„Impact of the financial crisis on BH economy“ by Kemal Kozarić Governor of the Central Bank of Bosnia and Herzegovina January 16, 2012

2 Macroeconomic indicators for BH (estimate)2012 (projection) Gross Domestic Product (GDP)KM billion cca. KM billioncca. KM billion GDP Per Capita KM Real Growth Rate0.7% 1.8%1.5% Industrial Production Growth Rate 1.6% 7.1%5% Average Inflation on Annual Level3.1% 3.0% BH Unemployment Rate27.1% 27.6 %28% Average Salary on BH Level KM 798 KM 824 (November)KM 820 Foreign DebtKM 6.25 billion (25.4 % GDP) KM 6.64 billion (25.7 % GDP)KM 7.3 billion (27.2 % GDP) Current Account DeficitKM 1.49 billion (6.1% GDP) KM 2.3 billion (8% GDP)KM billion (GDP 4.1%) Imports Coverage52.1% 53.6% (January - December)55% FDI (Estimate)KM 340 million KM 470 mil. (first nine months) Foreign ReservesKM billion KM billion

Macroeconomic indicators for BH Rating macroeconomic situation in Bosnia and Herzegovina "Better than one might expect"? (evaluation of part of academic and professional community, EC, IMF and other international financial institutions) Worrying... ↔... Disastrous? (evaluation of academic and professional community, NGOs,... → data on the growth of debt, foreign trade deficit, level of unemployment and overall economic activity in the real sector, level of poverty, impacted social groups,... 3

The structure of the financial sector in BH The banking sector dominates the financial system in BH.  It is the principal source for financing of economy and households. A large percentage of foreign ownership is a potential risk because strategic decisions are made outside the reach of the monetary authorities of Bosnia and Herzegovina. Relatively small share of other financial intermediaries Value, KM million Share, % Value, KM million Share, % Value, KM million Share, % Value, KM million Share, % Banks , , , ,3 Investment funds1.7627, ,88713,58883,7 Leasing companies1.3785, , , ,6 Insurance and re-insurance companies8533,58903,59403,89413,9 Microcredit organizations9463, , ,48563,5 Total

Banking sector in BH “Bank-centric” financial sector: 84% of the total assets of the financial sector (end 2010). The dominance of foreign banking groups 95% of total assets and 82% of equity is concentrated in banks with majority foreign ownership The significance of "Vienna Initiative" (external debt of the banking sector % of total commitments) High liquidity Good capital adequacy (16.1% in 2010 and 15.5% in Q1 2011) Profitability endangered Loss in 2010 NPL increase 55

Challenges and perspectives of the financial sector in BH The main risks for the future: The current macroeconomic situation (global, EU, region, BH) - Risks  Provision of real economic growth Maintenance of Financial Stability Threats to the fiscal position - fiscal deficit The revenue side Expenditure side (social transfers and public wages) 66

What are the main risks for the banking sector in BH (and region)? The possibility of spill-over of the crisis from home country of foreign banking groups and the EU zone Pro-cyclicality of the financial crisis to other segments of the financial sector - micro-credit organizations, leasing companies, capital market and insurance companies The efficiency of supervision (cross-border cooperation) Corporate governance in banks (respect and protection of local interests) Exposure in the region 77

What are the main risks for the banking sector in BH (and region)? After the fall of the level of savings during the crisis, return of confidence and increase in household savings (14% in 2010, 6% for 9 months in 2011) A slight increase in lending activity (about 3% in 2010, 3.4% for the first 6 months in 2011) The results of stress tests (for now, the banking system is well capitalized and is resistant to shocks) Financial and banking sector has shown remarkable level of resilience to the financial crisis? 88

Future challenges for the banking sector There is certainly a difficult period ahead of us, but we should try to: achieve adequate liquidity of capital; avoid systemic risk at any cost; achieve adequate capitalization; achieve an adequate amount of cash in the vaults; achieve adequate credit activity; avoid any form of unfair competition achieve adequate communication with internal and external public. 99

Future challenges for the real sector In order for the economy to be able to achieve the desired recovery, it is necessary to : 1.support to domestic production, especially for exporters; 2.work on the increase of domestic goods consumption; 3.work on the development of unused potentials in the energy sector; 4.develop the significant potentials in the domain of food production; 5.work on restoring and building of new touristic capacities; 6.continue the privatization process; 7.work on developing the competitiveness of the state and the elimination of administrative barriers for investors The most important precondition for the achievement of any of the above mentioned objectives is political stability. 10

11 Thank you for your attention 11