GP Put d.d.

Company profile

The company GP "PUT" was established in Sarajevo, Bosnia and Herzegovina, in 1952 as a state enterprise with a view to facilitate the growing demand for high standard roads. The establishment of the Company in the years immediately after World War II enabled the company to contribute enormously in the reconstruction of the former Yugoslavia and to gain valuable experience needed for capital offenses.

At home, in Bosnia and Herzegovina, the company has launched a number of projects that include roads, buildings, earth dams, runways, airports, as well as the production of building materials, prefabricated building components, installation material of crushed stone, prestressed bridge girders, concrete pipes, bricks concrete blocks and other concrete products for the construction industry.

Experience and huge potential, GP "PUT" soon broke and foreign markets, as follows:

  • 1965. Libya - In the coastal region, Benghazi-Tripoli, GP "PUT" has built more than 400 km of highways.
  • 1969. Kenya - In Kenya, the company was known as "Way - Sarajevo General Engineering Company." It was built over 1,500 km of roads of all standards, we have participated in several projects of reconstruction of the airport in Kenya. Repair and coating runways, commercial building Jomo Kenyatta International Airport in Nairobi, the upgrade of the existing runway in Malindi airport and Naivasha are examples of high quality work that is performed by the Company.
  • 1993. Pakistan - there is a PUT Sarajevo branch-office in Pakistan. A modern highway system between Lahore and Okara in Pakistan as well as projects carried out in several other regions.
  • 1998. Uganda - In early 1998 PUT Sarajevo began with the construction and reconstruction of roads Sironko - Kapchorwa (45 km). The project is aimed to provide access to one of the most beautiful national parks - Mount Elgon and to Kapchorwa District open to the rest of East Africa.

 

Financial reports

Income statement (All figures are in BAM)

2009.

2010.

2011.

2012.

2013.

30.6.2014.

OPERATING INCOME

-

-

32.790.638

39.555.384

40.181.688

11.320.905

Revenue from domestic sales

-

-

-

-

-

-

Revenue from sales abroad

-

-

-

-

-

-

Other revenues

-

-

-

-

-

3.125

OPERATING EXPENSES

-

-

42.007.652

44.828.217

44.040.621

16.468.777

Changes in inventories of finished goods and products

-

-

-

-

-

-

EXPENDITURES

-

-

42.007.652

44.828.217

44.040.621

16.468.777

Material costs and cost of goods sold

-

-

26.394.195.

29.894.916

30.778.475

10.272.944

Employees

-

-

8.441.027

8.972.576

8.967.214

4.063.827

Amortization

-

-

2.179.255

2.104.858

1.746.030

901.485

Value adjustments and allowances

-

-

1.395.486

593.428

712.383

-

Other operating expenses

-

-

3.597.689

3.262.439

1.836.519

1.230.521

DIFFERENCE OF OPERATING INCOME AND EXPENSES

-

-

-9.217.014

-5.272.833

-3.858.933

-5.144.748

FINANCIAL INCOME

-

-

462.275

202.502

2.302.345

517.682

Foreign exchange gains

-

-

422.197

187.502

165.251

517.682

Interest and other income

-

-

39.808

15.000

2.137.094

-

FINANCIAL EXPENSES

-

-

3.057.814

2.876.454

2.881.712

1.382.101

Foreign exchange losses

-

-

1.628.762

385.494

156.168

-

Interest and other financial expenses

-

-

1.429.052

2.490.960

2.725.544

1.382.101

DIFFERENCE OF FINANCIAL INCOME AND EXPENSES

-

-

-2.595.089

-2.673.952

-579.367

-864.419

EXTRAORDINARY INCOME

-

-

1.123.750

13.153.972

5.141.043

4.173.232

EXTRAORDINARY EXPENSES

-

-

424.635

4.888.328

271.531

27.976

TOTAL REVENUE

-

-

34.377.113

52.911.858

47.625.076

16.014.943

TOTAL EXPENDITURES

-

-

45.490.101

52.592.999

47.193.864

17.878.854

EARNINGS (LOSS) BEFORE TAX

-

-

-11.112.988

318.859

431.212

-1.863.911

TAX ON PROFIT

-

-

-305.065

0

0

0

EARNINGS (LOSS) AFTER TAX

-

-

-10.807.923

318.859

431.212

-1.863.911

Minority interests

-

-

0

0

0

0

NET PROFIT OR LOSS GROUP

-

-

-10.807.923

318.859

431.212

-1.863.911

Balance Sheet (All figures are in BAM)

2009.

