Bosnia & Herzegovina Monthly Economic Report

Issue: No 4 June 2012 18th Sarajevo Film Festival Sponsored by Raiffeisen BANK B&H

Adoption of the State budget for 2012 started new political crisis only 4months after the new Government was established Euro-zone is heading toward the recession in Q2 2012, clouding the SEE economic outlook All key drivers of the B&H economy turned to negative territory with the begging of 2012

Fiscal stability additional risk for B&H economy in 2012 the new negotiations over the SBA with the IMF started

beginning of 2012

Content

Bosnia & Herzegovina

Monthly Economic Report HIGHLIGHTS ............................................................................................................. 3 POLITICS .................................................................................................................... 4 GLOBAL ECONOMIC STANCE .................................................................................. 5 REAL ECONOMY IN B&H ........................................................................................... 6 TRADE BALANCE ........................................................................................................ 7 INFLATION................................................................................................................. 8 BANKING SECTOR ..................................................................................................... 9 FISCAL POLICY ........................................................................................................ 10 EQUITY AND DEBT MARKET..................................................................................... 12 BLUE-CHIPS ............................................................................................................. 13 B&H ECONOMIC OUTLOOK .................................................................................. 14 IMPRESSUM .............................................................................................................. 15

Highlights

Banking sector report

2

Highlights

Highlights

Highlights
Credit rating

Source: Raiffeisen RESEARCH

Economic outlook (20122015)

Source: Raiffeisen RESEARCH

Only 4 months after the new State Government (the Council of Ministers) was established, B&H entered into new political crisis with gloomy prospective. After the euro-zone avoided recession in Q1 2012, the macroeconomic indicators for April and May 2012 foreshadow negative economic reading in Q2 2012. As expected, the real economy in B&H turned to negative territory in Q1, driven by the total collapse of the industrial production and export. Inflation continue to moderate at 2% yoy in 2012, with low risk for additional price hikes by the end of 2012 Restrained Credit outcome of the B&H banking sector colored beginning of the year primarily driven by slow-down tendency in Corporate segment The saga related to the adoption of the State Budget for 2012, which was one of the major reasons for the downgrade of the sovereign B&H credit rating, has been finally resolved. The new Stand-by agreement with the IMF seems inevitable, which should lead to the Amending Budgets for both, Federation B&H and RS The primary debt market developments (issuance of the entity T-bills and bonds) dominated on the B&H markets Only few major blue chips distributed its profit as dividend payments Economic stagnation with estimated real GDP of 0% yoy remains our base-line scenario.
Bosnia and Herzegovina Nominal GDP (EUR bn) Real GDP (% yoy) GDP per capita (EUR) GDP per capita (EUR at PPP) Household consumption (real, % yoy) Gross fixed capital formation (real, % yoy) Industrial output (% yoy) Producer prices (avg, % yoy) Consumer prices (avg, % yoy) Average gross industrial wages (LCY, % yoy) Unemployment rate (avg, %) General budget balance (% of GDP) Public debt (% of GDP) Trade balance (% of GDP) Current account balance (% of GDP) Net foreign direct investment (% of GDP) Official FX reserves (EUR bn) Gross foreign debt (% of GDP) EUR/LCY (avg) USD/LCY (avg) 2008 12.6 5.7 3290 6700 6.0 16.0 7.3 8.6 7.4 14.9 23.4 -2.2 30.1 -38.2 -14.2 5.0 3.2 49.0 1.96 1.33 2009 12.3 -2.9 3195 6400 -3.9 -27.6 -3.3 -3.2 -0.4 5.6 24.1 -4.5 35.1 -27.8 -6.2 1.4 3.2 54.2 1.96 1.40 2010 12.5 0.7 3254 6600 -1.3 -8.1 1.6 0.9 2.1 2.1 27.2 -2.2 38.4 -26.0 -5.3 1.4 3.3 58.3 1.96 1.47 2011 13.3 1.9 3449 6800 2.5 7.0 5.6 3.7 3.7 5.0 27.6 -3.0 38.4 -27.9 -8.1 2.2 3.3 58.9 1.96 1.43 2012f 13.6 0.0 3541 6800 -0.5 -5.0 1.1 1.9 2.2 2.0 27.9 -2.5 39.7 -26.8 -6.6 1.4 3.3 61.0 1.96 1.52 2013f 14.2 2.0 3692 6900 2.5 4.0 5.0 1.9 2.0 4.0 27.6 -2.0 40.1 -28.2 -8.1 3.2 3.5 60.6 1.96 1.50

Analysts: Ivona Kristi, Srebrenko Fatui Tel.: +387 33 287 784 e-mail: ivona.kristic@rbb-sarajevo.raiffeisen.at srebrenko.fatusic@rbb sarajevo.raiffeisen.at Published by: Raiffeisen BANK d.d. BiH Investment Banking Research & Analysis Department

