Moody's: Stronger economic growth despite political complexities characterises Bosnia and Herzegovina's credit profile

Moody's Investors Service (Moody's) said in a new report that although the complexity of Bosnia and Herzegovina's political system impedes government effectiveness and therefore its access to external funding, further progress on reforms should support the country's economic growth.

"High unemployment, large current account deficits and limited access to the private external capital market constrain Bosnia and Herzegovina's credit profile" says Evan Wohlmann, Assistant Vice President -- Analyst at Moody's.

"However, we expect that progress on Bosnia and Herzegovina's reform agenda, needed for further integration with the EU and to unlock IMF funding, will help to reduce unemployment and boost domestic and external demand. As a result, we expect growth to pick up to around 3% in 2016," he adds.

However, the rating agency notes that the challenging political environment continues to delay the reforms needed to qualify for EU candidate status. It also undermines the country's ability to adhere to conditions set out in IMF agreements, which has led to nearly 25% of funding being withheld from the Stand-by Arrangement which expired in June 2015.

Nevertheless, Moody's comments that the country's external vulnerability has benefitted from a significant increase in reserves, and that the currency board arrangement, which has operated smoothly since it was established in 1995, provides stability to monetary policy.

However, Moody's expects significant reform implementation risks to remain, as the rating agency assesses the country's institutional strength as "low", given the complicated political structure and a lack of internal consensus. Although, Moody's considers the central bank a very effective institution, maintaining relatively stable inflation and financial stability.