Bosnia and Herzegovina's 'B+/B' ratings affirmed by S&P Global

S&P Global Ratings affirmed Bosnia and Herzegovina's 'B+/B' sovereign credit ratings with a stable outlook, anticipating political tensions will not significantly escalate despite complex institutional arrangements. This affirmation is underpinned by a strong fiscal position, with budget deficits projected below 1% of GDP and net debt stabilizing at 21% of GDP, largely owed to official creditors. While economic growth is modest at 2.5% this year, the banking system remains robust. Ratings could be lowered if political risks worsen, or raised with accelerated structural reforms, particularly for EU accession.

Analysis

S&P Global Ratings has affirmed Bosnia and Herzegovina's 'B+/B' sovereign credit ratings with a stable outlook, signaling a balance between the country's robust fiscal position and its significant political risks. The affirmation is anchored by a strong consolidated general government fiscal profile, with S&P forecasting budget deficits to average below 1% of GDP from 2025-2028 and net general government debt stabilizing at a manageable 21% of GDP. The debt structure is favorable, with nearly 60% owed to official creditors at long maturities. However, these strengths are counterweighed by an exceptionally complex institutional framework that fosters political volatility and policy deadlocks, as evidenced by recent secessionist threats from Republika Srpska. Economic growth remains modest, projected at 2.5% this year due to weak demand from key EU trading partners, and is expected to reach just under 3% from 2026-2028. While the currency board arrangement with the euro provides a crucial policy anchor, it limits monetary flexibility by preventing the central bank from acting as a lender of last resort. The banking system is a source of stability, remaining healthy with strong capitalization and nonperforming loans near historical lows of approximately 3.5%.

Key Decisions for Investors

• Investors should primarily monitor domestic political developments, as S&P clearly identifies escalating institutional risks as the key trigger for a potential credit downgrade.
• The stable but low economic growth forecast of 2.5-3.0% suggests that returns on the country's sovereign debt are more dependent on political stability than on a strong macroeconomic growth story.
• A potential ratings upgrade is explicitly tied to progress on structural reforms for EU accession, making any positive developments on this front a key long-term catalyst to watch.
• While the healthy banking sector provides a buffer, the central bank's inability to act as a lender of last resort is a structural risk that could amplify the impact of any severe economic or political shock.