Highlights

Politics

Adoption of the State budget initiated the new political crisis

The Council of Ministers of B&H

Source: Raiffeisen RESEARCH

Key political persons

The key priority of the new formed State Government (the Council of Ministers), the adoption of the State Budget, has become the trigger for the new wide political crisis. Thus, Bosnia and Herzegovina has entered into the second quarter of 2012 with the State Institutions functioning on the basis of Interim Financing which was the 6 quarter in a raw that the State institutions were financed on the basis of temporary financing. Moreover, the political disagreements started already during the consideration of the global framework for the fiscal period 2012 to 2014, which represented the key prerequisite for adopting the 2012 Budget. Consequently, the Global Fiscal Framework was adopted by the Fiscal Council but strongly disputed by the representatives of the Party of Democratic Action (SDA) as one the State coalition members. Thus, political bickering reached its top, when the representatives of same party voted against the Draft Budget for 2012 in all relevant institutions: the Council of Ministers, the Council of Ministers, and the State Parliamentary Assembly (upper and lower parliament). However, the State Budget passed all necessary confirmation procedures and finally came into force at the end of May 2011. The adopted Budget among other includes funds for the 2013 population census, the 2012 local elections, border crossings with Croatia which access to the EU in 2013 and funds for payment to early-retired members of the Armed Forces, who have been protesting in front of B&H institutions for nearly a month. On the other side, the adopted Budget calls for a 4.5% reduction in salaries for employees within the state institutions. However, the 2012 Budget saga triggered the new political crisis just couple of months after the State coalition was formed. The representatives of the SDA party remained on the firm stand that it is unacceptable for the State Budget to stagnate while at the same time the entity Budgets have been increasing. To be prices, the representatives of SDA accused the coalition partners (in particularly SDP) for working at the expense of the State and in favor to entities. On the other hand, SDP launched the initiative for dismissal of the ministers (members of SDA) within the State Council of Ministers and achieved agreement with the leading opposite party in B&H (Alliance for the better future SBB) according to which the SBB will enter the state coalition replacing the members of SDA. However, due to complicated political system in B&H and complex political power balance, the reconstruction of the political coalitions could last several months. To be precise, along with the reconstruction the State Government, the process of the Federal Government restructuring was launched as well, which could easily become the untied political knot. The new Federal coalition was already established between SDP, SBB, HDZ and HDZ 1990 but they have just simple majority (56 votes) at the Federal Parliament while for appointment of the new Government they will need to ensure the overall majority (66 votes). Therefore, the appointment of the new government is now mostly in hands of the minor political parties (in particularly People party Working for better future). However it is still highly unknown will they support the new coalition or will block the reorganization of the Federal Government and consequently the State Government. All in all, it seems that 2012 will also be one more year totally lost for serious progress relate to EU and NATO membership path.

Source: Raiffeisen RESEARCH

Seats in the State Parliament

Source: Raiffeisen RESEARCH

Highlights

Global economic stance

Clouds over the euro-zones horizon persist

Euro-zone GDP and PMI

Source: Thomson REUTERS Raiffeisen RESEARCH

Key financial market figures

The latest heavy-weight macroeconomic indicators for euro-zone published for April and May indicate clearly that the euro-zone is heading firmly toward the recession in Q2 2012 (after escaping it tightly in Q1), mostly as a consequence of the negative performance by two major economies Germany and France. Moreover, the PMI Manufacturing (the major indicator which predict future development of the quarterly GDP) further slumped to the lowest levels since mid-2009 during May 2012, falling to 45.1 from 45.9 in April with only Ireland and Austria reporting PMIs values above 50 (the values below 50 are related to the recessionary trends). On the other hand, depressing indicators of the industrial production and labor market are also mirroring very depressing fundamental picture, with euro-zone industrial production falling by 0.8% mom in April, or by 2.3% yoy, with the largest slumps reported by Portugal, Germany and Italy. Furthermore, the unemployment is hitting from month to month new record highs with May rate of 11% which is the highest unemployment rate since 95 with 17.5 mn people being registered as unemployed. The highest unemployment rate has still Spain with 24.6%, followed by Greece with 21.9% while the lowest is reported by Austria with 4.1%. Therefore, after escaping recession in Q1 (mostly thank to robust performance of Germany economy) euro-zone is steadily heading to recession in Q2 and Q3, with year-on-year GDP estimated to -0.4% in Q2 and -0.7% in Q3, while overall yearly economic performance is estimated to mild recession of -0.3% yoy real GDP, mostly thanks to overall flat performance of the Germany economy with estimated 0.5% yoy real GDP growth and minimum decline of France by -0.1% yoy. During June, the European financial markets were mostly under the pressure of rising euro-zone debt crisis fears and future outlook, related to the extraordinary elections in Greece and future reform scenario, which were defined as to be or not to be by the market participants for Greek stay in euro-zone. The additional cloud over the European sky was additional requested package by Spain for its ailing banking sector in total amount of EUR 100 mn (while independent estimate indicate that it would need capitalization in range of EUR 51 62 bn). Therefore, it is not surprising that we have evidenced incredible volatility of the major financial indicators during June, with sky-rocketing yields to peripheral bonds of primarily Spain which was in focus of investors, followed by Italy which reached new record high yields for 10y bonds (Spain was above 7% and Italy above 6%). In the FX market EUR was under the pressure reaching the EUR/USD level to the low of 1.2365 in end of May on escalation of euro-zone crisis, which was stabilized after the positive outcome of the Greek elections to 1.27. However, as we do not expect any major bad news in coming weeks the EUR/USD should move around level of 1.26 with upward tendencies toward 1.28 only in Q3 and Q4. On the other hand, EUR/CHF should be throughout year traded just slightly above 1.20 of the fixed exchange rate on the constant flight of investors toward the safety. Therefore, after the new record low yields on bonds of the core-countries such are Germany and France (1.17% and 2.26% in June for 10Y) they should be traded at higher yields although their increase is limited on still extremely high risk-aversion. As the ECB is expected to continue with maintaining the key rate at minimum of 1% with constant support to bond market and banking sector, the EURIBOR rates should be kept very low on abundant liquidity at 0.7% until end of year for EURIBOR 3M. Therefore, as the economic and financial outlook for eurozone is very weak for the rest of the year which would be under clouded further with further escalation of the debt crisis, the external environment and framework for the most of SEE countries who are directly linked to euro-zone market and financial sector would be also under the large downward pressure.
5

