FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT JUNE 2012
SARAJEVO STOCK EXCHANGE
debt. In addition, Republika Srpska issued for the
first time short-term T-bills in May and June 2011
serving as temporary financing to Republika Srpska
cash-based budget deficit. The offers were met by
high demand and achieved relatively favourable
conditions. Overall, even though the debt-to-GDP
ratio is still relatively moderate, its upward trend
needs to be monitored carefully.
Although there is evidence of an ongoing trend of
economic recovery, the incomplete reform process
acts as an impediment to laying the foundations
for solid and more domestic-driven growth in
Bosnia and Herzegovina. The growing trade gap
and increasing current account deficit suggest
that external imbalances are again taking shape.
The productive capacity and competitiveness of
the economy remain weak, as domestic sources
of growth are not adequately exploited and
national savings remain low. The currency board
arrangement enjoys a high level of confidence and
credibility, while the failure to agree on a Global
Framework for Fiscal Policies for 2011-2013 and
2012-2014 severely threatens the transparency,
reliability and sustainability of public finances and is
a serious impediment for short- and medium-term
budgetary and general economic planning. Overall,
the worsening quality of budgetary processes is
putting a strain on the viability of macroeconomic
policies, even though financial and monetary
stability has been preserved. Interplay of market
forces.
The private sector’s share in GDP is estimated
to have remained stable at around 60% of GDP
in 2010. In Republika Srpska there has been
no further progress in the privatisation agenda.
Following a government decision not to initiate
their privatisation, strategic companies such as
the power utility, Banja Luka airport and the postal
company remain public. Around 69% EN of the
initial stock of State-owned capital intended for
privatisation had been sold by September 2011,
unchanged from a year earlier. In the Federation,
only one out of nine companies included in
the revised privatisation plan has been partly
privatised by stock exchange transactions with
the achieved price being less than half of the
company’s estimated value. Attempts to privatise
the remaining eight companies were unsuccessful,
in some cases in spite of repeated offerings. None
of the companies considered “strategic” such as
the power utility and a tobacco factory were subject
to privatisation. The planned restructuring and
liquidation of socially-owned enterprises has made
slow progress. Most prices are liberalised, even
though a number of administered prices remain
(e.g. for utilities, including electricity and gas).
Overall, the planned privatisation process did not
advance for the third consecutive year.
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Market Entry and Exit
Following the economic crisis, the number of
newly registered companies dropped by around
50% in 2010. Property registration procedures
were significantly shortened during 2010 in
some courts, for example from 84 to 33 days in
the Sarajevo Court. The time needed to start a
business was reduced from 60 to 55 days, on
average, over 2010. Court registration timelines
and costs are harmonised between the Entities,
including the notary fees. However, the process
for obtaining all the necessary documents and
permits remains lengthy and companies must
still register in both Entities if they want to do
business in the whole country. Under the second
stage of the “legislative guillotine” project in the
Federation, seven bylaws have been adopted
in various ministries to streamline 109 business-
related administrative procedures, and some
administrative improvements have also been
implemented at Canton and municipal levels.
Labour tax procedures have been streamlined.
Overall, some improvements can be reported,
particularly in registration procedures.
The Legal System
The legal system in Bosnia and Herzegovina
remains complex. Even though the standard
of legislation is relatively high in some areas,
implementation and application of laws in practice
is often poor due to the weak enforcement
capacity of key institutions. The average time to
resolve a dispute before court in order to enforce
a contract remains high at 595 days. The rule of
law is weak and the judicial system often does not
function efficiently, is subject to obstruction by the
parties and does not cover commercial activities
adequately. Overall, weak rule of law, corruption
and unreliable contract enforcement continue to
hamper the business environment.
