1. „Macroeconomic Context and New Strategy of Competitiveness“ Kemal Kozarić, Ph.D. Governor of the Central Bank of Bosnia and Herzegovina The 2012 SEE Management Forum, Beograd, 19 September 2012

2. 2 Bosnia and Herzegovina – Current Situation 2 201020112012 (projection) Gross Domestic Product (GDP) KM 24.58 billion KM 25.95 billion around KM 26.80 billion GDP Per Capita KM 6,397 KM 6,758 Real Growth Rate0.7%1.6%0.6% Industrial Production Growth Rate 1.6%5.6%5% Average Inflation on Annual Level 2.1%3.7%3.0% BH Unemployment Rate27.2%27.6 %28% Average Salary on BH Level KM 798 KM 816KM 820 Foreign DebtKM 6.25 billion (25.2 % GDP)KM 6.64 billion (25.6 % GDP)KM 7.3 billion (27.2 % GDP) Current Account DeficitKM 1.50 billion (6.3% GDP)KM 2.23 billion (8.6% GDP)KM 1.499 billion (GDP 4.1%) Imports Coverage52.1%54.5%55% FDI (Estimate)KM 340 millionKM 612 million Foreign ReservesKM 6.457 billion KM 6.424 billion

3. Potential Risks in Development External risks Global economic crisis, particularly slowdown of economic activities in countries -our main trading partners – impact on exporters and foreign direct investments Banking sector spillover risks - 84% foreign owned banks Changes in the neighboring countries – Croatia joining the EU and impact on our foreign trade balance (positive and negative) 33 Internal risks Political stability- impact on potential investors perception and on credit rating Dynamics in implementation of the needed structural reforms High public spending in the previous years has jeopardized fiscal sustainability BiH budget deficit has to be under control BiH public debt needs to be monitored

4. Consolidated Budgets of Western Balkans Countries 1 4 Country200320052007200920102011 Albania-4.9-3.5 -7.0-4.2-3.7 Bosnia and Herzegovina 2.32.2-0.1-5.7-4.5-3.5 Croatia-3.4-2.8-2.3-4.1-5.0-5.7 Macedonia-0.60.30.6-2.7-2.5 Montenegro-3.12.16.4-5.3-3.8-3.4 Serbia-1.11.0-1.9-4.3-4.6 AVERAGE-1.50.40.3- 4.8 -4.1-3.9 Source: EBRD, Transition Report 2009 and 2012. Percentages for 2010 are “estimates”, and those for 2011 are “projections” % GDP

5. Total Budget Spending in the Western Balkans Countries 5 Country200320052007200920102011 Albania28.7%28.5%29.3%33.4%30.0%28.8% Bosnia and Herzegovina 47.2%45.8%46.8%50.6%50.7%49.4% Croatia43.8%41.4%41.9%42.3%41.9%41.4% Macedonia37.4%34.0%31.6%33.2%32.7%32.1% Montenegro42.6%38.2%40.9%47.7%45.9%44.2% Serbia45.4%41.9%45.3%46.0%44.6%43.5% AVERAGE40.9%38.3%39.3%42.2%41.0%39.9% % GDP Source: International Monetary Fund, World Economic Outlook Database, April 2012, the data for 2011 are estimated

6. Increase of Public Debt in the Balkans Countries 6 Data on public debts of countries of Western Balkans are from the web site of the International Monetary Fund by countries (www.imf.org – „Country Info“)www.imf.org.

7. Public Debt in Euro Zone 7

8. Changes in Lending Activities in the Western Balkans Countries 8

9. Increase of Bad Loans 9 The data are shown in percents. Source: ECFIN

10. Unemployment in the Region 10 Source: ECFIN, except for unemployment in BH 1

11. Trading in the CEFTA Region Country 200920102011 Total trading volume Trading with CEFTA countries Percenta ge of trading with CEFTA in total trading Total trading volume Trading with CEFTA countries Percenta ge of trading with CEFTA in total trading Total trading volume Trading with CEFTA countries Percenta ge of trading with CEFTA in total trading Albani a 3,745,575310,6478.3%4,202,779435,92110.4%4,766,650510,03010.7% Bosn i a and Herzegovina6,373,6222,771,53843.5%7,404,4043,185,32443.0%8,687,8953,454,02939.8% Croatia 20,368,6622,380,82411.7%21,552,4422,477,13811.5%23,054,5522,811,03812.2% Macedoni a 4,427,7271,146,10825.9%5,370,5441,246,10123.2%6,782,1021,246,10118.4% Montenegro 1,154,533776,64867.3%1,187,175800,52167.4%1,187,175800,52167.4% S erbia 14,283,2353,134,61821.9%16,825,0253,564,88921.2%19,362,9383,828,69819.8% CEFTA total 55,285,09011,274,27320.4%62,173,28812,595,99920.3%71,019,14214,035,30619.8% 11 in 000 euro; Source CEFTA, http://www.cefta2006.com

12. Decrease of Economic Activities in Countries Partners 12 1

13. The Structure of the Financial Sector in BH A high percentage of foreign ownership is a potential risk because strategic decisions are made outside the reach of the monetary authorities of Bosnia and Herzegovina. Rather small share of other financial intermediaries Table: Value of property of financial intermediaries. 13 2008200920102011 Value, KM million Share, % Value, KM million Share, % Value, KM million Share, % Value, KM million Share, % Banks19,57079.820,81580.820,60482.720,41684.3 Investment funds1,7627.21,2254.88713.58883.7 Leasing companies1,3785.61,6076.21,4165.71,1084.6 Insurance and re-insurance companies8533.58903.59403.89413.9 Microcredit organizations9463.91,2134.71,0874.48563.5 Total24,510 25,749 24,919 24,210

14. 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 - 29.5% of total liabilities) 14

15. The Main Risks for the Banking Sector in BH (and the Region)? The possibility of spill-over of the crisis from home countries of foreign banking groups and the EU Procyclicality 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, with emphasis on the improvement of relations with clients Exposure in the region – significance of home-host supervisory framework 15

16. The Main Risks for the Banking Sector in BH (and the Region)? After the decrease of the level of savings during the crisis, return of confidence and increase in household savings (14% in 2010, 10% in 2011) A slight increase in lending activity (about 3% in 2010, about 4% in 2011) The results of stress tests (for now, the banking system is well capitalized and resistant to shocks) Financial and banking sector have shown a remarkable level of resilience to the financial crisis. 16

17. Future Challenges for the Real Sector With purpose of the economy achieving the desired recovery, it is necessary to: 1.support domestic production, especially exporters; 2.work on the increase of domestic goods consumption; 3.work on the development of unused potentials in the energy sector; 4.develop 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 of 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. 17

18. Region Potentials The countries in the region face the shortage of sources of financing more and more frequently Increasing pressures of local and international factors for introduction of savings measures at all levels Main issue is how to save without jeopardizing competitiveness? Usage of local resources (energy production, food production, tourism) Stronger regional cooperation and joint activities at the third markets Political stability of the region and Euro-Atlantic integration 18

19. 19 Thank you for your attention! http://www.cbbh.ba 19