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Special Report ROAD TO SARAJEVO In association with © Photo by www.M1key.me, flickr. Some rights reserved Michal Huniewicz

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Page 1: Special Report ROAD TO SARAJEVO - GlobalCapital...Special Report ROAD TO SARAJEVO ... programmes of international cooperation, a sig-nificant number of projects are already being

Special Report ROAD TO SARAJEVO

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Welcome to Sarajevo, the capitalof Bosnia and Herzegovina. Iwant to use this opportunity topoint out immediately that

Bosnia and Herzegovina represents much morethan “post-war”, “complex structure”, “standstillin the process of government setup” and “pro-gramme with the IFI institutions”, which are theimages which are sometimes used in the foreignmedia. Please allow me to explain why I have adifferent point of view which allows me to lookat my country through the lens of acceleratedand better progress in the future. The Currency Board Arrangement, which

the Central Bank of Bosnia and Herzegovina(CBBH) has consis-tently implementedsince its establish-ment, guarantees fullconvertibility of thenational currency —the convertible mark— against the euro,which has two signifi-cant implications. Thefirst is that investorsand the business com-munity can count onthe absence of infla-tionary shocks due toexcessively expansion-ary monetary policy.The second is that, dueto the fixed exchangerate with our maintrading partner, for-

eign exchange risk is significantly lower thanwith the currencies of other emerging marketeconomies.

REFORMOver the years, significant progress has beenmade in the prevention of money launderingand financing of terrorism. The domestic reg-ulatory framework clearly stipulates that thenational currency is the only legal tender inthe country and sets out under which condi-tions and in which way financial transactionsare carried out with foreign countries. In our financial system, banks are the most

important financial intermediaries, and thebanking sector, which is in majority foreign-owned, is adequate capitalised, has high liq-uidity and is profitable. Although bankingsupervision is organised at the level of Bosniaand Herzegovina entities, the coordinationis carried out by the CBBH. The last set ofamendments to the laws regulating the workof financial intermediaries ensured a signif-icantly higher level of harmonisation ofdomestic regulations with the Basel Princi-

ples and the regulations applied in the Euro-pean Monetary Union. It also ensured that allbanks, regardless of the entity in which theywere registered, operated under equal con-ditions in the entire country.Despite the fragmented system of institu-

tional competence, which is a consequence ofconstitutional setup, systemic risks in the finan-cial system are monitored at an aggregate level.Regular interaction and exchange of informa-tion between monetary and fiscal authorities,as well as agencies in the field of supervisionand deposit insurance, ensure the authoritiesunderstand of the causes of systemic risks andhow they are transmitted across macroeco-nomic segments. There is a room for strength-ening of macro-prudential policies, as there isin other countries of the region and beyond,which I must stress are especially importantgiven the Currency Board Arrangement.Despite the complex structure, fiscal disci-

pline is satisfactory. The existence of a coordi-nation mechanism among fiscal authorities atdifferent levels ensures medium-term planningof the consolidated budget and the managementof public debt in a sustainable manner. Arrange-ments with international financial institutionsare not a necessary precondition for servicingour debts to international creditors for two rea-sons. The first is that the legal framework pro-vides a mechanism in which servicing ofinternational obligations is a priority in relationto any other expenditure, even under conditionsof temporary budget financing. The second isour low level of public debt, mainly under con-cession terms, and the fact that the plannedservicing of external debt does not exceed onefifth of the planned revenues from indirect taxes,which provide funding for financing.

ENERGYThe fiscal consolidation which took place inrecent years, the reduction of unregistered econ-omy, economic growth, as well as excise dutiespolicies resulted in continuation of activities inthe field of road infrastructure construction inBosnia and Herzegovina, and a stronger momen-tum in the field of energy sector reforms. TheFramework Energy Strategy was adopted inSeptember last year, and by the end of 2020, har-monisation is planned of domestic regulationswith the requirements of the Energy Commu-nity, including those related to renewable energysources and energy efficiency. Through bilateralprogrammes of international cooperation, a sig-nificant number of projects are already beingimplemented to strengthen the use of renewableenergy sources, including wind farms. Fundsfor the continuation of road infrastructure con-struction have been largely secured for themedium term, mostly under concession terms.

Establishment of a sustainable system of financ-ing of railway infrastructure is ongoing, amongother things, through cooperation with interna-tional supranational institutions in the field ofdevelopment of restructuring plans for railways.

AGRICULTUREIn the field of agricultural development, activ-ities are carried out in accordance with theStrategic Rural Development Plan 2018 2021,with the aim of enabling the use of IPARD fundsfor the sustainability and competitiveness offarms. Establishment of efficient food safetyand quality control systems resulted in theopening of the EU market for dairy and chickenmeat products from Bosnia and Herzegovina,all the levels of processing included. In addition,there are strong trade links in the field of agri-cultural products, not only within the CEFTAbut also with other countries. In the process ofaccession to the WTO, negotiations with Russiaare the only ones that are currently still open.Intensifying the development of business infra-

structure is also one of the objectives in the shortand medium term, and it includes the creationof a favourable business environment with afocus on reducing administrative and financialbarriers for growth and development of smallenterprises and projects supporting small andmedium enterprises in order to strengthen com-petitiveness and increase employment in thissector. In 2018, the Registry of para-fiscal levieshas been established, with the aim to reduce andharmonise them in the single economic space.Labour market reforms are currently beingimplemented to increase labour market flexibilityand reduce tax burden. The goal is to reduce thesize of the black market economys, improveworking conditions, and strengthen the compet-itiveness of domestic producers.Finally, a long-awaited step in the field of

digitisation has been made recently, when oper-ators have been granted permissions to intro-duce a 4G mobile network.