Financial Sector Development
The financial sector is dominated by banks that are
engaged mainly in traditional credit and savings
activities. The share of claims on the private sector
in relation to GDP decreased to around 55% in
early 2011, from 58% a year earlier. Twenty-nine
banks are operating in the country, one less than in
the previous year as one bank in the Federation is
undergoing a liquidation procedure. Two banks are
under provisional administration. Twenty-one banks
are under foreign ownership, seven under domestic
private ownership and one is majority Stateowned.
Despite losing some 2.4% of their share, the five
largest still account for more than half of the total
assets of the banking sector. Banks with foreign
ownership accounted for approximately 90% of
the total banking system assets in 2010. Banking
sector assets remained relatively stable between
the third quarter of 2010 and the second quarter of
2011. The capital adequacy ratio decreased slightly
from 15.6% in the third quarter of 2010 to EN
15.5% in the second quarter of 2011, comfortably
above the legal minimum of 12%, which itself is
significantly higher than the 8% required in the
Basel II Accord. After an aggregate net profit of
some € 12.6 million in 2009, the banking sector
finished 2010 with an aggregate net loss of € 63.6
million. The quality of the loan portfolio continued
to deteriorate. The share of non-performing loans
to total loans reached 11.8% in the second quarter
of 2011, the highest level since 2001, up from 9.2%
in the third quarter of 2010, while the volume of
loans increased. Nevertheless, banking profitability
indicators showed a remarkable upward trend in
the second quarter of 2011. The return on average
equity increased from -3.5% in the third quarter of
2010 to 3.5%, while the return on average assets
rose from -0.4% to 0.4%. Liquidity indicators
deteriorated slightly during the same period with
the rates of liquid to total assets falling from 29.3%
to 26.2% and of liquid assets to short-term financial
liabilities from 50.3% to 46.2%. Twenty-five banks
are participating in the deposit guarantee scheme.
Its coverage level remained unchanged at around €
18,000. In March 2011, Republika Srpska amended
the Law on the Banking Agency, establishing a
banking system ombudsman and widening the
Agency’s responsibilities for supervision and
protection against money laundering and financing
of terrorism. The amendment also assigns the
Agency customer protection functions. Overall,
despite the increasing non-performing loan ratio,
financial stability was safeguarded.
Annual credit growth continued its upward trend
and reached 6.7% in July 2011, though from a low
base. Loans to households grew slightly by 2.8%,
while those to private enterprises increased by
7.7%. The recovery of deposits has lost pace in
an annual comparison, growing by 2.2% in July.
Households remained the main contributors to this
development, increasing their savings by 10.7%,
while the corporate sector reduced its deposits by
6.6%. As a consequence of these developments,
the loans-to-deposits ratio climbed from 113.5%
in October 2010 to 120% in July 2011. The spread
between average loan and deposit interest rates of
commercial banks decreased by 18 base points
in the fourth quarter of 2010 compared to the
previous quarter, reaching 7.87 percentage points,
mainly due to reduced lending rates. This level
points to still high intermediation costs. Overall,
after the sharp correction experienced during the
financial and economic crisis, credit activities are
gaining strength again.
In the first half of 2011, local stock markets
regained some previously lost ground, recording
an upswing of 4% and 7.2% for the main indices of
the Sarajevo and the Banja Luka stock exchanges,
respectively. Their combined market capitalisation
recovered somewhat to around 47% of GDP
in the first seven months of 2011, up from 44%
in mid-2010. The cumulative turnover almost
doubled year-on-year in January-July 2011, mainly
influenced by two T-bills issues of Republika Srpska
(May-June 2011). The insurance sector remained
small and relatively weak, accounting for 1.9%
of GDP in 2010, representing marginal increase.
The annual growth of premiums picked up slightly
to 2.9%, as compared to 1.4% annual rise in
2009. The market was dominated by the non-life
insurance segment, which accounted for 84.2% of
the total. The number of companies active on the
market decreased to 25 at the end of 2010, after
the Federation’s Insurance Supervisory Agency
revoked the licence of Hercegovina Osiguranje.
Overall, financial intermediation by the non-banking
sector remained shallow.
Source IMF