2010.

2011.

2012.

2013.

30.6.2014.

ASSETS

Claims for unpaid subscribed capital

-

-

0

0

0

0

Total non-current assets

-

-

40.824.630

38.260.037

39.151.535

19.609.372

Intangible assets

-

-

268.170

248.663

235.871

229.326

Tangible assets

-

-

40.548.780

38.004.594

38.449.630

18.565.560

Financial assets

-

-

7.556

6.656

465.910

814.362

Receivables

-

-

124

124

124

124

Total current assets

-

-

41.991.564

49.804.958

52.502.089

54.235.647

Inventories

-

-

3.793.881

4.660.769

5.092.707

4.648.466

Receivables

-

-

38.197.683

45.144.189

47.409.382

38.193.916

Other receivables

-

-

-

-

-

10.219.482

Financial assets

-

-

-

-

-

242.768

Cash at bank

-

-

-

-

-

931.015

Prepayments, accrued income

-

-

648.112

620.117

409.104

449.091

Loss above capital

-

-

0

0

0

0

TOTAL ASSETS

-

-

83.464.306

88.685.102

92.062.728

74.294.110

LIABILITIES

Capital and reserves

-

-

24.893.583

26.702.340

27.352.426

10.179.465

           Subscribed capital

-

-

20.986.200

20.986.200

20.986.200

20.986.200

Reserves

-

-

23.586.013

23.942.881

24.225.796

22.917.063

           Profit or loss for the year

-

-

-19.678.630

-18.226.741

-17.859.570

-33.723.798

Minority interests

-

-

0

0

0

0

Long-term provisions for risks and charges

-

-

377.247

569.777

243.876

233.509

Long-term liabilities

-

-

4.939.434

2.102.036

13.173.283

13.603.027

Current liabilities

-

-

50.785.364

52.666.344

46.002.148

46.433.271

Payables

-

-

22.207.391

34.002.052

29.225.620

29.691.938

Current financial liabilities

-

-

23.907.677

15.710.637

14.752.209

13.592.918

Other current liabilities

-

-

4.607.296

2.953.655

2.024.319

3.148.415

Accrued expenses and deferred income

-

-

2.468.678

6.644.605

5.290.995

3.844.838

TOTAL LIABILITIES

-

-

83.464.306

88.685.102

92.062.728

74.294.110

 

Fundamental analysis

Indicators

2009.

2010.

2011.

2012.

2013.

30.6.2014.

