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Bosnia and Herzegovina: Market Profile

Picture: Bosnia and Herzegovina factsheet
Picture: Bosnia and Herzegovina factsheet

1. Overview

Bosnia and Herzegovina is an upper middle-income country, which has made good progress in terms of its development since the end of the Bosnian War in the mid-1990s. Its complex political system reflects the constitutional provisions made by the Dayton Agreement (to end the ethnic conflict), as well as the subsequent amendments introduced under the auspices of the international community through the Office of the High Representative. Today, Bosnia and Herzegovina is an European Union (EU) potential candidate country that is embarking on a new growth model.

Sources: World Bank, Fitch Solutions

2. Major Economic/Political Events and Upcoming Elections

March 2015
EU foreign ministers and Bosnia signed the Stabilisation and Association Agreement that has been on hold since 2008, increased the likelihood of Bosnia joining the EU if it carries out key political and economic reforms.

February 2016
Bosnia submitted formal application to join EU.

October 2018
Bosnia and Herzegovina held both presidential and parliamentary elections on October 7. The new three-person presidency is made up of Bosnian Serb leader Milorad Dodik, Šefik Džaferović from the Party of Democratic Action (SDA – the main Bosnian Muslim Party), and Social Democrat Željko Komšić, who represents Croat voters.

Sources: BBC Country Profile – Timeline, Fitch Solutions

3. Major Economic Indicators

Graph: Bosnia and Herzegovina real GDP and inflation
Graph: Bosnia and Herzegovina real GDP and inflation
Graph: Bosnia and Herzegovina GDP by sector (2017)
Graph: Bosnia and Herzegovina GDP by sector (2017)
Graph: Bosnia and Herzegovina unemployment rate
Graph: Bosnia and Herzegovina unemployment rate
Graph: Bosnia and Herzegovina current account balance
Graph: Bosnia and Herzegovina current account balance

e = estimate, f = forecast
Sources: IMF, World Bank, Fitch Solutions
Date last reviewed: November 5, 2018

4. External Trade

4.1 Merchandise Trade

Graph: Bosnia and Herzegovina merchandise trade
Graph: Bosnia and Herzegovina merchandise trade

Source: WTO
Date last reviewed: November 21, 2018

Graph: Bosnia and Herzegovina major export commodities (2017)
Graph: Bosnia and Herzegovina major export commodities (2017)
Graph: Bosnia and Herzegovina major export markets (2017)
Graph: Bosnia and Herzegovina major export markets (2017)
Graph: Bosnia and Herzegovina major export markets (2017)
Graph: Bosnia and Herzegovina major export markets (2017)
Graph: Bosnia and Herzegovina major import markets (2017)
Graph: Bosnia and Herzegovina major import markets (2017)

Sources: Trade Map, Fitch Solutions
Date last reviewed: November 12, 2018

4.2 Trade in Services

Graph: Bosnia and Herzegovina trade in services
Graph: Bosnia and Herzegovina trade in services

Source: WTO
Date last reviewed: November 5, 2018

5. Trade Policies

  • Bosnia and Herzegovina is not yet a member of the World Trade Organization (WTO). The Working Party was established on July 15, 1999, when the country started its accession negotiations for the WTO. In February 2018, the 13th meeting of the Working Party on the Accession of Bosnia was held, where WTO members supported the prompt conclusion of negotiations and welcomed the commitment by Sarajevo to finalise its accession process over the course of 2018.

  • The customs policy law and the rates of customs tariffs to be applied are largely based on EU standards. Bosnia and Herzegovina has signed the Stabilisation and Association Agreement (SAA) and the Central European Free Trade Agreement (CEFTA).

  • An excise tax is also paid on certain imported and domestic goods which include coffee, oil derivatives, tobacco, beverages and alcoholic drinks.

  • In 2009, Bosnia and Herzegovina introduced a law for the protection of domestic products against imports from Croatia and Serbia. The law stipulates that safeguard measures were necessary due to the influx of imports and dumping of particular agricultural products from Croatia and Serbia, as well as a conceivable decrease in exports from Bosnia to Serbia.

