The international credit rating agency Standard and Poor's published its Annual Report on Sovereign Credit Rating on Bosnia and Herzegovina for 2009 in which it reported that rating of Bosnia and Herzegovina stayed unchanged, B+ with stable outlook.

The Annual Report consists of all relevant indicators that influence the credit rating of Bosnia and Herzegovina. The sovereign credit ratings on Bosnia and Herzegovina (BH) are constrained, by Standard & Poor's Ratings Services view, of the country's large government and its complex political system. This system leads to regular political stalemates and will continue to inhibit the progress of reform during the current run-up to the general elections in October 2010. The country's fiscal management and flexibility continue to be weak and are constrained by sizable contingent liabilities, with presence of external vulnerabilities.

The ratings are supported by the fact that the government has explicitly prioritized its external debt-service payments. A Currency Board Arrangement (CBA) that has successfully navigated the economy through the turbulence of the past year and a half also provides support to the ratings. In June 2009, the monetary stability provided by the CBA was bolstered by the signing of a $1.57 billion, 36-month International Monetary Fund (IMF) stand-by arrangement (SBA), which helped to contain the risk of a disorderly disruption - as a result of the economic and financial crisis - in financing flows to BH.

According to the anlysts' wie, the successful execution of the SBA, which has become an important fiscal anchor, will lead to a greater degree of fiscal flexibility. This is, however, contingent upon the full implementation of a comprehensive fiscal strategy aimed at budgetary consolidation, in particular the large size of the general government (government expenditure was around 50% of GDP in 2009) and a cumbersome fiscal management framework.

The implementation of the planned policy package has already proven to be politically difficult. The IMF has twice delayed the disbursement of funds after the authorities failed to punctually adopt sensitive cuts to social expenditures. Following a general government deficit in 2009 estimated at 5.6% of GDP, it is expected deficit to decrease to about 4.7% of GDP in 2010, which is broadly in line with the conditions of the SBA and that the government's gross debt will reach nearly 47% of GDP by the end of 2010.

As part of the SBA, the major foreign-owned banks have committed to maintain their cross-border exposure in BH and to adequately support their BH-based subsidiaries in 2010. Throughout 2009, the financial account remained in surplus, primarily due to new loans and steady direct investment inflows. These inflows were partly the result of parent banks recapitalizing their BH subsidiaries. Despite vulnerabilities in the banking sector (reflected by a run on deposits in late 2008 and deteriorating asset quality), the situation in the banking system has been fairly stable.

Finally, prospects for EU integration over the medium to long term constitute a policy anchor and are a supporting ratings factor. A further supportive factor includes the assessment of the strong support from the international community that would be very eager to avert destabilizing events in the country, both in a financial and political context.

The stable outlook balances BH's medium to long-term growth potential and expectation that it will adhere to the SBA against a difficult budgetary situation, complex political structure and environment, and external and financial system vulnerabilities.

Creditworthiness could improve if BH continues to progress with its structural budgetary consolidation agenda, improves its institutional framework so that it makes headway on EU integration and implements structural reforms that foster growth (for example by reducing the size of the public sector). Conversely, the ratings could come under pressure if budgetary imbalances remain unaddressed, which would lead to a failure to comply with the conditions of the SBA. Such a scenario could undermine the confidence of investors and depositors and put at risk the country's economic and financial stability.

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