Current ratio indicator

-

-

0,83

0,85

1,14

1,17

Indicator of current liquidity

-

-

-

-

-

0,03

Quick ratio indicator

-

-

0,75

0,86

1,03

1,07

Financial stability indicator

-

-

1,37

1,33

0,97

0,82

Period binding commitments

-

-

441

429

381

1.029

Period binding claims

-

-

425

417

431

1.231

Trade receivables indicator

-

-

0,86

0,88

0,85

0,30

Craft store indicator

-

-

8,64

8,49

7,89

2,44

Crafts current assets indicator

-

-

0,82

1,06

0,91

0,30

Trades fixed assets indicator

-

-

0,84

1,38

1,22

0,82

Trades total assets indicator

-

-

0,41

0,60

0,52

0,22

Debt indicator

-

-

0,67

0,62

0,64

0,81

Self-financing degree

-

-

0,30

0,30

0,30

0,14

The gearing ratio

-

-

2,24

2,05

2,16

5,90

Debt factor in years

-

-

-6,24

22,60

27,18

-62,38

The degree of coverage I

-

-

0,61

0,70

0,70

0,52

The degree of coverage II

-

-

0,73

0,75

1,04

1,21

Interest coverage ratio

-

-

-5,64

1,28

1,22

-0,35

Total cost-effectiveness

-

-

0,76

1,01

1,01

0,90

Sales cost-effectiveness

-

-

0,78

0,88

0,91

0,69

Financing cost-effectiveness

-

-

0,15

0,07

0,80

0,37

Net profit margin

-

-

-0,27

0,05

0,07

-0,03

Gross profit margin

-

-

-0,28

0,05

0,07

-0,03

Net return on assets

-

-

-0,11

0,03

0,03

-0,01

Gross return on assets

-

-

-0,12

0,03

0,03

-0,01

Return on equity

-

-

-0,43

0,01

0,02

-0,18

EPS

-

-

-6.437,52

189,92

256,84

-1.110,20

DPS

-

-

0

0

0

0

DPR

-

-

0

0

0

0

P/E

-

-

0

0,07

0,05

-0,01

Total return on stocks

-

-

-515,00

15,19

20,55

-88,82

Profitability dividend  stocks

-

-

0

0

0

0

ROA

-

-

-12,95

0,36

0,47

-2,51

ROE

-

-

-43,42

1,19

1,58

-18,31

Cash flow

-

-

-8.628.688

2.423.717

2.177.242

-962.426

Sales

-

-

32.790.638

39.555.384

40.181.688

11.320.904

EBIT

-

-

-8.517.899

2.992.811

1.010.579

-999.492

EBITDA

-

-

-6.338.644

5.097.669

2.756.609

-98.007

Number of shares

-

-

1.678.896

1.678.896

1.678.896

1.678.896

Number of preference shares

-

-

0

0

0

0

Price of share

-

-

12,50

12,50

12,50

12,50

Price of preference share

-

-

0

0

0

0

Repurchased own shares

-

-

-

-

-

-

Minority interests

-

-

0

0

0

0

EV

-

-

25.925.634

23.088.236

34.159.483

33.658.212

BV

-

-

14,83

15,90

16,29

6,06

P/CF

-

-

-2,43

8,66

9,64

-21,81

P/EBITDA

-

-

-3,31

4,12

7,61

-214,13

P/BV

-

-

0,84

0,79

0,77

2,06

Altman - Z=

-

-

-0,23

0,53

0,65

0,22

Taffler - Z=

-

-

0,05

0,21

0,23

0,26

Quick test - degree of self-financing

-

-

3

4

3

2

Quick test – turnover profitability

-

-

1

1

1

1

Quick test – total capital profitability

-

-

1

1

1

1

Quick test – total debt

-

-

1

5

5

1

Quick test – total

-

-

1,5

2,75

2,50

1,25

MSTANDP - accelerated liquidity

-

-

2

3

4

4

MSTANDP - current liquidity

-

-

1

1

2

2

MSTANDP - financial stability

-

-

1

1

4

4

MSTANDP - indebtedness

-

-

2

2

2

1

MSTANDP - financing

-

-

2

2

2

1

MSTANDP - net profit margin

-

-

1

2

2

1

MSTANDP - ROA

-

-

1

5

5

5

MSTANDP - increase in cash and total assets / UP

-

-

5

5

5

2

MSTANDP - inventory turnover

-

-

5

5

5

5

MSTANDP - binding claims

-

-

5

5

5

1

MSTANDP - Altman

-

-

1

1

1

5

MSTANDP - indebtedness factor

-

-

5

1

1

1

MSTANDP - ROE

-

-

1

5

5

2,54

MSTANDP

-

-

-

-

-

-

 

Development: in past three years GP Put has increased its revenues from 32,79 mil. BAM to 40,18 mil. BAM. In the same period operating expenses has also increased from 42,01 mil. BAM to 44,04 mil. BAM. Also in the same three years financial revenues has increased from 0,46 mil. BAM to 2,30 mil. BAM, and financial expenditures has decreased from 3,06 mil. BAM to 2,88 mil. BAM which finally led to increasing in the company’s net profit from -10,81 mil. BAM to 431.212 BAM. If we analyse company’s balance sheet that we shall see that short and long term assets have approx. the same share in total assets. The most of long term assets are in long term tangible position and among short term assets positions the largest is receivables. Also in the period between 2011. and 2013. capital of the company has also grown from 24,89 mil. BAM to the 27,35 mil. BAM, as well as the long term liabilities (from 4,94 mil. BAM to 13,17 mil. BAM). However, short liabilities fall from 50,78 mil. BAM to 46,00 mil. BAM which reflected to liquidity ratios who have upward trends. As well as liquidity indicators, positive trends have activity, debt and economy indicators. Strong upward trends in GP Put business are shown through Cash flow, EBIT and EBITDA.