DYNAMIC ENVIRONMENTMy message to investors is that Bosnia andHerzegovina is a dynamic environment, wheresometimes, due to political rhetoric, which isnot unique to the countries of the region, we losesight of the enormous potential that we haveavailable, and that investing in Bosnia andHerzegovina provides access to much biggermarkets. Therefore, I welcome all those whowill visit Sarajevo and Bosnia and Herzegovinaand have a chance to see for themselves theenormous possibilities for the development ofthis country. It is important to keep in mind thatour values are not only our natural beauties andresources, but also our human potential thatwe are particularly proud of. l

10 ¬ A VIEW FROM BOSNIA AND HERZEGOVINA

EBRD EDITION WEDNESDAY MAY 8, 2019

INVESTING IN BOSNIA OPENS UPACCESS TO WIDER MARKETS

Senad Softic, Governor of the Central Bank ofBosnia and Herzegovina

Intensifying

the development

of business infra-

structure is one of

the objectives in

the short and

medium term

‘‘

‘‘GlobalMarkets

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Bosnia and Herzegovina (BiH) isa middle-income country with ahuge potential for growth, butunfortunately, it is the news and

discussions about the politics that most ofthe time dominate the economic reformdebate.

Bosnia and Herzegovina is a complexstate and its constitutional organisationlargely dominates economic developments.A state with two entities, Federation of BiHand Republika Srpska, as well as Brcko Dis-trict, is not a common model, resulting incircumstances in which the area of invest-ments is regulated differently than in cen-tralised states.

While potential investors are sometimesconfused about BiH’s fiscal architecture,implicit competition between the subna-tional levels of governance of the two enti-ties and Brcko District has kept bothpersonal and corporate income tax rates ata nominal rate of 10%.

The indirect taxation system, with thesingle VAT rate of 17%, remainedunchanged even during the great finan-cial crisis, and serves as a major and reli-able source of revenues.

On the positive side, with the ratio of netgeneral government debt to GDP below35%, average effective interest rate below1.5% and average time to maturity aboveseven years, public finance stability appearssecured.

On the negative side, in the post-warperiod, pension and health care systemfunds required huge social sector contri-butions which resulted in the high labourburden and high tax wedge.

Furthermore, like in other Balkan coun-tries, negative demographic trends forcepolicymakers to act fast in securing the sus-tainability of the social system. Social policyand social contributions fall under thescope of the BiH entities so the lover levelsof governance and major reforms are nec-essary in order to ensure the best possibleutilisation of funds for most vulnerable cat-egories.

State-owned enterprises pose anothersource of risk for public finance, but alsoan opportunity in case of successful restruc-turing, which will only be on the agenda ofthe levels of governance in the futureperiod.

PROTECTING THE TAX BASELike most complex systems, internal debateconcentrates on revenue allocation amongthe levels of governance. However, we alsoclosely follow international developments

and fully recognise the need for BiH to bea part of the global system for protection ofthe tax base, especially in the digital erawhere companies in the digital IT sectormay benefit from different rules across dif-ferent jurisdictions.

Despite recent bumps in global trade,globalisation and free movement of goodsand capital, sooner or later, resulted infewer obstacles for the free movement oflabour. Practically, BiH has to fight not onlyto maintain its human resources but alsoto attract skilled labour from abroad. Fail-ure to do so will result in the fact that BiHwill continue to export goods of a very lowlevel of sophistication withminimal value added. It iswith this perspective inmind that we approach theEU integration process. TheEU integration processrequires improvements onthe level of institutions inorder for the country tograsp the benefits of the big-ger and technologicallymore demanding market.

REFORMSWith or without the EUaccession process, we aresimplifying the administra-tive burden imposed onentrepreneurship and busi-ness. Both Republika Srpskaand Brcko District haveembarked upon reforms to limit parafiscalfees and this process is about to start in theFederation of Bosnia and Herzegovina.Municipalities implement different policiesto attract business, including establishment

of one-stop shops which will enable speed-ing up of the procedure of business regis-tration and creation of business zones.

Projected real economic growth rates forthe next three years exceed 3.5%, which is1 percentage point above the rates pro-jected for the EU, but still insufficient todecrease the development gap with devel-oped countries in foreseeable future.

However, we are aware that competitionin the 21st century is global and that theeconomic development depends on the abil-ity to adjust and implement digital tech-nologies. We see increasing numbers ofmillenials working for foreign companies

using their IT skills. This may signal whatthe governments should do in the future —invest in those self-developing sectors andsupport them, rather than creating big com-plicated reindustrialisation strategies.l

^

^

^

A VIEW FROM BOSNIA AND HERZEGOVINA ¬ 11EBRD EDITION WEDNESDAY MAY 8, 2019

SECURING THE ECONOMIC POTENTIALOF BOSNIA AND HERZEGOVINA

Vjekoslav Bevanda, Minister of Finance & Treasury of Bosniaand Herzegovina

BiH has to fight

not only to main-

tain its human

resources but also

to attract skilled

labour from

abroad

‘‘

‘‘

Signing an agreement with the EBRD that will provide a ¤180 million sovereign loan toBosnia and Herzegovina for the construction of a key road project, Corridor Vc, which, witha total length of approximately 15.8 km, will connect the country with European markets

GlobalMarkets

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China’s focus means Bosnian economy no longer feeling left behind

12 ECONOMICS & POLICYEBRD EDITION WEDNESDAY MAY 8, 2019

ROAD TO SARAJEVO

By Elliot Wilson

A sked by a journalist what was mostlikely to blow a government off-

course, the British prime minister HaroldMacmillan famously replied: “Events, dearboy, events.” That was in the early 1960s,but the sentiment is as relevant now as ithas ever been. We might seek to write ourown future, but events have a nasty habitof happening to us, without our verbal orwritten consent.

