reacted with swift and decisive containment measures. The containment measures imposed were among the strictest in CEE, which resulted in a rapid decline of daily new infections. The pandemic was contained to a great extent. Therefore, the state of emergency has been abolished in the country and both the Federation of Bosnia and Herzegovina (FB&H) and the Republic of Srpska (RS) have lifted the curfew and allowed free movement from mid-May onwards. With the loosening of restrictions came an increase in the daily new infections but compared with the average in South Eastern Europe (SEE) and the earlier spike in cases, the increase is not worryingly high. Currently the daily new infections average around 50 cases per day, which is well below the average of 100 cases in the SEE region.
The move back towards normality is best illustrated by examining mobility data provided by Apple and Google. During the start of the lockdown period at the end of March, mobility was down by about 60%. Currently, mobility levels have recovered fully and are above the levels denoted pre-corona. Energy usage data, however, shows that the deviation from the previous years was around -20% and was still on a downward trend as of 22 May, suggesting that some parts of the daily and economic life have not recovered yet. Moreover, adverse effects of the lockdown are becoming increasingly tangible due to an unprecedented slump in many sectors of the economy. Key indicators available for April, the first month of full lockdown, confirmed gloomy expectations by showing that major pillars for the small and open Bosnian economy, such as exports of goods and industrial production (32.8% and 19.2% of GDP respectively) collapsed by -32.7% and -15.9% yoy respectively, pressured by the collapse of external demand. Due to the simultaneous collapse of private consumption, domestic demand and services are no supporting factor this time around. This was already mirrored in the slump of retail sales (20% of GDP) by -35.5% yoy and almost vanishing tourism revenues in April (-98% yoy). Although one of the fastest growing sectors in the past three years, tourism still makes up only 4% of GDP. This puts Bosnia in the group of less affected countries by the expected collapse in tourisms compared to peers such are Croatia, Montenegro and Albania.
Ambitious IFI financed recovery package of at least 4% of GDP – hampered by complex decision-making
Nevertheless, the local economy is on track to enter its deepest recession in modern history since the challenging 1990s. After seven years of stable and moderate economic expansion (2.8% GDP growth yoy on average), the country’s economy stands on the brink of a -5% GDP slump in 2020. Although Bosnia managed to deliver a moderate number of infections and casualties compared to its SEE peers, the battle for “saving the economy” is still in its initial stage and characterised by a high degree of uncertainty. The country’s complex structure and political decision-making process does not bode well to deliver a speedy and well-orchestrated economic crisis management. Like in other countries the looming bottomless recession calls for a decisive fiscal support and recovery package. Even though, fiscal support packages through the so called “Stabilization funds” approved by both FB&H and RS, are considerable comparable to SEE peers (direct support measures at 4.3% of GDP vs 3.1 % in SEE on average), they could come too late for many SMEs and their workers due to complex political and administrative decision-making. Hence, the number of unemployed persons increased already by 21K persons since mid-March, while we expect an increase of the unemployment rate to at least 17% in 2020. In addition, indirect fiscal support measures through the Guarantee funds of the entities were announced in total amount of 2.8% of GDP which is crucial for the continuation of private sector financing and credit activity. Despite positive assessment of the commercial banks toward the Guarantee scheme, the entity governments have still not adopted the necessary bylaws for making the Guarantee funds fully operational. Therefore, the political response to the crisis has not lived up to expectations while substantial speeding up in implementation of fiscal support measures is not our baseline scenario.
The ambitious fiscal support packages by FB&H and RS will be financed by an increase of public debt mostly relined on IFI’s credit lines which were swiftly negotiated and approved by the IMF, the European Commission (EC) and the World Bank. In fact, B&H is receiving the second largest amount of external support within the CEE region, behind Ukraine, so far. An amount of EUR 690.5 mn or 4% of GDP has been pledged. Up to now, the funds disbursed by the IMF are: EUR 330 mn through the Rapid Financing Instrument (RFI), from the EC: EUR 80.5 mn through the IPA funds and EUR 30 mn for COVID-19 support of medical equipment by the World Bank. The EC approved also EUR 250 mn of support as Macro Financial Assistance (MFA), where the first tranche should be disbursed in Q3. Moreover, EBRD and World Bank are in discussions regarding additional support schemes in the amount of 1.8% of GDP. Hence, for the first time after four years of a consolidated fiscal surplus at all central government levels in the country, in 2020 we expect a strong swing into red numbers with a deficit of at least -2.8% of GDP accompanied by an increase of public debt to 38% in 2020, up from 32.9% in 2019.