Future potential: taking into account the activity of which the company is engaged as well as Bosnia and Herzegovina general infrastructural underdevelopment with the ending of unfavourable macroeconomic developments, or starting new anti-cyclical investments which are primarily related to large infrastructural projects assess of company’s future is very potent. Furthermore, recent political announcements at Investor Conference in Dubrovnik (Croatia), which are imposed by the EU representative Ingram certainly has great potential for obtaining positive business results within a period of next 3-5 years.

 

Auditor’s report

Management is responsible for ensuring that the financial statements for each financial year are prepared in accordance with the Law on Accounting and Auditing in FBiH and accounting standards applicable in the territory of the Federation and which include: International Accounting Standards (IAS) and International Financial Reporting Standards (IFRS) together with instructions, explanations, guidelines and principles that IFAC and IASB and adopted by the Commission for Accounting and Auditing FBiH translate and publish, give a true and fair view of the financial position and results of the Company for that period.

In preparing those financial statements, the responsibilities of the Board include guarantees:

  • are selected and then applied consistently suitable accounting policies
  • that judgements and estimates are reasonable
  • that the applied current accounting standards, subject to any material departures disclosed and explained in the financial statements
  • financial statements are applied on the going concern basis unless it is inappropriate to presume that the Company will continue in business for the foreseeable future.

Management must also ensure maintaining proper accounting records, which at any time, with reasonable accuracy the financial position of the Company. The Board is also responsible for safeguarding the assets of the Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

On behalf of the Board

Adnan Terzić

GP Put d.d. Sarajevo.

 

Independent Auditors' Report

Owners of GP Put d.d. Sarajevo

We have audited the accompanying financial statements of the company GP Put Sarajevo, which comprise the balance sheet, statement of financial position as at 31.12.2012, the income statement and statement of comprehensive income as of 31.12.2012., Statement of changes in equity and cash flow. Cash Flow Statement for the final period of the year set out on pages 4-7, financial statements are prepared on the basis of the Law on Accounting and Auditing and the FBA and accounting standards applicable in the territory of Federation by and which include the International Accounting Standards (IAS) and International Standards financial Reporting (IFRS) along with instructions, explanations, guidelines and principles that IFAC and IASB and adopted by the Commission for Accounting and Auditing FBiH translate and publish these changes in accounting policies set out in Note 2 to the financial statements.

Responsibility for the Financial Statements

Management is responsible for the preparation and fair presentation of financial statements in accordance with International Financial Reporting Standards, and for such internal control as management determines is necessary to enable the preparation of financial statements that are trivial misstatement due to fraud or errors, which is listed on pages of our report.

Auditor's Responsibility

Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with International Standards on Auditing. Those standards require that we comply with ethical requirements and plan and perform the audit so that we obtain reasonable assurance whether the financial statements are free of material misstatement.

An audit involves performing procedures to obtain audit evidence about statements and disclosures in the financial statements. The procedures selected depend on the auditor's assessment and the assessment of risk of material misstatement of the financial statements, whether due to fraud or error. When analysing the risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the financial statements in order to design audit procedures that are applied in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of internal controls business entity.

An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management created as well as evaluating the overall presentation of the financial statements. We believe that the audit evidence we have obtained is sufficient and applied to provide a basis for our audit opinion.

Reviews reserve account while emphasizing accent

Trade receivables

As at 31.12.2012. trade receivables of the business units in Kenya and Pakistan amounted to KM 9.636,76 (Note 16 to the financial statements). We could not confirm the recoverability of these receivables at the balance sheet date and possibly introducing new corrections value of these receivables to the financial statements.

In our opinion, except for the possible effects described in the previous paragraph, if any financial statements present fairly, in all their significant aspects, the financial position of the company GP Put Sarajevo as of 31.12.2012., The result of its operations, cash flows and changes in equity for the year ended in accordance with the Accounting and Auditing of BiH, FBiH and the accounting standards applicable in the territory of the Federation of BiH and covering International Accounting Standards IAS and international Financial Reporting Standards IFRS together with the instructions, explanations, guidelines and principles that IFAC and IASB and adopted by the Commission for Accounting and Auditing FBiH translate and publish these changes in accounting policies set out on page 11 and 12.

