Standard & Poor’s has affirmed Bosnia & Herzegovina’s B/B foreign and local currency ratings and its stable outlook, but warned that divisive politics are delaying economic reforms that should unlock a new tranche of funding from the International Monetary Fund (IMF).

In May, Bosnia’s parliament missed its best chance to adopt key legislative changes proposed by the government that would have unlocked the second tranche under the agreement with the IMF, signed in 2016. To receive the second tranche, Bosnia needed to implement a set of measures which included cutting public spending, improving control of employment and increasing excise duties on oil – none of which have been completed.

“The rating affirmation reflects our view that BiH will be able to contain its budget deficits during periods of less-available external financing. At the same time, rising external debt and substantial external financing needs in light of sustained current account deficits weigh on the ratings,” S&P said in a statement.

The rating agency noted that Bosnia’s failure to meet the IMF’s requirements will require significant renegotiations of the programme framework in order for further tranches to be disbursed and that any future disbursements will be delayed extensively.

“In addition to the immediate financial effects, we think that the derailing of the IMF arrangement is detrimental for the country as the IMF programme has provided an important anchor for the country's structural reform agenda,” the statement said.

According to S&P, if reforms stall further, Bosnia could lose external financing for key infrastructure projects.

It added that Bosnia’s ratings are constrained also by divisive politics that bring policymaking to a standstill, as well as its limited monetary policy flexibility and low wages.

On the other hand, the rating agency noted that Bosnia’s modest but steady economic growth supports indirect tax revenues, which the country uses to service its external debt. The ratings are also underpinned by Bosnia’s relatively low and predominantly concessional debt burden.

S&P also noted that Bosnia’s failure to meet the requirements for the IMF’s second tranche is raising the question of whether external financing is available for the country.

“Failure to implement legislation to fulfill conditions for the first review of the IMF's extended fund facility (EFF) have derailed the program, raising questions on the availability of external financing. Nevertheless, we estimate that Bosnian policymakers will resume their efforts to fulfill the programme's conditions in the coming 12 months,” S&P said in a statement.

The country is expected to experience higher political tensions ahead of the October 2018 general election as the main political parties will most likely choose to once again raise the tensions between the two entities in the country, the Muslim-Coat Federation and Republika Srpska.

“In this environment, we expect private consumption to fuel growth, while large-scale public investment projects will hinge on the availability of foreign financing inflows,” the statement reads.

S&P expects Bosnia’s current account deficit to expand to around 8% of GDP in 2020 from an estimated 5% of GDP in 2017. At the same time, gross exports are expected to continue their robust growth and tourism seems rising thanks to visitors from the Middle East.

The rating agency expects that Bosnia’s general government fiscal deficit will average below 1% of GDP in 2017-2020 mainly due to lack of external financing.