Source: Thomson REUTERS, Raiffeisen RESEARCH

GDP by euro zone countries

Source: Raiffeisen RESEARCH

Highlights

Real economy in B&H

New recession hovers over the B&H economic outlook

Industrial production (% yoy)

Although the State Agency for Statistics does not report on quarterly GDP outturn in B&H, it is evident that the B&H economy has collapsed with the beginning of year, dragged down by negative readings in most of the key macroeconomic indicators. Thus, having in mind that B&H economy as well as other SEE economies is very exposed to the headwinds of the euro-zone crisis, such economic patter was highly expected. Furthermore, the small and open B&H economy struggles amid a week environment on one hand and with affluence internal weaknesses mirrored in total lack of clear economic and investment strategy by the elected authorities. The hardest negative impact of the restored crisis in Q1 was on the Manufacturing as it is primarily linked to the business cycle in the euro-area through the exports channel. What is more, out of 14th, mostly export oriented Manufacturing sections only one section expanded, which consequently lead the Manufacturing to collapse by 11% yoy. The industrial output was additionally hampered by the tu mble of Electricity, gas and water supply which was impeded by the unfavorable weather conditions while only category which reported timid expansion was Mining and quarrying. Accordingly, the total industrial production in first quarter of 2012 was down by 9.4% yoy. The subdued industrial output was also supplemented by the fragile growth in other indicators of the GDP performance such as construction, retail trade and tourism. Consequently, the loss of positive momentum in key sectors resulted in elevated joblessness during the first quarter of 2012, as the unofficial unemployment rate peaked 44.1%, the highest unemployment rate since middle of 2009. At the same time, growth of the gross and net salaries remains at the trivial level and coupled with the subdued Retail Trade indicators, VAT tax and the Retail loans all points to sluggishness into domestic consumption which is the major category within the GDP structure. Therefore, if the GDP for Q1 2012 would be available, we would see the first negative GDP reading, two years after coming out of the economic downturn. What is more, as the prevailing pessimism from the euro-zone sovereign crisis still clouds over the SEE countries, the same negative economic pattern has continued in second quarter of 2012. Moreover, the first published indicators for April 2012 confirmed that key economic indicators are still in negative territory although the negative pace is somewhat milder compared to Q1 2012. Hence, in April 2012 the industrial production went down by 5.8% yoy, with Manufacturing and Mining in negative territory (-8% yoy and -11.7% yoy) while Electricity, gas and water supply first time in 2012 reported positive readings (+7% yoy) due to much more favorable hydrological conditions. In additional, due to change of seasons, we could also see some respectable improvement in tourisms, remittances and consequently the Retail trade, however these figures are still not available for April 2012. However, much more severe progress we do not anticipate before third quarter of 2012 when the Industrial production and Export which were the main catalyst of the economic recovery in period 2010 2011, could deliver some positive reversals. Hence as the overall trend reversal in real economy will still depend on the euro-zone head-winds we still anticipate to see overall economic stagnation, mirrored in real GDP of 0% yoy with high downside risk coming from the interim weaknesses, such are fiscal restructuring and slump of private investments.

Source: Agency for Statistics of B&H Raiffeisen RESEARCH

Structure of employees in B&H

Source: Agency for Statistics of B&H, Raiffeisen RESEARCH

Net salaries by sectors

Source: Agency for Statistics of B&H Raiffeisen RESEARCH

Highlights

Trade balance

Total collapse of export outturn in first 4 months of 2012

Trade balance of B&H

After two years of rapid export performance, the foreign trade of B&H totally collapsed in 2012 affected by economic pessimism which clouds over the euro-zone and has spread across the SEE region. Moreover, the beginning of the year was severe reminder for the SEE countries of the economic vulnerability to any depressed demand in the euro-zone as their single most important export market. Therefore, the small and open B&H economy shared same economic pattern with other SEE economys colored with quite depressing foreign trade results in first 4 months of 2012. Accordingly, in first 4 months of 2012, B&H reported tumble of export by 9.7% yoy buttress by the slump in all key categories which in period 2010 2011 drove the export and economic recovery in general (Mineral products, Base metals, Machinery, Wood, Chemical products etc). On the other hand, the export was increased in categories such as: Arms and Ammunition, Fur and leather, Plastic and rubber etc, which however holds just minor share in structure of total export and therefore was not enabled to give more prominent push to overall export figures. Hence, looking more detailed into the structure of export by regions, the export collapse is primarily driven by the lack of demand from CEFTA country than euro-zone. Moreover, the exports to euro-zone reported just timid decline by 0.4% yoy, as demand from Germany, which remained flat, managed to mitigate the negative effects from other major export markets (Slovenia, Serbia and Italy). On the other hand, the export into the countries from region (CEFTA) turned down: Croatia (-13.6% yoy), Serbia (-32.5% yoy) and Montenegro (-30.5% yoy). At the same time, the imports of goods expanded by mild +0.8% yoy over the same period. The engulfed import in first fourth months of 2012 was affected on one side by the state of natural disaster in February 2012 which paralyzed the transportation in the country, but also by the lower domestic demand and therefore domestic consumption. The largest imports also came from the EU 27 market (46.8% of total import), SEE countries and Russia. Hence, it should pointed out that as well as exports, B&H increase its value of imports from Germany (+10.1% yoy) while other key markets reported decline or remained even: Croatia (-4.4% yoy), Russia (+0.3% yoy) and Serbia (-0.4 % yoy). Accordingly, total value of export in period January April 2012 summed up to BAM 2.419 billion while total value of import came to BAM 4.722 billion which gives quarterly trade deficit of BAM 2.30 billion and the export/import ratio in same period of 51.2%. All in all, the impact of the euro-zone crisis affected hardest the trade balances of the countries which GDP mostly dependent on exports performance. Therefore, as we expect the continuation the subdued economic activity in euro-zone and region we cant expect some stronger trend reversal of the export performance in forthcoming period although some low single-digit positive growth rates are probable. On the other hand, imports will remain in mild expansion, pointing to sluggishness in domestic demand. Accordingly, the rebound in foreign trade is also expected in second semester of 2012 with high downside risk primarily linked with future developments regarding the euro-zone debt crisis.