The hosts of this year’s EBRD conferenceknow more than most about this phenom-enon. Over the past century, Bosnia andHerzegovina has been passed around likedip at a party. Austria-Hungary annexed itbefore its empire collapsed, upon which itwas absorbed into the Kingdom of Serbs,Croats and Slovenes. Hitler then came andwent, leaving it under Tito’s control, as partof the Socialist Federal Republic ofYugoslavia. When the Soviet Union col-lapsed, civil war ensued. The 1995 DaytonAccords brought an end to the conflict, anda real country began to emerge.

Of course, this being the Balkans, nothingis ever simple. Politics in Bosnia and Herze-govina is a complex affair, requiring anawful lot of careful daily diplomacy. Thecountry consists of the Federation of Bosnia

and Herzegovina, Republika Srpska, andthe tiny self-governing Brcko District on itsborder with Croatia.

Executive power is wielded by the Coun-cil of Ministers, a cabinet whose chair isnominated by a presidency comprisingthree members (a Bosniak, a Serb, and aCroat, reflecting the ethnic mix), and con-firmed by the House of Representatives, thelower house of government. The upperHouse of the Peoples comprises 15 mem-bers appointed by local parliamentary bod-ies. It is complex but, by and large, it works.

That has resulted in an economy thatcontinues quietly to impress. In its latestWorld Economic Outlook, published inApril 2019, the IMF tipped economic outputto expand at 3%-3.5% every year until themid-2020s. In its latest CEE Quarterly, pub-lished March 2019, Italian lender Uni-Credit, which operates in 10 countries inemerging Europe, including Bosnia andHerzegovina, said GDP would slow slightlyto 2.8% this year and 2.9% in 2020, amid aglobal slowdown.

Inflation has long vacillated between1.5%-2% and is forecast to remain withinthis band. The country does run a sizeablecurrent account deficit of around 5%-6%,but again, it rarely varies, neither swellingnor narrowing. This, in short, is a nation

state that, perhaps unsurprisingly, givenits turbulent history, craves stability.

IMF FINANCINGYet that parity is often hard to achieve. Insta-bility is rarely far away, and where it exists,it is often internally created and propelled.The country is heavily reliant on externalinstitutional funding, notably from the Euro-pean Union and the IMF. Bosnia and Herze-govina is not a member of the EU, but thesingle market has until recently been thesingle largest provider of funds and finan-cial assistance. Between 1996 and 2018, itinvested more than €3.5bn ($3.9bn) in recon-struction, agriculture, and strengtheningpublic administration and the rule of law.

The country’s relationship with the IMFhas been more stop-go. A €553m loan agreedby the Fund in September 2016, disbursedin 11 instalments, was agreed on the provisothat government would push through much-needed structural reforms designed to safe-guard financial stability. Foot-dragging ledto payments being halted in 2017, restartedin February 2018, and then frozen in placeagain last August, due to disagreementsover a new law granting benefits to war vet-erans, and to recurring political instability,which involved a prolonged delay to the for-mation of a working tripartite government.UniCredit noted in March 2019 that animprovement in the political climate in Feb-ruary, stemming from the formation of bothhouses of parliament, was not likely to “trig-ger the resumption of IMF financing”.

This year has also provided Bosnia andHerzegovina with a rare a chance to show-case its finer plumage. In April, the country

^

The governor of the central bank of Bosnia and Herzegovina hopes

global investors will understand the opportunities and will seek to

exploit them but so far, the main source of that attention has come

from China

“Here and acrossthe region,officials arelooking to China,not Europe, toprovide thefunding and theadditional growththat the countryneeds— Gunter Deuber,head of economics,fixed income andforeign exchangeresearch at RaiffeisenBank International

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www.globalcapital.com/globalmarkets14 ECONOMICS & POLICYEBRD EDITION WEDNESDAY MAY 8, 2019

ROAD TO SARAJEVO

hosted the 10th Sarajevo Business Forum(SBF), dubbed the “Balkan Davos”, jointlysponsored by local lender Bosna BankInternational and the Jeddah-based IslamicDevelopment Bank. The event attractedparticipants from Turkey, Sweden andMorocco, and a delegation of 50 businessgroups from the Gulf region. The keynotespeaker at the event was Malaysia’s veteranprime minister Mahathir Mohamed.

EBRD MAIDEN EVENTThis week’s conference, the first time theEBRD’s annual event has visited Sarajevo,gives Bosnia and Herzegovina a chance todemonstrate its commitment to deregula-tion, and to promoting its status as a reliableand attractive investment partner. The Lon-don-based multilateral’s active portfoliocomprises €1.06bn spread across 155 proj-ects, the bulk of which focuses on transport,infrastructure, power and energy, and

adding depth and strength to the privatesector. EBRD officials expect to channel€300m into the country in 2019.

There is little doubt that, if stability canbe guaranteed and if its natural, financialand human resources can be properly har-nessed, Bosnia and Herzegovina’s potentialis vast. Its most immediate and visibleattribute is its arresting scenery. LonelyPlanet admires its “craggily beautiful” hin-terland, dotted with waterfalls andmedieval castles, and points to its “intrigu-ing East-meets-West atmosphere, blendingOttoman and Austro-Hungarian histories”.According to the national tourism board,3.04m people visited the country in 2018, up13.5% year-on-year. Many came to visit thehistoric centres of Sarajevo and Mostar,while others prefer to go wild, trekking andcamping and rafting near Banja Luka andon the Drina river.

