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FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 BANJA LUKA STOCK EXCHANGE ECONOMIC AND POLITICAL DEVELOPMENTS Politic and Economic Environment The nationwide elections held on October 1st have shifted the balance of power between political parties in Bosnia and Herzegovina (BiH), but have failed to break the pattern of ethnically divisive politics, and may even have reinforced it. The three traditionally ethnic nationalist parties–the Serb Democratic Party (SDS), the Croatian Democratic Union of BiH (HDZ BiH) and the mostly Bosnian Muslim Party for Democratic Action (SDA)–have emerged weakened from the elections. The main winners were the nominally moderate parties: the SNSD in the RS, and the SzBiH in the Federation. However, both the SNSD and the SzBiH prospered by running on an ethnic agenda during an election campaign that was tense and at times inflammatory. EU representatives and the BiH authorities agree that talks on an SAA between BiH and the EU have proceeded smoothly from a technical perspective. However, progress has been slow in meeting many of the criteria for an SAA, including those on police reform, co-operation with the International Criminal Tribunal for former Yugoslavia (ICTY) in The Hague, reform of the public administration, and passing laws on higher education and broadcasting. The upcoming report of the European Commission on BiH's progress in meeting EU requirements is therefore expected to be highly critical of the local authorities, so that the agreement will almost certainly not be signed until 2007. In the light of current concerns within the EU over the pace of future enlargement, BiH's path towards membership is likely to be significantly longer than those of the most recent new EU entrants. Membership of NATO's Partnership for Peace (PfP) program continues to be delayed by inadequate cooperation with the ICTY. Negotiations with the IMF over a new standby arrangement have been on hold for some time. However, given the negative consequences that would ensue from an IMF withdrawal, and with the elections out of the way, we expect the authorities to work with Fund representatives to resolve their differences over the fiscal position and conclude a new agreement at some point. Economic Performance Recent rapid growth in imports of investment goods will strengthen the country's export base, and significant export-oriented capacity has come on stream in the past year. The recent expansion of consumer borrowing should keep household spending buoyant in 2006 and push real GDP growth to an estimated 5.3%. Credit growth is likely to slow in 2007-08, which, along with publicsector wage restraint, is likely to weaken domestic demand growth. However, strongly rising investment is expected to keep annual real GDP growing at around the same pace as in 2006, although the potential for political instability presents some risk to this forecast. The introduction of VAT led to a sharp spike in price growth in both entities in early 2006, and inflation remained well above trend levels in the first half of the year. A slowdown in inflation is anticipated in both entities towards the end of 2006 as the impact of VAT dissipates and base-year effects take hold, although annual average inflationis expected in both entities to be several percentage points higher than in 2005. In 2007-08 the absence of any further tax increases, together with more modest wage growth, will see inflation ease in both the Federation and the RS. The marka is pegged to the euro at a rate of KM1.96:[euro]1. Low inflation in BiH has tempered the pace of real effective appreciation in previous years, although rising inflation in 2006 and a weakening US dollar in 2006-07 will see the real effective exchange rate appreciate by about 4% in 2006 and by 2% next year. The marka appears to be considerably overvalued, although the likelihood of a change in exchange-rate regime over the forecast period is remote. The Central Bank of Bosnia and Herzegovina (CBBH) maintains sufficient reserves to cover the whole of its monetary liabilities. Its free reserves–that is, those above and beyond these liabilities–remain relatively low, despite strong growth in recent years. However, the chances of a speculative attack on the marka are also low.* * The Economic Intelligence Unit Ltd., October 2006 Key Information Contacts Bosnia and Herzegovina Council of Ministers www.vijeceministara.gov.ba Ministry of Foreign Affairs of Bosnia and Herzegovina www.mvp.gov.ba Directorate of European Integration www.dei.gov.ba Central Bank of Bosnia and Herzegovina www.cbbh.ba Republic of Srpska Government www.vladars.net Foreign Trade Chamber of Bosnia and Herzegovina www.komorabih.com Republic of Srpska Securities Commission www.khov-rs.org Central Registry of Securities www.crhovrs.org 2005-SHARE IN GROSS VALUE ADDED (%) (a) 2003-MAIN COMPONENTS OF GROSS DOMESTIC PRODUCT (%) (b) Services Agriculture Industry (c) Private consumption General government consumption Exports of goods & services Import of goods & services 65.7 24.5 9.8 100 90 80 70 60 50 40 30 20 10 0 91.7 22.3 25.1 59.1 PAGE 48
FEDERATION OF EURO-ASIAN STOCK EXCHANGES SEMI ANNUAL REPORT APRIL 2007 BANJA LUKA STOCK EXCHANGE BOSNIA ECONOMIC CHARTS AND TABLES 2002 (a) 2003 (a) 2004 (a) 2005 (a) 2006 (b) GDP at market prices (KM billions) 11.6 12.3 14.6 15.7 17.9 GDP at market prices (US$ billions) 5.6 7.1 9.3 10.0 11.5 Real GDP growth (%) 5.3 4.4 6.2 5.0 5.3 Retail price inflation (av; %) 0.4 0.6 0.4 4.5 8.2 Population (million) 3.9 3.9 3.9 3.9 3.9 Exports of goods fob (US$ millions) 1,110 1,478 2,087 2,580 3,500 Imports of goods fob (US$ millions) -4,449 -5,637 -6,656 -7,534 -8,250 Current-account balance (US$ millions) -1,190 -1,637 -1,784 -2,087 -1,730 International reserves (US$ millions) 1,321 1,796 2,408 2,531 2,700 Total external debt (US$ billions) 2.5 2.6 3.2 3.4 (b) 3.9 Exchange rate (av) KM:US$ 2.08 1.73 1.58 1.57 1.56 (a) Actual. (b) Economist Intelligence Unit estimates. FACTS AND FORECASTS 2005 (a) 2006 (b) 2007 (b) Real GDP growth (%) 5.3 (c) 5.6 5.8 Federation retail prices (%) 2.5 2.8 2.9 RS retail prices (%) 3.4 3.9 3.8 Current-account balance (% of GDP) -20.6 (c) -16.2 -12.9 Exchange rate (KM:$1) (d) 1.57 1.57 1.46 2005-PRINCIPAL EXPORTS (%) 2005-PRINCIPAL IMPORTS (%) Base metals Mineral products Machinery Mineral products Wood & wood products Chemicals Other Foodstuffs Chemicals Other 14.2 10.7 14.5 10.0 8.1 9.4 26.4 40.6 16.2 49.9 2005-MAIN DESTINATIONS OF EXPORTS (%) 2005-MAIN ORIGINS OF IMPORTS (%) Croatia Serbia and Montenegro Croatia Germany Italy Germany Other Serbia and Montenegro Italy Other 15.5 14.4 20.5 13.1 16.9 10.2 11.3 9.0 39.6 49.5 (a) In real terms. (b) Economist Intelligence Unit estimates. (c) Not including construction. The Economic Intelligence Unit Ltd., October 2006 PAGE 49
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