  • As a result of Bosnia and Herzegovina not having EU member status, even though the majority of its trading partners are EU member states, export and import supply chains will face more onerous border and documentary times and costs when compared to those of EU states. The most salient risk is the high cost associated with the import border compliance process, which is higher than that of countries such as Macedonia, and contributes towards Bosnia's status as regional underperformer in relation to customs burdens.

Sources: WTO - Trade Policy Review, Fitch Solutions

6. Trade Agreement

6.1 Trade Updates

Bosnia formally applied for EU membership in February 2016, and if the country were to join the Union, its tariff rate would be lowered in conjunction with the EU Common Tariff of 1.0%. For the time being, however, Bosnia's import tariffs are harmonised each year with the combined nomenclature of EU and legislative regulations.

6.2 Multinational Trade Agreements

Active

  1. Bosnia and Herzegovina-European Free Trade Association (EFTA – consisting of Switzerland, Norway, Iceland and Liechtenstein): The main focus of this free trade agreement (FTA), which came into force in January 2015, is the liberalisation of trade in goods. The agreement abolishes all customs duties on industrial products as of its entry into force. Additional agricultural agreements between the individual EFTA states and Bosnia and Herzegovina form an integral part of the instruments establishing the free trade area.

  2. The CEFTA, consisting of Albania, BiH, Serbia, Moldova, Montenegro, Former Yugoslav Republic of Macedonia (FYROM) and UNMIK/Kosovo: CEFTA came into force in May 2007 and helps increase trade between regional counterparts and fosters non-EU bilateral relations.

  3. Bosnia and Herzegovina-EU: The SAA between the EU and Bosnia and Herzegovina entered into force on June 1, 2015 and has caused a shift in the latter's export and import partners and goods. The SAA establishes a close partnership between the EU and Bosnia and deepens the political, economic and trade ties between the two parties. It is from now on the main framework for relations between the EU and Bosnia and Herzegovina, further preparing the latter for future EU membership. The entry into force of the SAA has also increased the confidence of domestic and international investors in Bosnia and Herzegovina. It allows both Bosnian and EU companies to access their respective markets. This is conducive to enhanced business opportunities for both the EU and Bosnia-based companies, and would stimulate economic growth and employment. SAA will also contribute to the progressive alignment of Bosnian norms and legislation with the EU legislation, thus benefiting Bosnian citizens through better quality, healthier and safer goods.

  4. Bosnia and Herzegovina-Turkey: An FTA with Turkey, which came into force in July 2003, provides additional free access to a consumer market of 80 million people.

Under Negotiation

Bosnia and Herzegovina-Malaysia: The agreement, which is expected to materialise by 2020, will help businesses exploit opportunities in manufacturing and the import and export of Halal products due to the large population of Muslim consumers in both markets. This will also boost service exports in terms of tourism in both countries.

Source: WTO Regional Trade Agreements database

7. Investment Policy

7.1 Foreign Direct Investment

Graph: Bosnia and Herzegovina FDI stock
Graph: Bosnia and Herzegovina FDI stock
Graph: Bosnia and Herzegovina FDI flow
Graph: Bosnia and Herzegovina FDI flow

Source: UNCTAD
Date last reviewed: November 5, 2018

7.2 Foreign Direct Investment Policy

  1. The Foreign Investment Promotion Agency (FIPA) of Bosnia and Herzegovina works to attract Foreign Direct Investment (FDI), and encourage existing investors to expand their businesses in Bosnia and Herzegovina. FIPA has identified sectors, such as manufacturing, energy and wood processing as key industries that are likely to see high investment growth in the coming years. Overall, there are no restrictions on foreign investment or ownership, with the exception of the defence and media sectors, where foreign control is capped at 49%.

  2. Businesses operating in Bosnia and Herzegovina face a high import burden as infrastructural development, industrial capacity and diversification remain weak due to a dearth of fixed capital formation and lack of political resolve in the country. Imports are, therefore, driven by the country's need for complex machinery and manufactured goods that cannot be produced locally, as well as some of its energy requirements, such as oil and gas.

