Standard&Poor's Rating Services lowered sovereign credit ratings on Bosnia and Herzegovina from B+ to B, with placing the ratings on CreditWatch with possible negative implications.

Standard&Poor's has reported that the downgrade reflects the opinion of this agency analysts that policy flexibility is weakening along with the deteriorating political environment, as reflected in the diminished prospects for a resolution to the political crisis in Bosnia and Herzegovina. This is seen in the lack of progress in adopting a state budget for 2011 and 2012 and the absence of a state government 13 months after the elections.

The inward-looking political focus has further weakened the possibility of EU accession. This will deter important flows of foreign capital and drag on longer term growth prospects, Standard&Poor's analysts reported.

The inability to reach an agreement on the 2011 state budget has obstructed the adoption of a 2012 - 2014 fiscal framework, which is needed in order to adopt a state budget for 2012.

According to the opinion of analysts, political instability is damaging Bosnia and Herzegovina's real economy and longer term growth prospects, with foreign capital inflows at their lowest since 2000. Standard&Poor's expects per capita real GDP growth of close to zero in 2012, the fiscal deficit will narrow to 3.2% of GDP this year, and slip below 3.0% in 2012 in part because of the constraints of temporary financing. Also, it is estimated that Bosnia and Herzegovina's current account deficit has widened in 2011 to 7.4% of GDP. For the next year, downside risks to forecasts stem not only from the domestic situation, but also from the deteriorating external environment, particularly in key trading partners.

The CreditWatch placement reflects the likelihood of a further downgrade if the political and economic situation does not move in positive direction. Should the current impasse be resolved, the ratings are likely to stabilize at the current level.

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