Emphasis of matter

Note 32 to the financial statements describes the owner of the company Nexe Grupa d.d. Našice, on 03/21/2013. informed the competent institutions in the Republic of Croatia on the petition to open prebankruptcy settlement in accordance with the Law on financial transactions and prebankruptcy settlements in Croatia (NN 108/12, 144/12). Management is not aware of any circumstances or information that led them to believe that the same cause materially negative impact on the overall financial position of the Company. Our opinion is not qualified due to this fact.

 

The statutory auditor of the Company

Revsar d.o.o. Sarajevo

Alma Delić

 

Other relevant information

Ongoing projects:

  1. Highway Vlakovo – Suhodol: contract value 462.150 €
  2. Highway Vlakovo – Lepenica: contract value 2.308.471 €

 

Assets analysis

Property, plant and equipment

Property, plant and equipment are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes the purchase price and all costs directly attributable to bringing the asset to working condition for its intended use. Maintenance and repairs, replacements and improvements of minor volume are expensed as incurred.

Significant improvements and replacements are capitalized. Gains and losses on the retirement or disposal of assets are included in the income statement in the period in which they occur. Properties in the course of construction are carried at cost thumbnails for possible impairment. Calculation of depreciation commences when the assets are ready for their intended use. Depreciation is calculated based on the estimated useful lives which are as follows:

Property and plants: 10-40 years

Equipment: 4-10 years

Transportation equipment: 4-10 years

Assets held under finance lease are depreciated over their expected useful lives or the lease term if shorter.

 

Macroeconomic overview

After a mild recovery, the economy has re-entered into negative territory in 2012. Following a 1% real growth in 2010 and 2011, output growth is estimated to have turned negative in 2012, partly due to the deterioration of the external environment and partly to severe climatic conditions in both winter and summer. Tight lending conditions, falling employment and the implementation of fiscal consolidation measures had negative repercussions on domestic demand. At the same time, the worsened external environment – due to the EU sovereign debt crisis – resulted in falling exports, which, albeit accompanied by shrinking imports, led to a negative contribution of net exports to growth. The gradual recovery targeted by the programme over the medium-term horizon, is based on progressively strengthening domestic demand, while the negative contribution of net exports is set to increase.

After a sharp crisis-led adjustment in 2009-2010, external imbalances have been rising. The current account deficit narrowed significantly in the peak of the crisis, initially driven by shrinking imports, due to falling domestic demand, and thereafter by the favourable evolution of metal prices, fuelling nominal export growth. However, the narrowing of the current account deficit has been reversed since mid-2010 and external imbalances have started to grow again. This deterioration was mainly driven by the expansion of the trade deficit, reaching 32.4% of GDP in 2012, as export growth slowed in 2011 and even turned negative in 2012, influenced by the worsened external environment. The narrowing in 2013 and then stabilisation of the current account deficit foreseen in the programme might be difficult to achieve. The trade balance could deteriorate more than foreseen due to structural problems related to weak private sector productivity which limits export growth potential while imports will grow alongside the expected domestic demand recovery.

Fiscal sustainability needs to be anchored in a credible medium-term strategy. After the gradual fiscal consolidation in 2010-2011, which followed the sharp deterioration in 2009, budgetary imbalances increased in the course of 2012. The downturn in economic activity reduced the tax base and the budget revenue-to-GDP ratio fell to 39.9%, while expenditures expanded further. Thus the budget deficit increased to 1.5% of GDP, from 0.7% of GDP a year earlier, according to the EFP. The country had to resort to the IMF and a new Stand-By Arrangement was agreed. The authorities' ambitious fiscal strategy over the medium term aims at an expenditure-led fiscal consolidation of 2.5 percentage points of GDP by 2015, but it is subject to significant risks. The foreseen cuts in current spending require the adoption and implementation of structural fiscal reforms which cannot be taken for granted, given the country’s track record, while spending pressures may increase in the run-up to the general elections scheduled in 2014.

The main fiscal challenge stems from the composition of expenditure. Consolidated general government expenditures have been increasingly dominated by current spending even before the crisis, while their share rose even further -at close to 90%- during the economic downturn at the expense of capital outlays, which served as a fiscal buffer. The public sector wage bill of about 13% of GDP exceeds by a wide margin the region average, partly due to the complex constitutional set-up of the country and as a result of unsustainable wage hikes in the pre-crisis period. Social spending - accounting for over 17% of GDP- also exceeds the regional standards, with a significant part related to the 1992-1995 war. The authorities recognise the need for decisive actions to reduce the large government size and to improve the expenditure composition and claim to have put these goals at the centre of their fiscal strategy.