  3. A bonus to foreign investors is the Law on the Policy of FDI, which accords foreign investors the same rights as domestic investors, including during the bidding process for privatisation tenders. Existing investors are also granted protection from amendments to the Law on Foreign Investment. If the Bosnian government were to make changes to this law, the individual investor may select the most favourable version of regulations to apply.

  4. Despite the various investment incentives of the Bosnian market, some short-term risks as well as longer-term barriers to FDI still exist. State-owned enterprises (SOEs) – which affect sectors such as defence, media and telecommunications – are mostly owned by the sub-national governments and are thus controlled by various political parties, which leaves them open to inefficient management/management focussed on national objectives as opposed to market-efficient operations. By law, private enterprises can compete under the same conditions as public ones, but in practice, SOEs have the upper hand as some of them hold a near-monopoly and make large profits due to their dominant market position.

  5. Although Bosnian law states that foreign investors shall have the same ownership rights of real estate as domestic persons, the Law on Agricultural Land prohibits foreigners from acquiring ownership of agricultural land unless international agreements state otherwise. The rights of foreigners to own real estate in Bosnia and Herzegovina may also be subject to reciprocity. This may present risks to investors or simply dissuade them from investing or seeking ownership of property in the country.

  6. Bosnia and Herzegovina exhibits the fifth-worst state of cluster development in the region (out of 12 South East European states), behind Romania. This indicates that there are few business parks with close groupings of ventures from multiple different sectors, suggesting a poor state of business relationships and economic management in the country.

Sources: WTO - Trade Policy Review, ITA, US Department of Commerce, Fitch Solutions

7.3 Free Trade Zones and Investment Incentives

Free Trade Zone/Incentive ProgrammeMain Incentives Available

Bosnia and Herzegovina operates a number of Free Trade Zones (FTZs) which offer a range of incentives for investment.

There are six FTZs which are located at Vogošća, Sarajevo, Holc, Lukavac, Mostar and Visoko.

- Investors in these zones do not pay taxes or contributions, and are free to invest and re-transfer capital, as well as transfer their profits

- Exempted from Value Added Tax, contributions and import duties

- Investment and transfer of profit and investments are free of charge

- Reduced Municipal fees for facilities construction, allowing for payment in instalments

- Faster administration for acquisition of construction permits

- Reduced costs for certificates of occupancy for usable areas

Sources: US Department of Commerce, Fitch Solutions

8. Taxation – 2018

NIL

9. Foreign Worker Requirements

9.1 Foreign Worker Requirements

Bosnia and Herzegovina's labour risks are largely driven by the difficulty of finding suitable staff. The country has a small and shrinking population due to low birth rates and a steady flow of outward migration, depleting the pool of skilled labour. This shortfall has not been counterbalanced by corresponding inward migration of highly skilled workers, with immigrants mostly arriving from neighbouring states rather than developed countries.

The large informal economy poses additional risks to investors and foreign businesses, as they are exposed to unfair competition from unregistered employers that pay no tax or social insurance for their workers.

9.2 Localisation Requirements

Since unemployment in Bosnia and Herzegovina is high, requirements for businesses to hire foreign workers are rigorous. Quotas on the number of work permits which may be issued to foreign workers for each sector of the economy are decided on an annual basis by the Council of Ministers. Only the highest level educational degrees are accepted as a legitimate reason to hire a foreigner instead of a local.

9.3 Foreign Worker Permits

The permit application process is lengthy, with 45-50 days required for a work permit and 30 days for a residence permit. Work permits are valid for a period up to one year and are only valid for the specific job and specific employer for which they are originally issued. The risks associated with such rigorous demands and lengthy visa processes will deter businesses requiring highly skilled workers from setting up in Bosnia and Herzegovina, as the low skill level of the domestic labour force means that foreign labour will often be required.