Source: Agency for Statistics of B&H, Raiffeisen RESEARCH

Export by sectors (yoy)

Source: Agency for Statistics of B&H, Raiffeisen RESEARCH

Export by key markets

Source: Agency for Statistics of B&H, Raiffeisen RESEARCH

Highlights

Inflation

Inflation continues to moderate with the beginning of 2012

Structure of CPI (%)

The relaxing mood in consumer prices which started with the end of 2011 has persisted through the whole first quarter of 2012 and further in April 2012, placing down the price pressure on weakest level since third quarter of 2010. Moreover, after easing to +3.5% yoy in final quarter of 2011, the inflation went down to +2.3% yoy in Q1 2012 and to +1.9% in April 2012. Such developments were backed by the higher base affect on one side and by much favorable external environment on other. At the same time, the weak domestic demand is still fragile for more prominent influence on inflation level. Hence, across the CPI index the major stimulus to subdued price pressure came from the Food and Non-alcoholic beverages (33%) as the largest category within the CPI structure and which was one of the key inflation triggers in period before. Thus, the Food and non -alcoholic beverages as of March 2012 went down to 1.6% yoy in Jan Apr 2012 the lowest reading since end of 2010. On the other hand, Transport and Alcohol and tobacco products were on robust upswing by 6.6% yoy and 10.0% yoy respectively due to excise tax hikes. The solid pressure on consumer prices also came from the Housing, water, electricity and other fuels division (+3.7% yoy) while other division remained in range of 1% - 2% yoy. The disinflationary mood came from Health (-0.3% yoy), Clothing and footwear (6.6% yoy) while the Education also first time since middle of 2009 has plumbed into deflation (-0.1% yoy). The major risk on inflation level in first months of 2012 came from the turmoil on the world oil markets which lead to several upward price corrections of petroleum on domestic market. However, due to high base affect the price hike in transport was insufficient to give more prominent push to overall inflation. Furthermore, the increase of petroleum prices with the beginning of the year, proved to be just short lived corrections due to stabilization on the world oil markets. Furthermore, the price hike in Alcoholic and tobacco products division is solely owed by the annual increase of excise on tobacco products as policy which leads to harmonization of the excise tax rates in B&H with the EU. All in all, the pressure on consumer prices in 2012 is much more favorable compared to year before, which is fully in line with our expectations. In forthcoming months we do not reckon on unexpected price hikes and therefore the inflation level should remain stable in range between 2% - 2.5% yoy respectively while overall inflation is estimated at 2.2% yoy. Furthermore, taking into account the inflation projections from the regional countries, Bosnia and Herzegovina will have the lowest inflation pressure in 2012 as well as in mid-term outlook (2012 2015). Therefore, according to mid-term projections for the SEE countries the inflation pressure is anticipated at +5.8% for Serbia, +3.2% for Bulgaria, +3.2% for Romania, +3.1% for Albania and +2.8% for Croatia. Over the same period, we expect to see continuation of the moderate price pressure in B&H which will after 2012 additionally eased and remained on level of around 2% respectively.

Source: Agency for Statistics of B&H, Raiffeisen RESEARCH

Key inflation categories (% yoy)

