B&H Economic Insight: Slow vaccination progress could hamper economic outlook

Bosnia and Herzegovina (B&H) was among the European countries which managed to contain the second wave of COVID-19 quite early, with January to February average number of daily infected being at 350 or 10 infected on 100K people (for more details see our previous Economic Insight: Bosnia and H. second wave contained)

However, March and April brought a substantial spike in COVID-19 numbers, showing how one of the loosest containment policies in Europe at that time (open borders with no tests required, only people gathering limited to 30 and curfew from 23 to 5 am, while all services were working), could bring dramatical developments amid winter tourism season.

As a result, the second half of March and the first half of April brought new record high numbers not only in daily cases of infected (1,433 daily or 42 on 100K of people in this timeframe) but also in terms of fatality rate (46 casualties daily or 3.9% fatality rate) which was the second-highest in Europe after Hungary. In that period the most affected was Canton Sarajevo with casualties numbers being on daily basis higher than during the four-year war and siege of the city back in the '90s.

Hence, at the end of March both bh. entities, Republic of Srpska (RS) and Federation of B&H (FB&H) introduced tighter measures in the most affected cantons including a longer curfew from 9 pm to 5 am, cafés and restaurants being closed. Primary schools were shifted again to remote along with high schools and universities. Companies have been shifted also to work remotely wherever possible. These measures have brought remarkable improvement in the last ten days in COVID-19 trends in the country. However, it is too early to be too optimistic with still quite a loose approach of policymakers to COVID-19 situation which is best illustrated through the “vaccination delivery saga” and extremely slow vaccination pace in B&H.

B&H has only lately started the immunization process with the first delivery of COVAX program vaccines to the country, after the State ministry escalated the issue to the COVAX about late deliveries. Only on March 25th, the country finally managed to receive the first vaccines dispatch from the WHO — COVAX program. Earlier the country has started with the vaccination of the health workers from donated vaccines from other countries. So far, the country received 142 thousand vaccines, out of which 49.8 thousand are from COVAX (Pfizer+Astra Zeneca) while the rest are donated vaccines (Serbia, Turkey — Astra Zeneca and Sinopharm). In April the country has received written commitments for additional deliveries from COVAX of 100.6 thousand until June. Also, additional donated 105 thousand vaccines (from China, Malaysia and Slovenia) are announced for May followed by the first delivery of 240 thousand of Pfizer (EU — IPA Fund). Hence, until June the country should receive in total 587.6 thousand doses of vaccines, enough for vaccination of 8.4% population which is still strongly behind other SEE and CEE countries.

After the COVAX program proved to be very slow and inefficient (the country paid in September 2020 for 1.23 mn vaccines while until June it would receive only 150.4 thousand, 12% of the amount paid), the entity level governments FB&H and RS started direct negotiations with Western suppliers (Pfeizer, Astra Zenecca) and with Russia for deliveries of Sputnik V (cca. 600K vaccines) with progress expected sooner for Russian delivery. The country also expects 892 thousand of already paid vaccines through the EU channel — IPA Fund. If the above-mentioned deliveries are realized and vaccination progress speeds up in Q2 and Q3, the country could reach a vaccination level of 20% people until the end of Q3 — still lower than CEE peers. Only in the case that the COVAX, the EU-IPA and direct purchases negotiations are implemented in the country at a higher speed, the country could reach the vaccination of 45% of people until the autumn. With the current level of recovered people from COVID-19 this could be sufficient for reaching some level of herd immunity. However, this scenario is quite tight to the downside.

COVIDAt the end of March, the Agency for Statistics of B&H (BHAS) finally released Q4 2020 GDP for B&H which confirmed our expectation of decelerating recessionary trends and the start of a mild rebound in the economy, driven mostly by the revival of external demand. Q4 2020 GDP saw the lowest yoy decline after the COVID-19 hit with reported -3.8% yoy and +2.9% qoq GDP growth, which was better than expected. Therefore, in 2020 B&H reported a plunge of economic activity by -4.5% yoy in real terms which was slightly below our latest estimate (-4.8% yoy real GDP), mostly thanks to a strong rebound in exports of goods and gross investments in Q4 2020 being better than expected. However, the recession in B&H in 2020 still represents steeper economic loss compared to the average GDP decline of 4.3% in the SEE region (except for Croatia).

