Coping with COVID-19
Growth fell 3.8% y/y in 1H20, reflecting the 9.3% y/y drop in 2Q. The slowdown reflects constrained domestic demand, as household consumption and investments fell 9.4% y/y and 25.2% y/y, respectively, shaving a total of 12.8pp from headline GDP. Despite the 31.7% y/y decline in G&S exports, the 29% y/y drop in imports allowed for a 3.6pp positive net export contribution.
High-frequency indicators suggest a mild recovery in 3Q, with industrial production recovering faster than retail, although both remained in negative territory in 3Q. The resurgence of Covid-19 in late October called for another partial lockdown; we hence cut our FY20 and FY21 GDP forecasts by 0.5pp and 1pp to -4% y/y and 3% y/y, respectively, with risks still prevailing to the downside.
Deflation trends accelerated from mid-year, with average CPI after 10M20 at -0.9% y/y. Given the obvious constraints on the demand side, and a prolonged period of low oil prices, we expect deflation trends to persist in the near term. We forecast prices to decline 1% y/y in 2020 on average, before rising 0.9% y/y in 2021.
Authorities expect revenues to drop 5% y/y this year, while the expenditure side could rise roughly 12% y/y, courtesy of various fiscal aid measures in place. The fiscal deficit is thus expected at 5.3% of GDP in 2020, which will push public debt towards 38% of GDP. Given that the country does not have access to international markets, the deficit will be covered through domestic borrowings and loans from IFIs. Talks with the IMF regarding a KM 1.5bn credit line are underway, but have stalled due to objections from the Serbian entity.
The results of the November local elections were somewhat of a surprise, as they show weakening of old nationalist blocs in both entities, thus possibly creating space for more progressive policies. SDA, the largest Bosnian party, has been reduced to almost entirely rural areas in the Federation, while Dodik’s SNSD lost the majority in Republika Srpska’s capital Banja Luka.