9.4 Visa/Travel Restrictions

30 days are required for a visa application and citizens of all African, some Latin American and most Asian and Middle Eastern states require a visa before arrival. Due to various visa arrangements, foreign nationals from 79 jurisdictions that include Europe (except Belarus), North America, Australia, New Zealand and some parts of Latin America enjoy access to Bosnia and Herzegovina without a visa for up to 90 days.

Sources: Government websites, Fitch Solutions

10. Risks

10.1 Sovereign Credit Ratings


Rating (Outlook)Rating Date
Moody's
B3 (Stable)
16/02/2018
Standard & Poor'sB (Stable)
28/03/2012
Fitch Ratings
Not Rated
Not Rated

Sources: Moody's, Standard & Poor's, Fitch Ratings

10.2 Competitiveness and Efficiency Indicators


World Ranking
201620172018
Ease of Doing Business Index
79/189
81/190
86/190
Ease of Paying Taxes Index
154/189
133/190137/190
Logistics Performance Index
97/160
N/A72/160
Corruption Perception Index
83/176
91/180N/A
IMD World CompetitivenessN/A
N/AN/A

Sources: World Bank, Transparency International

10.3 Fitch Solutions Risk Indices


World Ranking
201620172018
Economic Risk Index Rank132/202
Short-Term Economic Risk Score34.8
35.0
36.5
Long-Term Economic Risk Score40.5
44.8
46.3
Political Risk Index Rank132/202
Short-Term Political Risk Score42.1
40.6
41.0
Long-Term Political Risk Score51.8
55.8
55.8
Operational Risk Index Rank116/201
Operational Risk Score46.4
45.1
46.0

Source: Fitch Solutions
Date last reviewed: November 8, 2018

10.4 Fitch Solutions Risk Summary

ECONOMIC RISK
Economic activity continues to show resilience in the face of elevated political risks, and GDP growth is expected to remain on its current trajectory over the coming years amid falling unemployment, rising investment in infrastructure projects, and robust export growth. At the same time, the country's growth potential remains capped by its unstable political climate, institutional weakness, and shortages of skilled workers.

OPERATIONAL RISK
Bosnia and Herzegovina offers an operating environment with significant operational risks, mainly relating to weak transport infrastructure, the limited size of the labour force, a fractured political environment and weak cross-border relationships. Even though the country has a relatively open investment climate, with no restrictions on foreign direct investment and a low rate of corporate income tax, its small market size, complicated regulatory barriers and weak rule of law weigh down investor confidence.

Source: Fitch Solutions
Date last reviewed: November 30, 2018

10.5 Fitch Solutions Political and Economic Risk Indices

Graph: Bosnia and Herzegovina short term political risk index
Graph: Bosnia and Herzegovina short term political risk index
Graph: Bosnia and Herzegovina long term political risk index
Graph: Bosnia and Herzegovina long term political risk index
Graph: Bosnia and Herzegovina short term economic risk index
Graph: Bosnia and Herzegovina short term economic risk index
Graph: Bosnia and Herzegovina long term economic risk index
Graph: Bosnia and Herzegovina long term economic risk index

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Economic and Political Risk Indices
Date last reviewed: November 21, 2018

10.6 Fitch Solutions Operational Risk Index


Operational RiskLabour Market RiskTrade and Investment RiskLogistics RiskCrime and Security Risk
Bosnia and Herzegorvina Score46.045.544.348.445.9
Southeast Europe Average57.4
52.857.959.459.4
Southeast Europe Position (out of 12)12
121212
10
Emerging Europe Average56.954.158.458.556.8
Emerging Europe Position (out of 31)26
292927
22
Global Average49.6
49.749.949.149.8
Global Position (out of 201)116
126129
97
108