Deeper recession than in 2009 & 2021 but not the deepest one in modern history
Due to the bad combination of fast-burning international crisis, ultra-challenging external circumstances and a sluggish policy response locally, the corona crisis will have a much more severe economic impact than the Global Financial Crisis (GFC). This time around private consumption – a key pillar of economy (75% of GDP) and usually a stabilising factor – is expected to collapse by -6.8% on rising unemployment and a wage decline (up to –5% yoy), pressured also by the high level of uncertainty. Furthermore, with the expected dramatic decline of the euro area GDP by at least -6.5% yoy and steep recession in key regional trade partners (Croatia, Serbia, Slovenia, Montenegro) demand for B&H exports of goods and services is expected to collapse by -10% yoy, followed by drying up investments of private companies and overall investments by -11% yoy. Hence, depending on the momentum of recovery in the overall European economy we still see downward risks to our current 2020 GDP call of -5.2% for the local economy.
However, it should also be noted here that from a local perspective the crisis may feel and turn out to be less existential than in other parts of the EU. The 1990s were marked by existential economic setbacks, also in the context of the war which followed the disintegration of Yugoslavia. Here the economy shrank by 10-11% on an annual basis, then again by -6% to -9% at the beginning of the 1990s. Some calculations suggest that the economic power in Bosnia and Herzegovina fell by 60%-70% or more on an aggregated level during that challenging period. In this respect, the expected GDP slump in 2020 by -5% appears not too dramatic, although the Bosnian economy shrank “only” by -3% yoy during the GFC in 2009 and “only” by -0.8% yoy in the context of the euro area crisis (2012).
Strong Austrian connection
On the surface, the economy and the banking sector in Bosnia sail under the radar of international investors. In the overall portfolio of international banks active in the region CEE, Bosnia accounts for only just under 1% (!) of total CEE exposures. However, for some Austrian companies the developments in Bosnia are of high relevance. Austria is among the top 10 trading partners in Bosnia and above all, Austria is the main source of Foreign Direct Investment in the country, just ahead of Croatia and Serbia. There are only three more CEE countries, where Austrian FDI have a similar prominent position, namely Croatia, Serbia and Slovenia. The Austrian investor position is possibly even more prominent in the banking sector. Here Austrian banks account for almost 45% of the balance sheet positions of international banks in Bosnia, just behind or almost on a par with Italy (48%). Foreign banks are of great importance in the country, as they account for a market share of just over 80%, while in relative terms the Austrian banking sector footprint is as decisive as in neighboring (from an Austrian perspective) Slovakia and well ahead of most other CE/SEE countries. With today’s level of knowledge, we believe that the banking sector in the country is well capitalized, liquid and equipped for the difficult times. In contrast to the years before the GFC, the loan books have grown only moderately in recent years along with high risk discipline. This holds especially true for retail lending. To this extent, the share of non-performing loans is not expected to reach 15% again in this crisis, as it did in the aftermath of the GFC, followed by the euro area debt crisis and European double-dip recession. In addition, foreign banks (as in the last crisis in the context of the so-called “Vienna Initiative”) are expected again to contribute to maintaining macroeconomic stability and to boost the recovery in the country. For example, foreign banks, with their high market shares and strong customer relationships, can now be an important vehicle for European IFI funds to be put to good use locally.
Ivona Zametica is Chief Economic Analyst and Research and Advisory Group Manager at Raiffeisen Bank Bosnia and Herzegovina.
Gunter Deuber is Head of Economics, Fixed Income and FX Research at Raiffeisen Bank International in Vienna and designated Head of Raiffeisen Research.
Casper Engelen is a Junior Economist in the Economics Research Department at Raiffeisen Bank International in Vienna.