Source: Agency for Statistics of B&H, Raiffeisen RESEARCH

Inflation and labor market figures

Source: Agency for Statistics of B&H, Raiffeisen RESEARCH

Highlights

B&H banking sector

Credit outcome of B&H banks follows slow-down momentum of economy

Credit outcome by categories

After mild economic recovery in 2011 was largely underpinned by the respectable credit outcome of B&H banking sector, the beginning of 2012 was flavored by the restrained lending activity which followed downward path of the economy in general. What is more, the downward pressure on the credit volumes came from two sides, the pending recession and the sticker capitalization rule of the European Banking Association (EBA) for Tier I of 9%. Therefore, in period January April 2012 we saw the slow-down of the lending outcome primarily to Corporate segment which, as the main category in loans structure slump the overall credit growth on much moderate levels compared to 2011, while the same pattern is expected to be continued in months ahead. Accordingly, as of 30.04.2012 B&H banks placed total of BAM 15.549 billion of loans (+5.1% yoy) with Corporate and Retail loans as major categories which accounts to around 90% of total loans. However, the Corporate and Retail loans showed diverse figures as the Corporate segment was mostly affected by the slow-down while the on the other hand, the Retail sector reported moderate growth rates with the beginning of 2012. Moreover, over the period of 4 months in 2012, growth of loans to Corporate sector declined to +2% yoy, driven primarily by the lending outcome to public enterprises while at the same time outturns to private enterprise slump to lowest value since beginning of 2010 (+0.8% yoy). On the other hand, lending outturn to Retail segment after reaching its peak in January 2012 (+6.9% yoy) went down to +6.2% yoy in April 2012 which is still well above the 2011 average. Consequently, Corporate loans totaled to BAM 8.11 billion while Retail loans came up to BAM 6.71 billion. Hence, the fastest growing category remains the Public sector loans which expanded by 46.6% up to BAM 0.69 million, mostly due to tightening in regular revenues collection and financing needs. Over the same period, growth of total deposits was also lowered to fragile +2.7% yoy on the back of weaker citizens saving which came down to single-digit growth rates in first 4 months of 2012. However, the Retail deposits are still only driving force of the deposits outcome as other major categories are constantly in reddish territory. Moreover, the citizen savings as of 30.04.2012 summed up BAM 7.26 billion (+9.3% yoy) which accounts to 57% of total deposits. The financial soundness indicators of B&H banking sector in Q1 2012 followed the sliding trend and reported much feeble readings compared to end of 2011. The non-performing assets (NPA) surge to 9.3% (from 8.8% in Q4 2011) which totals to around BAM 2 billion, while non-performing loans (NPL) came up to 12.1% (from 11.8% in quarter before) accounting to BAM 1.87 billion. Liquidity also declined from 27.3% in Q4 to 24.7% in Q1 2012. Hence, the capital adequacy which expanded further to 17.5% from 17.2% at the end of 2011 came out to be the only improving FSI with the beginning of 2012. However, according to the first realized data, B&H banking sector reported respectable profitability readings in Q1 with positive financial result in total amount of BAM 46.6 million (out of 29 banks only 6 reported negative financial results). However, official data for RS banking sector has still not been published and therefore the detailed analysis of the of the banking sector profitability still not available. All in all, giving the all mentioned figures and the current economic stance in B&H, the stronger banking sector performance cant be expected before second semester of 2012 when we anticipate revival of the economy in general. New wave of economic worsening would bring additional increase in NPLS and rising need in capital and deposit base by several players in the market. However, B&H banking sector despite of the moderate slow-down tendency remains the most stable sector of the B&H economy.

Source: Central Bank of B&H, Raiffeisen RESEARCH

Deposits by categories

Source: Central Bank of B&H, Raiffeisen RESEARCH

Financial soundness indicators

Source: Central Bank of B&H, Raiffeisen RESEARCH

Highlights

Fiscal policy

The State level Budget 2012 saga finally resolved

State Budget for 2012

Source: Ministry of Finance of B&H, Raiffeisen RESEARCH

External debt of B&H

Source: Central Bank of B&H, Raiffeisen RESEARCH

Primary market developments

Source: Ministry of Finance of FB&H, Ministry of Finance of RS, Raifffeisen RESEARCH

After adoption of the Global Fiscal Framework for 2012-2014 by the Fiscal Council of B&H (FC) during March, as precondition for the adoption of Budget for 2012 and further disbursement of the loans from the World Bank and European creditors planned for 2012, the State Budget for 2012 was finally adopted on May 24th 2012. By adoption of the State Budget for 2012 by the Parliamentary Assembly of B&H, the Budget saga was finally resolved which was one of the major reasons for the latest downgrade of the sovereign B&H credit rating by Moodys from B2 to B3. The State level Budget was adopted in total amount of BAM 1,394 million (revenues + financing + external debt servicing) which is increase by 12% yoy, out of which for financing of the State Institutions BAM 950 mn is planned and for financing of the external debt BAM 444.9 mn. On the expenditure side, the total amount of BAM 1,394 mn is planned which is by 4% yoy increase compared to 2011. The external financing is planned in amount of BAM 62.9 mn while regular revenues are planned in amount of BAM 887.3 mn. Therefore, some temporary imminent pressure related to fiscal framework and financing are resolved at all institutional levels in B&H, although there are rising pressures related to the current 2012 budget of the entities levels (Federation B&H and RS), and existing structure of financing which will unquestionably lead to Budget 2012 amending during summer in both B&H entities (also supported by the IMF). During June, the final Reports on the Budget Execution for 2011 were published by the both entity level ministries of finance (FB&H and RS), which were mostly below the planned Budget targets for 2011, mostly due to lower revenue and financing level than planned. Moreover, the Federation of B&H reported total revenues and financing in amount of BAM 1,483 mn which is by 12% below the Budget for 2011. The major driver for missing the revenue and financing target was lower level of external financing than planned, as the loan from the European Commission in amount of BAM 58.7 mn was not disbursed and missing the target in level of the planned non-tax revenues (dividends from the public companies). In addition, the planned dividends (stakes in profit) from the public companies was expected in total amount of BAM 240 mn, while collected was only BAM 115.7 mn or BAM 124 or 52% less than expected, mostly as the Federal government decided not to exploit the public companies deposits from the banking sector which was initial plan after the new Government was established in March 2011. On the other hand, tax revenues were mostly in line with plan with collected BAM 1,137 mn or 5% less than planned. On the expenditure side, total expenditures amounted to BAM 1,380 mn which is 5% less than plan, mostly due to cuts in capital expenditures by 50% amounting to BAM 13.7 mn, while current expenditures were also 3% lower than plan or BAM 1,349 mn. Therefore, as the expenditure side was also lower in 2011, total deficit in Federal budget in 2011 was lower compared to plan with deficit (financing) in total amount of BAM 89.1 mn compared to BAM 148.7 mn of planned financing. The local financing through the primary debt issuances of T-bills in amount of BAM 90 mn was completed in line with the Budget. All in all, giving still troubled economic developments and pressured revenue collection, Federation B&H in 2011 reported satisfying fiscal performance and low level of fiscal deficit at the level of -0.5% of GDP. According to the Report on the Budget Execution of Republic of Srpska, total revenues collected in 2011 reached level of BAM 1,745 mn, while tax revenues amounted to BAM 1,439 mn which is by 3% lower compared to the plan. Non-tax revenues reached level of BAM 213 mn which is 60% above the Budget.