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index

Graph: Bosnia and Herzegovina vs global and regional averages
Graph: Bosnia and Herzegovina vs global and regional averages
Country
Operational Risk Index
Labour Market Risk Index
Trade and Investment Risk IndexLogistics Risk IndexCrime and Security Risk Index
Slovenia
67.954.0
60.973.483.4
Croatia63.851.9
55.471.276.7
Romania62.657.162.162.968.5
Cyprus61.755.161.761.268.8
Bulgaria
60.155.563.660.061.1
Macedonia57.247.268.356.057.3
Montenegro
56.852.858.856.559.3
Serbia56.858.559.456.952.5
Turkey
53.752.055.865.042.0
Kosovo51.355.257.651.940.7
Albania50.749.047.649.656.8
Bosnia and Herzegovina46.045.544.348.445.9
Regional Averages57.452.857.959.459.4
Emerging Markets Averages46.848.047.545.746.0
Global Markets Averages49.649.749.949.149.8

100 = Lowest risk; 0 = Highest risk
Source: Fitch Solutions Operational Risk Index
Date last reviewed: November 8, 2018

11. Hong Kong Connection

11.1 Hong Kong’s Trade with Bosnia and Herzegovina

Graph: Major export commodities to Bosnia and Herzegovina (2017)
Graph: Major export commodities to Bosnia and Herzegovina (2017)
Graph: Major import commodities from Bosnia and Herzegovina (2017)
Graph: Major import commodities from Bosnia and Herzegovina (2017)

Note: Graph shows the main Hong Kong exports to/import from Bosnia and Herzegovina (by consignment)
Date last reviewed: November 8, 2018

Graph: Merchandise exports to Bosnia and Herzegovina
Graph: Merchandise exports to Bosnia and Herzegovina
Graph: Merchandise imports from Bosnia and Herzegovina
Graph: Merchandise imports from Bosnia and Herzegovina

Note: Graph shows Hong Kong exports to/import from Bosnia and Herzegovina (by consignment)
Exchange Rate HK$/US$, average
7.76 (2013)
7.75 (2014)
7.75 (2015)
7.76 (2016)
7.79 (2017)
Sources: Hong Kong Census and Statistics Department, Fitch Solutions
Date last reviewed: November 8, 2018


2017
Growth rate (%)
Number of Bosnian residents visiting Hong Kong775
0.4

Source: Hong Kong Tourism Board


2017
Growth rate (%)
Number of European residents visiting Hong Kong1,929,824
-0.2

Sources: Hong Kong Tourism Board, Fitch Solutions
Date last reviewed: November 12, 2018

11.2 Commercial Presence in Hong Kong


2017
Growth rate (%)
Number of Bosnian companies in Hong Kong N/A   N/A
- Regional headquarters
- Regional offices
- Local offices


11.3 Treaties and Agreements between Hong Kong and Bosnia and Herzegovina

  • The Agreement between China and Bosnia and Herzegovina on the Promotion and Protection of Investments entered into force in January 2005. The duration of the initial treaty term is 10 years, with its purpose being to extend and intensify the economic cooperation between the two countries.

  • The Agreement on the abolition of visa requirements for holders of ordinary passports between Bosnia and Herzegovina and China was signed by the two countries in November 2017. The agreement stipulates that citizens of Bosnia and Herzegovina and China who are holders of valid passports will have no obligation to obtain visas for entry, exit, stay or transit through the territory of the other contracting party for up to 90 days within a 180-day period.

  • The Agreement on agricultural cooperation between Bosnia and Herzegovina and China was signed in November 2017. The signing of this agreement is opening the process of intensive communication between institutions and business communities in the field of agriculture and rural development in both countries, as well as providing further promotion of economic, scientific and technological cooperation in the aforementioned sectors.

  • Bosnia and Herzegovina has a Double Taxation Agreement with China, which entered into force in December 1989.

Sources: Government Sources, Fitch Solutions

11.4 Chamber of Commerce (or Related Organisations) in Hong Kong

There is no Bosnian Consulate in Hong Kong.

11.5 Visa Requirements for Hong Kong Residents

A tourist visa is not required for Hong Kong residents for a stay up to 90 days. All travelers will need a passport valid for at least 90 days from the date of first entry into the territory of Bosnia and Herzegovina.

Source: Hong Kong Immigration Department
Date last reviewed: November 12, 2018

Content provided by Picture: Fitch Solutions – BMI Research
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