In an interview with GlobalMarkets,

Senad Softic , governor of the Central Bankof Bosnia and Herzegovina picks up on thattheme and runs with it, pointing to thecountry’s “excellent strategic location, vastnatural resources, beautiful landscapes,skilled and competitive workforce, andgrowing industrial capacity”. Tourismaside, the country is dominated by theexport of metals and heavy goods, fromwooden furniture, textiles and tobacco, todefence equipment and minerals. But thecountry is slowly developing a high-techbase, the governor says, noting that hehopes global investors “will understandthose opportunities and will seek to exploitthem”. Asked what industries will addvalue to the wider economy going forward,he points to agriculture and IT and IT-related services.

Perhaps Bosnia and Herzegovina’s biggestchallenges involve discovering its investoridentity and unlocking and realising higher

Five years ago, Bosnia’s relationship withChina was all but non-existent. Now, thanks

to the rise of the Belt & Road Initiative (BRI),president Xi Jinping’s grand plan to redraw theglobal trade map in his image, China hasbecome one of the Balkan state’s keyinvestment partners, and the rapport seems togrow every year. While Serbia is the primary focal point of BRI

led-investment into the region, Bosnia andHerzegovina ranks second in total inwardmainland investment and is catching up fast. Inthe five years to the end of 2018, the Chineseinvested $1.41bn in local projects, against$1.12bn for Montenegro and $690m for Croatia.Indeed, inward investment over that period

was greater than the total invested by China inthe economies of Hungary, Slovakia, Bulgaria andthe Czech Republic combined. Over the past year,China has inked deals with Bosnia andHerzegovina to construct local power plants andhighways, upgrade its telecommunicationsnetwork with the aid of controversial telecomsfirm Huawei, and expand its dairy industry. In a report on China-CEE relations, published in

March 2019, Raiffeisen Bank said that while theBalkan economy remained “dominantly orientedtoward EU countries in terms of the tradebalance and inflows of FDI”, China was rapidlybecoming a highly valued partner, due to itsability to channel huge amounts of capital intoinfrastructure projects. Tourism, a key sector,would “benefit from tighter co-operation withChina”, helping to cut unemployment and boostliving standards.But Bosnia and other regional states would be

wise to consider the long-term impacts of

opening the door to investmentsand interest from the People’sRepublic. Bosnia is hardly alonein the region in running asizeable annual current accountdeficit, which is tipped by theIMF to widen to 5.1% in 2019,and to 6.2% in 2020, from 4.5%in 2018.While most of the goods it

imports come from Europe,cheaper products from Chinaare starting to flow in fast.Bosnia and Herzegovina imported ¤610m($685m) worth of goods from the mainland in2017, mostly textiles, footwear and machinery, a9% rise in value terms over the previous year, yetit exported goods worth just ¤20m to Asia’slargest economy.

WARNING BELLSRaiffeisen said the BRI would improve regionalinfrastructure and accelerate overland tradefrom East Asia, much of which will flow throughthe Balkan region to Europe, after navigatingwestern Asia and Turkey. But it tempered its praise by pointing to

several, now well-established mitigating factors.A blanket refusal to decouple funding andconstruction often forces capital-hungry BRImarkets to permit projects to not only be fundedby mainland lenders, but also to be built byChinese firms, denying host states a goldenopportunity to boost the number of people inskilled employment.In Bosnia, mainland construction firms will

build a four-lane highway linking Banja Luka and

Novi Grad, and a power plant in Tuzla. Bothprojects are funded by loans from Export-ImportBank of China. As Raiffeisen notes in its report: “The fact that

China not only provides loans, but also its ownresources such as labour, raw materials andmachinery, is attracting increasing criticismamong countries.”China’s rapid encroachment on a region long

seen as Europe’s backyard, is “causing warningbells to ring in the EU”, it says, adding thatChina’s involvement in strategic industries hasbegun to raise security concerns, as well as fearsof fragile frontier states succumbing to so-called“debt-trap diplomacy”.Some CEE countries reacted by passing laws

mandating state approval if a strategicallyimportant asset is bought by a foreign interest(read: China). For now, mainland investment ismore than welcome in Bosnia and Herzegovina,a young state hungry for capital, growth, jobsand better infrastructure. Whether that willstay the case in the years to come, remains tobe seen.—E.W.

Chinese Ambassador to Bosnia and Herzegovina, Ji Ping (left) and DeputyMinister of Communications and Transport of BiH Sasa Dalipagic signing amemorandum of understanding in April

A deeper dive into China’sbelt-and-road

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UniCreditis my Partner in CEE.

International Market Expertise

unicredit.eu | unicredit.ba

UniCredit offers both local and international expertise to its clients through 14 core markets including: Italy, Germany, Austria, Bosnia and Herzegovina, Bulgaria, Croatia, Czech Republic, Hungary, Romania, Russia, Serbia, Slovakia and Turkey.

As the leading bank in Bosnia and Herzegovina, UniCredit is pleased to welcome you to the 2019 EBRD Annual Meeting and Business Forum in Sarajevo.

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www.globalcapital.com/globalmarkets16 ECONOMICS AND POLICY

EBRD EDITION WEDNESDAY MAY 8, 2019

ROAD TO SARAJEVO

rates of growth. In many ways the two factorsare interrelated. Economic output looks setto continue to grow at pretty much the same,steady pace until at least the mid-2020s.“Growth is OK,” notes Gunter Deuber, headof economics, fixed income and foreignexchange research at Raiffeisen Bank Inter-national. “The data is healthy enough andwages continue to rise, so we cannot com-plain about the situation, but taking a long-term perspective, where is the upside?