Mostly in line with our estimates for 2020, a double-digit slump in exports of goods and services (-15.7% yoy) contributed the most to economic contraction followed by private consumption (-4% yoy) which are two major pillars and drivers of B&H economy in general. Gross investments, especially private ones also reported double-digit contraction (-12.4% yoy) as private companies were resistant to go to new investment cycles with still high uncertainty related to COVID-19 outlook. These developments resulted in rising corporate and private individual savings in bh. banking sector in 2020, which should be the base for expected pent-up consumption and investments cycle in 2021. The only positive contributor to GDP in 2020 was, as expected, public consumption (0.4% yoy) mostly thanks to fiscal support programs (COVID-19 minimum wage subventions) and rising fiscal spending. On the other side of the coin, plummeting private spending and investments led to a colossal decline in imports of goods and services (-13.8% yoy) which contributed positively to GDP dynamics through net trade.

In Q1 2021, the trends which have started back in Q3 and Q4, continued with a stronger rebound in the real sector, driven primarily by exports of goods and manufacturing which grew strongly to the positive area in yoy terms. The soft-containment measures did not have any major impact on industry and exports of goods during the 3rd wave of COVID-19 which will result in a further strong rebound in Q2 onwards. We see also a continuation of a mild rebound in consumer demand and retail sales although at a slower pace, as the COVID-19 breakouts and containment measures are putting some headwind to spending and increase concerns about the economic outlook.

Therefore, our baseline GDP target for 2021 remains intact at 3% yoy in real terms, driven mostly by a strong rebound in external demand and exports of goods and services (+6.8% yoy) which will drive economic recovery, followed by pent-up investments (+10% yoy). On the other hand, we expect a rather limited rebound in private consumption by 1.7% yoy due to still high uncertainty related to COVID-19 outlook and vaccination process which could pose a certain risk for more short-term containment measures in the services sector in Q3 and Q4. Only in the case that new COVID-19 escalations and waves happen in H2 2021 followed by longer periods of containment measures in the larger scope of services, would we consider cutting our GDP target. However, this is still not our baseline scenario, as we expect a speeding up of the vaccination process in Q2 2021 with no large-scale shut-downs in services and the real economy in B&H.

The Fiscal Council of Bosnia and Herzegovina has failed to agree on a set of reforms within a Letter of Intent (LOI) for the new Extended Fund Facility (EFF) program with the International Monetary Fund (IMF) during December 2020. B&H policymakers have had the opportunity to reopen negotiations on a program in the amount of EUR 750 million (4% GDP) after the Article IV mission was completed during Q1 2021, a scenario which has not materialized so far. The money from the program should be directed towards programs and guarantee schemes to overcome the consequences caused by the COVID-19 pandemic in the private sector. It would be conditioned by reform agenda such as making a single registry of all bank accounts within the Central Bank of B&H and establishing the Agency for the bank restructuring with the aim to improve the financial sector stability in cases of stress. However, the main ruling party from RS was against the reforms which would enhance single market space and state-level institutions, hence, re-opening and finalizing negotiations with the IMF for the EFF program is highly questionable in 2021. This is supported by the fact that both entities have secured the budget financing for 2021 through the agreed Macro-Financial Assistance (MFA) from the EU, the local currency debt securities issues, and also by the latest EUR bond issuance of RS on April 20th via London SE (EUR 300 mn, 5Y bond was placed to international investors at an average yield of 4.75%).

The country is expected to receive the first tranche of the MFA from the EU in early Q2 2021 in the amount of EUR 125 mn (the total arrangement is worth EUR 250 mn), while the second tranche will be followed up by the set of reforms requested. Even in this case, we do not expect the policymakers to implement reforms requested for the second tranche disbursement of the MFA. From recent events it is quite clear that policymakers have distanced themselves from the important reform processes requested by the EU accession process and IFIs, putting in focus only their short-term political agenda. The nationalistic and divisive rhetoric has been elevated in the last couple of weeks in the country, putting it again in the focus of international and regional news feed.

Therefore, our view over the fiscal targets remains unchanged for 2021 as external financing with IFIs will not be fully disbursed and implemented. Therefore, we expect the consolidated fiscal deficit to decline moderately to -2.8% GDP with an increase of public debt to 39% of GDP in 2021.