10

Highlights

Fiscal policy

Moderate level of the overall Public debt in B&H at 38.4% GDP

Revenues structure of FB&H

Source: Ministry of Finance of FB&H, Raiffeisen RESEARCH

Revenues structure of RS

Source: Ministry of Finance of RS, Raiffeisen RESEARCH

General budget balance (% GDP)

Source: Central Bank of B&H, Raiffeisen RESEARCH

On the other side of the coin, expenditures were by 19% higher compared to the Budget by reaching BAM 2,088 mn, which was mostly driven by the higher than expected growth of the current expenditures categories and some segments of social-transfers. Therefore, total deficit of the Republic of Srpska was by BAM 94 mn higher compared to the planned deficit of BAM 248.1 mn with BAM 342.5 mn of 2011 deficit and reached the level of 3.9% GDP in 2011. The financing by the primary issues was successfully carried on during 2011 in total amount of BAM 120 mn of long-term bonds and BAM 96 mn of T-bills (total BAM 216 mn) or 12.4% of the Budget. Coming to the issue of the execution of 2012 Budgets in Federation and Republic of Srpska, the Amending Budgets for 2012 seem inevitable. Moreover, the revenue collection targets seem now too ambitious by the both ministries of finance on one hand, as well as the need to restructure the planned sources of financing for 2012. To remind, the both entities planned for 2012 to finance the deficit mostly through the primary issues of the debt instruments in local currency (BAM 290 mn in FB&H BAM 230 mn bonds and BAM 60 mn of T-bills while RS planned BAM 100 mn BAM 70 mn in T-bills and BAM 30 mn of bonds) which seems from the current market perspective very ambitious (in June we have evidenced very poor demand and placement in primary issuances in both entities more details in the next chapter). Therefore, it is not surprising that the B&H authorities at all levels, during the latest mission of the IMF expressed their willingness to coordinate some budgets 2012 restructuring and approach the IMF with the set of measures during the summer to officially start the new round of negotiations over the new Stand-by Arrangement. Hence, one of the expected measures by the both entity Governments and ministries of finance is the adoption of the Amending budget for 2012 during summer (by July 15 th should be adopted in Federation of B&H) which would be mostly changed in segment of the source of financing where the domestic financing through the primary issues would be replaced by the planned IMF SBA while bond issues would be mostly skipped and replaced by the T-bills primary issues (more details in the next chapter). The Amending Budgets for 2012 are also supported by the IMF, as part of the restructuring and measures which should be carried out for continuation of the SBA, although we are still not optimistic that all measures will be completed until the end of the year due to new round of the political crisis, and that the inflow of the SBA money could be expected or late by the end of year or in the beginning of the year. During June the final report on the public debt on all central institutional levels was published the State B&H, Federation B&H and Republic of Srpska. The total debt consolidated public debt amounted to BAM 9,9974.7 mn which is increase by 5.2% yoy or stock of 38.4% GDP which still places B&H in group of the moderate indebted countries. Out of the total stock of debt, BAM 6,660.2 mn or 67% is the external public debt, while 33% or BAM 3,314.5 mn is the internal public debt. At the entity level, Republic of Srpska is more indebted compared to Federation B&H with total public debt of BAM 4,080.9 mn or 48% of GDP, while on the other hand FB&H reported stock of the debt of BAM 5,805.4 or 35% of GDP. In total amount of the internal public debt, the primary issued debt in 2011 was also included, which in case of Federation B&H reached only 1.5% ot total debt or BAM 90 mn (T-bills), while in RS it reached 4.3% or BAM 174 mn. There is evident trend of decrease of the securitized old debt frozen currency savings and war claims in both entities due to maturing of the issued bonds in 2008 2011 periods.

11

Highlights

Equity and debt market

Rising pressure on long-term YTMs in local currency bond market expected

WCB bonds on BLSE (yield %)

