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2020/06/08 / Erste Group Research

Outbreak of COVID-19 adds to overall worries

Growth slowed last year, landing at 2.6%. The slowdown reflects less supportive external environment, as key trading partners’ battled to avoid a recession, but also a prolonged period of domestic political uncertainty. Failure of Mostar-based Aluminij, one of the country’s biggest exporters, added to overall export and industry slump.

With the onset of Covid-19 outlook has deteriorated. We expect the economy to contract by 3.5% this year. Structure wise, the story shifts, as now domestic demand will weigh on GDP, while external side of the equation should offer some relief in line with falling imports. On the positive side, we expect a bounce back in 2021

Average inflation in 2019 landed at just 0.6% y/y with prints below 1% throughout the year, except at the very start of the year. 1Q20 expectedly, given the slump in commodities, brought further slowdown with average CPI at just 0.4% y/y. We expect yearly prints to move to negative territory going forward and forecast average FY20 CPI at -0.5% y/y, before rising to 1% on average in 2021.

The fiscal deficit is seen persisting in 2020 (EBCe -4.5% of GDP) due to virus outbreak and subsequent effect on both the revenue and expenditure side. For 2019 the deficit is estimated at 0.5% of GDP as growth in public spending due to public wage unfreezing was the key driver. Increased financing needs will reverse the recent downward debt trajectory, but debt is expected to remain sustainable.

The main risks for BiH continue to be slow growth in the EU and political tensions within the country and region. Faster reform implementation is necessary to address long-standing structural and institutional weakness in order to speed up the convergence story. Currently, incentives for reforms are generally misaligned, subject to daily political bickering, while unfavorable demographic trends continue to exacerbate the key problems.

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General information

AuthorErste Group Research
Product nameCEE Country Macro Outlook
Topic in focusFX, Macro/ Fixed income
Economy in focus-
Currency in focus-
Sector in focus-


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