“Something needs to happen to reallytake the country to the next level,” he adds.“We need to start seeing growth rates of4%, 5%, 6%, or more. If that doesn’t happen,the number of young, ambitious and skilledpeople who leave the country as soon asthey can, will continue to rise — though thisis a problem across the whole of theBalkans.” A 2017 report published by thesecurity ministry found that over half of thepeople born in Bosnia had emigrated,mostly to Germany and Austria. Inwardremittances, which make up more than atenth of economic output, jumped 9.3% year-on-year in 2017 to $2.02bn, according toWorld Bank data.

Then there is the issue of job creation.Unemployment, despite trending down, isan issue that will take years to solve. Uni-Credit tips it to fall to 31% in 2020 from 34%in 2019 and 36% in 2018. It is part of a positivelong-term progression — the jobless ratewas in the early forties as recently as 2016— but Raiffeisen Bank’s Deuber warns thatdeclining unemployment is due “not neces-sarily to economic progress, but to the num-ber of people who either continue to leavethe country, or who are so frustrated withthe status quo, they aren’t claiming welfare”.

CHINA CALLINGPerhaps the best way to inject moremomentum in an economy that is barelybreaking a sweat, is for public officials andlocal corporates, lenders and investors, tolook east rather than west. Bosnia andHerzegovina’s key external partner is, andwill remain, the EU. Directly and indirectly,Europe funds projects, lends capital to localfirms and banks, and acts as a financial,economic and diplomatic guardian. Accord-ing to European Commission data, the EUaccounts for more than 70% of the overalldirect investment in the Balkan region.

But the big step-change in recent yearshas been the arrival on the local andregional scene of another sovereign big-hit-ter. A decade ago, annual inward invest-ment in the Balkans by the People’sRepublic of China was more of a trickle thana flow. The advent of president Xi Jinping’sBelt & Road Initiative has changed all that.Both the overland “belt” and the maritime“road” pass near or through the mountain-ous Balkan region, and economies acrossboth East Asia and Southeast Asia areinvesting heavily in the region, widely seenas a backdoor into Europe. (This is likely toexplain the presence at April’s SBF ofMalaysian premier Mahathir.)

Investment by China across the regionhas soared. The latest “17+1” annual sum-mit, held last August in the Croatian cityDubrovnik, brought together officials fromChina and the 17 internationally recog-nised CEE nation states. Bosnia was one ofthe standout beneficiaries of the event,emerging with an armful of signed infra-structure projects set to be financed andbuilt by China.

The list includes a highway linking BanjaLuka with Novi Grad on the Croatian bor-der. The first phase of the project, set to costupward of €1bn, will be built by a state-rundivision of Jinan-based Shandong GaosuGroup, and funded by a €300m loan fromExport-Import Bank of China. In March,Bosnian lawmakers approved a $1.04bnloan from the Beijing-based developmentlender to expand a power facility in Tuzla,the country’s third largest city.

Two mainland firms, China GezhoubaGroup and Guangdong Electric PowerDesign, will build the expanded plant,marking the largest investment in theBalkan state’s energy sector since the endof the civil war. Fadil Novalic, prime minis-ter of the Federation of Bosnia and Herze-govina, called the loan a “historic moment”for the country, adding: “We have not hadsuch an investment in 40 years.”

A 2018 study by the European InvestmentBank found that more than one fifth of the€12bn in construction loans channelled intothe CEE region by China in the 10 years to2018, was directed into projects in Bosniaand Herzegovina. China is also investing inthe country’s dairy sector, while controver-sial telecommunications firm Huawei ishelping to build the country’s 4G network.

This shift toward a greater reliance onmainland Chinese capital matters deeply,notes Raiffeisen Bank’s Deuber. “For a longperiod of time, the region in general, andBosnia [in particular], have felt like theyare being ‘left behind’ by Europe,” he says.“Here and across the region, officials arelooking to China, not Europe, to provide thefunding and the additional growth that thecountry needs.” GM

Made in China in BiHThe agricultural co-operation between Central and Eastern European countries and China within the 16+1 framework was the focus of the 21st International Economy FairMostar in 2018; a power plant built by Chinese company Dongfang Electric Corporation in Stanari, Bosnia and Herzegovina

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By Majlinda Bregu, Secretary General of theRegional Cooperation Council (RCC)

Western Balkans might be home to manyproblems, but business sentiment remains

overwhelmingly positive, standing at 61 points.If one is interested in “a full screen image” of theregion, one needs to grasp another figure: 63%of the Western Balkans’ citizens are unhappywith the economic situation. It is easy to spotsigns of disarray: rule of law; commitment bypublic officials to understand and resolve busi-ness-related problems; disputes; international-isation of the region’s private sectors to reachhigher intra-regional and international invest-ment levels and stimulate more intense trade;unemployment at two digits; and an increasingbrain drain, just to mention some.

Yet among the hyperboles and truth, a basicpoint gets missed. More than half of WesternBalkans citizens believe the European per-spective will make their lives better; it willstrengthen the economic ties between the sixWestern Balkans economies (WB6).

By most objective measures, over the pastseveral years, the region has experienceduninterrupted economic growth (trend 3.5%in 2019 and 3.8% in 2020). Still GDP per capitain Western Balkans is less than a third of therichest EU member state — Germany. Theaverage FDI stock per capita in the WesternBalkans is less than half of the FDI stock percapita in Eastern European EU members, andjust one seventh of the EU average.

Nevertheless, the region provides a wel-coming environment to investments, withcorporate profit tax rates ranging from 9% to15%, being among the lowest in Europe.Monetary and financial systems in the regionare strongly dependent on euro.