Source: Banja Luka Stock Exchange Raiffeisen RESEARCH

In line with our expectations, a free-fall toward the south which characterized Q1 of 2012, continued in both capital markets of B&H during April and May as well. Slump to the new all time lows of the major blue-chip indices on both Sarajevo and Banja Luka SE seems unstoppable with both indices reporting deep losses in both months on month-on-month (mom) and yearto-date (ytd) basis. Moreover, SASX-10 reported in May loss by -4.2% mom or -8.2% ytd, while on the other hand BIRS was slightly more resilient and lost -0.6% mom and -6.1% ytd respectively. The free-fall of the markets could not be reversed, although the market liquidity/turnover was slightly better in March-May period with total turnover reaching the record amounts in April-May which was first of all supported by the active calendar of the primary debt instruments issuances by the entities Federation B&H and Republic of Srpska. However, it should be underlined that beside active primary segment of the debt market, also the regular turnover with equities and bonds was improved especially during May. Therefore, the regular turnover with equities on SASE in May reached the record amount in this year of BAM 8.5 mn (compared to monthly average of BAM 3.1 mn) which was mostly fuelled by the more active trading with the major blue-chips in the market prior to the Junes Shareholders Assemblies in which most of the dividend payers decide to disburse the profit to the shareholders. Hence, the largest turnover was reported with Tvornica cementa Kakanj, BH Telecom, Bosnalijek, Fabrika duhana Sarajevo, Elektroprivreda BiH although most of the share prices went to red territory (only Bosnalijek managed to report 10.10% mom price increase). In the debt market segment, the primary debt market was very lively during March-May in line with the preliminary announced Plans of the Primary Debt Issuances adopted within the Budgets 2012. Hence, in Federation of B&H in March and April we had successful 4th and 5th issue of the 6M T-bills of FB&H in total amount of BAM 25 mn and 15 mn with bid/to cover ratio of 1.2-1.3. The average yields to maturity (YTM) were further under the downward pressure with 2.28% and 2.20% which is the lowest cost of financing in SEE region due to high excess liquidity in local banking sector (98% of investors were banks again). In addition Federation of B&H started in May also with the first issues of the primary long-term debt instruments with first auction of 3Y bonds in amount of BAM 80 mn, which was successfully placed at the incredibly low yield of 5.25%. This was first out of the planned 5 auctions in total amount of BAM 230 mn which have been planned to be implemented until September 2012. However, Junes 4Y auction in amount of BAM 30 mn with low 57% subscription mirrored the rising-risk aversion of the local banks which have limited possibility to credit exposure to one issuer, and lowering interest for investing in long-term instruments by the end of the year. That was the major reason why the Federal Ministry of Finance and Treasury decided to amend the Budget 2012 and change the structure of financing for 2012, which would be now more oriented toward the IMF Stand-by negotiations and new issuances of shorter-term instruments in total amount of estimated additional BAM 100 mn of 3M-6M T-bills. However, in coming months we can expect slight upward pressure on yields as the banks are already exposed to Federal debt instruments. It should be also underlined, that during the summer we could expect adoption of the Law on Securities with the major fundamental change in the capital market through introduction of the OTC market segment.

FCS bonds on SASE (yiled %)

Source: Sarajevo Stock Exchange, Raiffeisen RESEARCH

Key indexes on BLSE and SASE

Source: SASE, BLSE, Raiffeisen RESEARCH

12

Highlights

Blue-chips

Only few companies paid dividend to its shareholders

Telekom Srpske a.d. (TLKM-R-A)

Source: Banja Luka Stock Exchange Raiffeisen RESEARC

Telekom Srpske a.d. Banja Luka After modest business performance in 2011 with top and bottom-line result of BAM 480.79 million (+1.63% yoy) and BAM 107.41 million (-0.87% yoy), Telekom Srpske a.d. Banja Luka continued with positive business results in first quarter of 2012 achieving expansion of sales revenues by 2.84% yoy and the net profit by 21.67% yoy, becoming the largest telecom operator in B&H. Moreover, in 2011 the company almost equalized the number of mobile users with BH telecom d.d. Sarajevo as its main competitor, while in 2012 is highly expected that Telekom Srpske a.d. will definitely take over the leading position on the mobile market segment. In the meantime, the Shareholders Assembly adopted decision to distribute BAM 56.8 million as dividends to its shareholders which gives DPS of BAM 0.1157 per share (dividend yield of 8.1%). Furthermore, giving the profit distribution policy from previous years, we envisage that the company will continue to pay dividend on semi-annual level, with next distribution during the second semester of 2011 after the semi-annual figures will be published. Telekom Srpske represents the most liquid company on BLSE and based on the Peer group analysis it is currently trade with discount of around 15% to its current price of BAM 1.43. BH Telecom d.d. Sarajevo BH Telecom d.d. Sarajevo remained the most profitable company in B&H despite of the evident downturn trend in financial figures. Moreover, with annual sales revenues of BAM 572.34 million (+0.5% yoy) and bottom-line of BAM 134.4 million (-2.3% yoy) achieved in 2011, the leading position on telecom market in B&H is significantly eroded by its main competitor Telekom Srpske a.d. However, the BH Telecom still hold the largest number of users (2.1 million users) as lieder in all networks (fixed, mobile, ADSL etc) The Shareholders Assembly adopted the decision on profit distribution according to which, BAM 110 million will be paid as dividend, which gives dividend per share of BAM 1.73 (dividend yield of 10%). This is the second dividend payment conducted in this year as earlier the shareholders assembly decided to restrained earning allocate for dividend payment in total amount of BAM 20.6 million (BAM 0.32 per share). On opposite to its competitors, BH telecom is currently overpriced compared to its fair price calculated on the basis of Peer Group analysis and the annual figures from 2011. Fabrika duhana Sarajevo d.d. Fabrika duhana Sarajevo d.d. is also one of few companies which managed to pay dividend on the basis of the financial result in 2011. As expected the dividend per share amounted to BAM 3.5 which is the same DPS as in 2011 (dividend yield of 7.9%). Fabrika duhana Sarajevo d.d. in 2011 achieved net profit of 6.46 million (-0.9% yoy) and sale revenues of BAM 76.29 million (4.7% yoy). The main threat to companys business performance represents excise policy according to which the excise rate on tobacco products in B&H will be harmonized with the one in European Union until 2014, which gives favor to the international brands. This lead to slump of the companys sales revenues while the leading position on the tobacco market is significantly eroded. Privatization of the company is included in the Privatization plan adopted by the Federal Privatization Agency while final decision will be made by the Federal Government. However, due to political dead-lock and the unfavorable market conditions, characterized by the slump of market prices and low liquidity, we do not expect that the Federal Government will conduct the privatization of reaming state capital in this year.

