Annual Report 2008 - ProCredit Bank

Management Business Review 17
Political and Economic Environment
The Stabilisation and Association Agreement
(SAA) with BiH was signed in June 2008, signalling
the European Union’s readiness to support
the country’s bid for EU accession. Reform of the
national constitution, however, remains at the top
of the international political agenda. Progress on
this front has been impeded by the apparent irreconcilability
of the major political parties’ positions
and deteriorating relations between them.
An agreement on constitutional reform therefore
seems unlikely in the near future. A high level of
public spending and inefficient public administration,
as well as the general lack of fiscal responsibility
shown by the country’s governing entities,
will continue to be high on the agenda of pressing
political issues in 2009 and beyond.
Annual GDP growth came to 6.8% in 2008, up from
5.8% in 2007. The expansion was driven by a favourable
external environment and a strong rise in
private consumption due to increased real wages
and consumer borrowing. However, due to a tighter
monetary policy and slower export growth, real
GDP growth is projected to slow to 5.5% in 2009,
stabilising thereafter at a level of around 5%. 1
There was greater industrial output during the
year, which is projected to continue rising with
large-scale developments in road networks and
energy grids. The SAA will probably have a positive
impact on some local producers due to the reduction
or abolition of customs duties on a wide
range of imports from the EU. At the same time,
reduced collection of duties might lead to further
declines in the revenues of the country’s governing
entities.
The currency board arrangement remained in place
with the local currency – the convertible mark
(BAM) – pegged to the euro at a fixed rate. This
contributed greatly to macroeconomic stability.
Consumer price inflation stood at 9.9% at yearend.
2 Inflation during 2008 was driven primarily
by increases in food prices and housing and heating
costs, which together accounted for 55% of
household expenditures in BiH.
Both exports and imports rose during 2008. Although
electricity exports doubled, a greater
level of imports drove the current account deficit
to 16%. This is projected to remain high in the
coming year.
The International Monetary Fund and other international
institutions have urged the authorities in
BiH to make a greater effort to reduce the regulatory
burden on businesses. In 2008 the World Bank’s
“Doing Business” report ranked BiH 119th among
181 countries in terms of the constraints faced by
businesses. This poor ranking was attributable to
the difficulties involved in starting a business and
registering property, as well as other bureaucratic
requirements to be met by businesses.
Financial Sector Developments
The banking industry comprises 31 institutions
and is dominated by foreign capital. Banks with foreign
capital held 81.9% of the sector’s total capital
at year-end. Concentration was moderate, with the
three largest banks holding 67.4% of total assets. 3
Growth in the banking sector slowed down in
2008 compared to the previous two years. Total
assets increased by 11% to BAM 22.2 billion (EUR
11.1 billion) at year-end.
The banking sector’s total loan portfolio grew
to BAM 14.6 billion (EUR 7.4 billion), 4 which was
63% of GDP. Loans with a maturity of more than
one year accounted for 74% of total loans, or BAM
10.9 billion (EUR 5.6 billion).
The overall rate of credit growth in 2008 was
22% on an annual basis, somewhat below the reported
increase of 28% in 2007. While the sector
was growing at the same year-on-year pace over
1
Unless otherwise indicated, figures are based on:
www.imf.org, Bosnia and Herzegovina: On the Road to
EU Accession, November 2008
2
Data in this and the following sections are based on EIU,
Country Report Bosnia and Herzegovina, November
2008. Inflation is calculated according to the EU-harmonised
measure, which differs from the IMF source
3
Federation of Bosnia and Herzegovina only, Federal
Banking Agency Report: September 30, 2008.
4
Data based on Central Bank BiH monthly statistics as of
December 2008