One of the strongest assets that the regionholds is human resource base, given that overthe last years we have added more than 1.6m1

of highly qualified people to the overall work-force. Furthermore, the Western Balkansregion is a demanding domestic market,whose internal free trade agreement providesopen access to almost 20m consumers.

This region needs to undertake a joint proac-tive approach in improving its business envi-ronment and presenting it to the global busi-ness community.

Standing on the gateway between the east-ern and western part of the world, along witha network of FTAs and preferential trade sta-

tus with third economies (EU, US, EFTA,Turkey, Russia and the CIS), the region canserve as a safe harbour for investments whilstenabling easy access to the global market.

Foreign investors have also recognisedexisting opportunities in the Western Balkansand as a result the region recorded the FDIinflow of €1bn in the past year.

However, the conventional wisdom speaksloudly: this is still modest and far below thetrue potentials of the Western Balkans.

MAKING A CONNECTIONConnectivity is the name of the game.Connecting markets, people, integrating theWB6 into the EU single market. That is thereason standing behind the Western BalkansRegional Economic Area (REA). The REAaims at bringing goods, services, investments,business community, and skilled workersamong the six economies.

Under this action, the Regional CooperationCouncil (RCC) has brought the region’s gov-ernments and businesses together to workwith us on enabling free flow of investments,human capital and communication, whoseresults will have direct implications on busi-nesses and the quality of life of our citizens.Needless to mention, our work has horizontalimplications on under-tapped potentials of

our region such as the SME base, industrialbase, development of regional value chainsand their inclusion in the global ones,increase of women and youth employment.

The businesses of the region support us inthis thought, with almost 70%2 of them stat-ing that regional cooperation is important fortheir business operations.

So far, under the REA umbrella, and togeth-er with the region and the EU’s support alongthe way, we have:

• Achieved a historical regional agreementto eliminate roaming costs and paved the wayfor more substantial reductions of roamingcosts between Western Balkans and the EU.For our businesses and citizens, this repre-sents a milestone in the development of anopen regional market.

• Initiated negotiations for a regional agree-ment that will enable the creation of a region-al mobile expert pool and will facilitate freeflow of human capital in the region, namelythrough mutual recognition of professionalqualifications in the sectors of medicine andcivil engineering, and recognition of academ-ic qualifications attained at quality assuredhigher education institutions.

• Facilitated a first-ever common invest-ment agenda for the region, leading to ashared investment space and reforms in theareas of investment entry and protection,along with promotion of the region as a goodinvestment destination to the global businesscommunity. We are adding value to this worknow by initiating the reforms in financial sec-tors so as to enable access to more fundingopportunities for doing business.

AMBITIOUS It is a rather ambitious undertaking, and cer-tainly not the only one on the RCC’s work-desk,but we are very much conscious that economicreconciliation of the region will enhance ashared prosperity. l

The Regional Cooperation Council (www.rcc.int)is an organisation that promotes regional cooper-ation with the purpose of European integration ofSouth East Europe. Majlinda Bregu is the Secretary General of theRegional Cooperation Council. She was the longestserving Minister of European Integration in Alba-nia (March 2007 to September 2013). Mrs. Bregu hasbeen elected as Member of Parliament of Albaniafor three consecutive legislatures (2005-2017).

1 RCC SEE 2020 Strategy Annual Report onImplementation 2 RCC Balkan Business Barometer 2019

STANDING ON THE GATEWAYBETWEEN THE EASTERN AND WESTERN PART OF THE WORLD, THE REGION CAN SERVE AS A SAFE HARBOUR FOR INVESTMENTSWHILST ENABLING EASY ACCESS TO THE GLOBAL MARKET

S P O N S O R E D B A N K I N G R E P O R T R C C ¬ 17EBRD EDITION WEDNESDAY MAY 8, 2019

REGIONAL COOPERATION COUNCIL

Western Balkans — in business we trust!

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18 EU ACCESSIONEBRD EDITION WEDNESDAY MAY 8, 2019

ROAD TO SARAJEVO

By Elliot Wilson

Step by step. Bosnia and Herzegovina’shopes of joining the European Union

rely on following this mantra. It is the best— and really the only — way to ensure thatin the years and maybe the decades tocome, this nation of 3.5m people puts itselfin the best possible position of being ableto join the world’s largest single market.The process will not be easy — nor has

it been so far. All six western Balkan statesaspire to EU membership, Bosnia included,but at present there is little immediatechance of the bloc’s powerbrokers, partic-ularly Germany and France, fully embrac-ing the concept.In April, French president Emmanuel

Macron said all six had to resolve them-selves to “work[ing] on the stability of theregion”, and in particular, on ensuring thatit does not backslide, falling prey to a resur-gence of the kind of horrific ethnic conflictthat gripped the region in the 1990s.Bosnia faces a raft of challenges as it

inches slowly along the road to accession.In 2015, it resolved a territorial fracas withMontenegro over a five-mile stretch of

Adriatic seacoast in the Sutorina valley.But border disputes with Croatia and Ser-bia linger, and show little sign of resolu-tion. From the outset, the accession process

has been more stop than start. Bosnia hasbeen recognised as a “potential candidatecountry” since 2003. A Stabilisation andAssociation Process agreement requiringit to carry out a number of institutionaland structural reforms was signed in 2008,ratified in 2010, and enforced in 2015.Bosnia formally applied for EU member-

ship in February 2016 and will remain inthis limbo state until its status is raised anotch, to official “candidate country”, adecision that can only be made by the Euro-pean Council. To be sure, there is much thatBosnia and Herzegovina can do to furtherits cause and expedite this process.