BH Telecom d.d. (BHTSR)

Source: Sarajevo Stock Exchange, Raiffeisen RESEARCH

FDS d.d. (FDSSR)

Source: Sarajevo Stock Exchange, Raiffeisen RESEARCH

13

Highlights

B&H economic outlook

Hard landing of B&H economy in 2012

Private consumption and CPI

Source: Agency for Statistics of B&H Raiffeisen RESEARCH

FDI vs C/A balance in % of GDP

In line with our estimates most of the heavy-weight economic indicators in Bosnia and Herzegovina turned to negative territory in first semester of 2012, as the first serious impact of the worsening euro-zone economic outlook. As constant political turmoil is hampering recovery in domestic public investments and reform processes which could boost up domestic demand and labor market recovery, small and open B&H economy is fully exposed to the headwinds in worsening of the external environment. Recessionary trends which in euro-zone have started already in Q4 2011 are pressuring down positive contribution which rising external demand and external trade had on moderate recovery of bh. economy in 2010-2011 period. Hence, January-April data is showing serious slump of exports and export-reliant industrial production reporting figures deeply in negative territory - dynamics which have not been seen since 2009. Moreover, most of categories in real sector which makes more than 30% of domestic GDP reported negative yoy developments in first four months of 2012, such are manufacturing, electricity, gas and water supply, construction, while retail trade and other services in general are under serious downward pressure with very low-single digit growth rates in same period. If quarterly GDP would be available for BH economy we would expect first negative quarterly and year-on-year developments of domestic economy in almost two years. As overall euro-zone economy is evidently heading toward recession in second quarter of 2012, external demand should fade away further clouding over bh. exports and manufacturing outlook. Collection of indirect taxes and retail trade dynamics are also indicating on further easing of domestic consumption, while banking sector credit growth is expected to slow-down further in coming months of Q3 2012 additionally putting under the pressure overall domestic demand. On the other hand troubled labor market indicators and decline in real disposable income are additionally pressuring down domestic consumption which is expected to stagnate in 2012. Hence, pattern of economic worsening during H1 2012 was similar to one seen back in 2008, during the first wave of economic crisis in euro-zone, with slumping exports and industrial production, extremely poor inflow of FDI and squeeze in credit growth. However, as we expect recessionary trends in euro-zone to bottom-out during second and third quarter, B&H economy should be also under the strongest downward pressure mostly in the same period, while first serious positive rebounds expected in the last two quarters. The first positive developments are expected again in exports and industrial production in third and fourth quarters which are expected to post low single-digit growth rates. Accordingly, we still expect as our baseline scenario for 2012 to see economic stagnation with estimated real GDP of 0% yoy, with potential downward risks highly related to further developments of euro-zone economy (especially our main trading partners), eventual level of required fiscal tightening or cuts in public spending which could occur with start of the negotiations over the new Stand-by arrangement with the IMF. Additional risks are also related to the domestic political turmoil, although in our baseline we have not taken into account any public spending and investment contribution to growth anyway. On the other hand, risks over the credit crunch in domestic sector have eased substantially although some players are under the rising pressure of needed capital raise and improving the liquidity and local deposit base. The NPLs have still not bottomed-out although we expect much milder patter of the credit portfolio worsening by the end of 2012, compared to 2010-2011 period.

Source: Central Bank of B&H Raiffeisen RESEARCH

Real GDP growth (% yoy)

Source: Raiffeisen RESEARCH

14

Highlights

Imressum

Raiffeisen Research
Raiffeisen BANK d.d. Bosna i Hercegovina
Investment Banking Division Sanja Korene, Head of Investment Banking; Phone: + 387 33 28 71 22, e-mail: sanja.korene@rbb-sarajevo.raiffeisen.at Ivona Kristi, Head of Research; Phone: + 387 33 28 77 84, e-mail: ivona.kristic@rbb-sarajevo.raiffeisen.at Dragomir Grgi, Head of Capital Markets; Phone: + 387 33 28 71 26, e -mail: dragomir.grgic@rbb-sarajevo.raiffeisen.at Nadira enanovi, Head of Brokerage Business and Investment Advisory; Phone: +387 33 28 76 47, e-mail: nadira.cenanovic@rbb-sarajevo.raiffeisen.at

Raiffeisen CAPITAL a.d. Banja Luka

Nataa Majstorovi, Director; Phone: + 387 51 23 14 90, e-mail: natasa.majstorovic@rbb-sarajevo.raiffeisen.at

Publisher
Raiffeisen BANK d.d. Bosna i Hercegovina Zmaja od Bosne bb, 71000 Sarajevo www.raiffeisenbank.ba Raiffeisen direct info: +387 33 75 50 10 Fax: +387 33 21 38 51 This publication was completed on July 02nd, 2011

Disclaimer This publication is prepared and published by Raiffeisen BANK d.d. Bosna i Hercegovina, Sarajevo (hereafter: Raiffeisen BANK). The publication is prepared only for information purposes and any of its parts can not be defined as a proposal or invitation for purchase/sale of any assets, security or right which is mentioned, and cannot be a substitute for an independent investment advice, and no obligation by its publishing is made for Raiffeisen BANK. The information, opinions, analyses, conclusions, prognoses and projections issued within the publication are based on publicly available data, which Raiffeisen BANK rely on, but cannot guarantee for their accuracy. All information, opinions, analyses, conclusions, prognoses and projections issued within the publication are subjects to change which depends on change of source of information and changes occurred in period between moment of creating and reading of the publication. No proposals or guaranties are stated or implied, and Raiffeisen BANK or its employees cannot take any responsibility/obligation for errors, omissions, misstatements, negligent or any direct or consequential loss or damage suffered by any person as a result of relying on any part of the publication. Final decision for purchase/sale of any assets, securities or right is solely responsibility of the reader. The document and its parts can not be copied or in any way reproduced without stating the information source.

15