‘NO REFORM PROGRESS’In an official fact sheet on the Balkan statepublished in April 2018, the European Com-mission pointed to the still-glaring needfor reform at every level of economy andsociety. Despite the reform process beingat a very early stage, “no progress ha[d]

been achieved” over the previous year, itwrote. Corruption was still “widespread”and remained an “issue of concern”, while“significant efforts were still neededregarding financial investigations [and]improving counter-terrorism efforts”.There were a few ticks in its box, though

one got the sense, reading the document,of a country being damned with faint praise.Bosnia had made some headway in fightingorganised crime, and was doing a tidy jobat overhauling its judicial system. But moreeffort was needed to improve freedom ofexpression, it said, pointing to politicalattacks on journalists and the continuedprevalence of gender-based violence.In an exclusive interview with Global-Markets, Senad Softic , governor of the Cen-tral Bank of Bosnia and Herzegovina,insists the country has “come a long wayin the process of EU accession”, and addsthat being part of the bloc would boostgrowth, create more jobs, raise living stan-dards, and ensure greater political stability. He admitts Bosnia had to “speed up the

process of reforming its public administra-tion and judicial system, and to intensifythe fight against corruption and crime”.

Joining the EUremains a dreamfor Bosnia

The questionsBosnia struggledto answer relatedto issues ofjustice, freedom,and nationalsecurity

Joining the European Union would put Bosnia and Herzegovina squarely on the investment map. But for

now it seems that the hosts of this year’s EBRD annual meetings are not ready to make the step up yet

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Rule of law, the business climate, protec-tion of investors, better infrastructure,enhanced institutional capacity: all of thesefactors have to be radically improved beforethe EU can view Bosnia and Herzegovinaas a direct peer, a valuable and valued eco-nomic, financial and political partner. Many of the challenges the country

faces can and will only be resolved overtime. There are no short cuts and the EUis a complex edifice. Joining the team willput Bosnia and Herzegovina squarely onthe investment map. Capital will flow inand jobs and growth will follow. But it ismanifestly clear that the country is notready to make the step up yet. When in March 2019 Milorad Dodik, the

chairman of Bosnia’s three-member statepresidency, submitted to the EU a long-overdue set of answers to more than 600questions posed the previous year, the EUfound that 20 of them were left blank. Thehead of the Enlargement Commission,Johannes Hahn, played down the issue,noting that the overarching goal was inany case to secure a “positive opinion” ofBosnia’s candidate status.Referencing the incomplete document,

Dodik was candid about the problem, not-ing that the government was “not in a posi-tion to respond… because of a lack ofcomprehensive information”. A dearth of

data is a problem in most frontier states,particularly those desperately trying tostitch a country together from scratch.But it is notable, and not a little worry-

ing, that the questions Bosnia struggled toanswer related to issues of justice, free-dom, and national security.

UPHILL BATTLEEurope in turn faces its own dilemma. Itcan only do so much to transform frontiermarkets on its distant borders into fullyfunctioning Western-style democraciesthat protect citizens’ rights and investors’interests. Brussels also faces an uphill bat-tle in convincing richer states to admitpoorer nations into its club, and at presentnone of the official candidate candidates,a list that includes Serbia, Turkey andAlbania, look set to be asked, in the near-term, to join the single market. Gunter Deuber, head of economics, fixed

income and foreign exchange research atRaiffeisen Bank International, believesthat for Bosnia and Herzegovina, joiningthe EU is “light years away. They have noteven started accession negotiations, andeven when they do, my guess is that it willtake them 10 or 15 years, or longer.”He draws a comparison with Cyprus,

which joined in 2004 after seven years ofaccession talks, but which, 15 years later,

remains a divided state. “Bosnia faces thesame challenges on its borders,” Deuberadds. “So I’d be surprised if we see any-thing substantial happen before 2030.”For whoever is running the European

project at the end of the next decade, thismay be problematic. So long as the peopleof Bosnia and Herzegovina believe a betterfuture — one in which they are seen by theleaders of Germany and France, and bythe suits in Brussels, as a peer and a part-ner — is possible, the country will continueto move forward in a positive manner.But, adds Deuber “if people on the

ground feel that accession is a long timeaway, that it won’t happen, that it won’tchange their lives and surroundings, orthose of the next generation”, they maylose hope. “In that situation, you can runup against a situation where the country’sexistence could again be threatened.”To some, talk of unravelling at this

week’s EBRD conference in Sarajevo mightseem out of place, even a little disrespectfulto the hosts, but it would be wise, at a timewhen a far larger and richer Atlantic stateis busy unravelling as it leaves the Euro-pean Union, to remind ourselves that forcountries like Bosnia and Herzegovina,joining the EU matters deeply. For the westBalkan state, it has to be the only and theright way forward. GM

www.globalcapital.com/globalmarkets20 EU ACCESSIONEBRD EDITION WEDNESDAY MAY 8, 2019

ROAD TO SARAJEVO

Application approvedThe official ceremony for Bosnia and Herzegovina's answers to the European Commission's questionnaire in Sarajevo, in February 2018 withEuropean Union enlargement commissioner Johannes Hahn, Bosnian Prime Minister Denis Zvizdic,European Commission President Jean-ClaudeJuncker and chairman of the Bosnian Tripartite presidency Dragan Covic

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September 20 2019 | Singapore

For more information, please contact:

Lily ZhuE: [email protected]

T: +44 (0) 20 7779 8921 | www.euromoneyconferences.com/asia-pb-singapore

Private BankingSeminar and Debate

Asia

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www.globalcapital.com/globalmarkets22 BANKING

© Ex13 [CC BY-SA

3.0 (https://creativecommons.org/licenses/by-sa/3.0)]

EBRD EDITION WEDNESDAY MAY 8, 2019

ROAD TO SARAJEVO

By Elliot Wilson

Bosnia and Herzegovina is an unusualeconomy. It is neither big nor particu-

larly rich — indeed, on a per capita basis,only four other European nation states arepoorer. Unemployment, despite fallingslowly in recent years, remains elevated ateye-watering levels. Most skilled workersleave to seek a better and richer life abroad.The economy is dependent on transient sec-tors like tourism, and on the export of min-erals, energy, and heavy goods such asdefence equipment and furniture.

Yet there is one standout sector wherethe country excels and does so to an extentthat will likely surprise the casual observer:banking.

Gunter Deuber, head of economics, fixedincome and foreign exchange research atRaiffeisen Bank International, says Bosniaand Herzegovina’s banking sector is “oneof the country’s most overlooked stories,and one of its biggest success stories.”

As is the case across much of southeast-ern Europe, as well as the wider CEE region,the banking sector is dominated by foreignplayers, notably Italy’s UniCredit, Vienna-based Raiffeisen, and Turin-headquarteredIntesa Sanpaolo, along with Russia’s Sber-bank and NLB Group, the largest bankingand financial group in Slovenia. UniCredit,the largest lender by assets, revenues,deposits and customer numbers in Bosniaand Herzegovina, posted consolidated profit

of €43m ($48.2m) in the market inthe first nine months of the calen-dar year 2018, up 5% year-on-year.(It has yet to publish its full-yearresults for the Balkan state). Netfees and commission jumped8.8% over the same period, withoperating income up 4.8% andoutstanding customers loans ris-ing 12.2%.

Like most lenders with a nationalpresence, the Italian lender has tooperate separate banking groupsin the Federation of Bosnia andHerzegovina and Republika Srp-ska, an additional cost that every-one has to endure and absorb.

Raiffeisen Bank, the thirdlargest onshore lender by assetsand revenues, posted after-taxprofit of €43m in the full year

2018, an annualised increase of 13.1%, withtotal assets rising 6.5% year-on-year andtotal outstanding customer loans up 9.3%,to €1.29bn.

In September 2018, the Brussels-basedEuropean Banking Federation said thebanking sector was a valued “generator ofbusiness” to the local economy. It noted thatsector-wide banking assets grew 8% year-on-year in the previous full financial year,with total deposits rising 12.2%, to €10.8bn,and total outstanding loans expanding 7.1%,to €9bn. “All banks,” it said, ended the year“with historically good results”.

INCOME GROWTHWherever you go, you hear the same positivestories and good news. Vedran Obucina, ananalyst at Central European FinancialObserver, an information provider overseenby Poland’s central bank, describes a bank-ing sector that is “safe and stable and… wellcapitalised and highly liquid”.

Raiffeisen Bank’s Deuber points to thelender’s success in regularly posting “doubledigit growth in income and in return onequity, which we have been doing here forseveral years in a row. There are very fewmarkets anywhere in Europe where thatkind of return is possible.” Most of thegrowth, he says, stems from a belief in thecountry’s future, and from citizens who leavefor work purposes, but who also repatriatea large share of their income and savings.

He adds: “The real story here is on the

consumer side. You see a lot of people want-ing to invest here, talking to us about creditfinancing, and taking out a mortgage tobuild a house.”

That view is shared by Sendad Softic , gov-ernor of the Central Bank of Bosnia and Herze-govina. He tells GlobalMarketsin an interviewthat the banking sector is “broadly sound”,and benefits from a “strengthened institu-tional, regulatory and supervisory frameworkthat is addressing remaining potential vulner-abilities. This is being done in line with best-in-class European and global practices.”

Softic also points to the importance ofpromoting financial inclusion and also inno-vation in financial technology. In April 2019,Sarajevo hosted the fourth annual FinConfconference, attracting delegates fromacross the world, including senior econo-mists at UniCredit and the Jeddah-basedIslamic Development Bank.

POSITIVE SPILLOVERSFinancial inclusion in Bosnia and Herzegov-ina has risen strongly in recent years, thoughthe authorities still have plenty of work todo. According to World Bank data, publishedin its 2017 Findex report, 59% of citizens haveaccess to a formal financial institution, ahigher level than Albania (where the ratio isjust 40%) but lagging neighbouring Serbia(71%) and Croatia (86%).

Not all markets in central and easternEurope are equally welcoming to heavyinward investment from foreign lenders.Over the past decade Hungary has returneda sizeable slice of its financial sector to localhands, while foreign ownership in severalother markets, including Bulgaria, CzechRepublic and Poland has been slowly inch-ing down in recent years.

Yet central bank governor Softic has nocompulsion about allowing the sector to beowned or controlled by foreign institutions,noting: “[W]e expect positive spilloversfrom changes in the banking system in theEU to have impact on our own systems.”

Of course, there are challenges to operat-ing in one of Europe’s smaller banking mar-kets. Raiffeisen Bank’s Deuber points to thecomplexities involved in operating in a coun-try that, due to its split nature, has two indus-try regulators. “You have one central bankbut two financial regulators, which makesit a little odd for an institution like ours, oper-ating in a relatively small market.” GM

Banking on Bosnia’s financial strengthThe strength of Bosnia and Herzegovina’s banking sector is one of the tiny country’s overlooked

successes, posting despite double digit growth in income and in return on equity

“We expectpositivespillovers fromchanges in thebanking systemin the EU to haveimpact on ourown systems’ —Senad Softic ,Governor of theCentral Bank ofBosnia andHerzegovina

Centralna Banka BiH

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