After a mild recovery, the economy has re-entered into negative territory in 2012. Following a 1% real growth in 2010 and 2011, output growth is estimated to have turned negative in 2012, partly due to the deterioration of the external environment and partly to severe climatic conditions in both winter and summer. Tight lending conditions, falling employment and the implementation of fiscal consolidation measures had negative repercussions on domestic demand. At the same time, the worsened external environment – due to the EU sovereign debt crisis – resulted in falling exports, which, albeit accompanied by shrinking imports, led to a negative contribution of net exports to growth. The gradual recovery targeted by the programme over the medium-term horizon, is based on progressively strengthening domestic demand, while the negative contribution of net exports is set to increase.

After a sharp crisis-led adjustment in 2009-2010, external imbalances have been rising. The current account deficit narrowed significantly in the peak of the crisis, initially driven by shrinking imports, due to falling domestic demand, and thereafter by the favourable evolution of metal prices, fuelling nominal export growth. However, the narrowing of the current account deficit has been reversed since mid-2010 and external imbalances have started to grow again. This deterioration was mainly driven by the expansion of the trade deficit, reaching 32.4% of GDP in 2012, as export growth slowed in 2011 and even turned negative in 2012, influenced by the worsened external environment. The narrowing in 2013 and then stabilisation of the current account deficit foreseen in the programme might be difficult to achieve. The trade balance could deteriorate more than foreseen due to structural problems related to weak private sector productivity which limits export growth potential while imports will grow alongside the expected domestic demand recovery.

Fiscal sustainability needs to be anchored in a credible medium-term strategy. After the gradual fiscal consolidation in 2010-2011, which followed the sharp deterioration in 2009, budgetary imbalances increased in the course of 2012. The downturn in economic activity reduced the tax base and the budget revenue-to-GDP ratio fell to 39.9%, while expenditures expanded further. Thus the budget deficit increased to 1.5% of GDP, from 0.7% of GDP a year earlier, according to the EFP. The country had to resort to the IMF and a new Stand-By Arrangement was agreed. The authorities' ambitious fiscal strategy over the medium term aims at an expenditure-led fiscal consolidation of 2.5 percentage points of GDP by 2015, but it is subject to significant risks. The foreseen cuts in current spending require the adoption and implementation of structural fiscal reforms which cannot be taken for granted, given the country’s track record, while spending pressures may increase in the run-up to the general elections scheduled in 2014.

The main fiscal challenge stems from the composition of expenditure. Consolidated general government expenditures have been increasingly dominated by current spending even before the crisis, while their share rose even further -at close to 90%- during the economic downturn at the expense of capital outlays, which served as a fiscal buffer. The public sector wage bill of about 13% of GDP exceeds by a wide margin the region average, partly due to the complex constitutional set-up of the country and as a result of unsustainable wage hikes in the pre-crisis period. Social spending - accounting for over 17% of GDP- also exceeds the regional standards, with a significant part related to the 1992-1995 war. The authorities recognise the need for decisive actions to reduce the large government size and to improve the expenditure composition and claim to have put these goals at the centre of their fiscal strategy.

The authorities expect a gradual recovery over the medium-term. GDP growth is projected to reach 1.3% in 2013 and to accelerate to 3.6% in 2014 and 3.9% in 2015. The recovery will be mainly domestic demand-driven. The gradually accelerating private consumption and surging investment demand will be accompanied by rising imports, which will cause a negative net contribution of the external sector to the economic growth during the whole programming period. The rising external demand is expected to trigger faster expansion of the export-oriented branches of the processing industry, in particular the metal, chemical, and wood processing sectors. The labour market will be positively influenced by the higher economic activity and employment will rise from 2014.

The authorities expect a gradual recovery over the medium-term. GDP growth is projected to reach 1.3% in 2013 and to accelerate to 3.6% in 2014 and 3.9% in 2015. The recovery will be mainly domestic demand-driven. The gradually accelerating private consumption and surging investment demand will be accompanied by rising imports, which will cause a negative net contribution of the external sector to the economic growth during the whole programming period. The rising external demand is expected to trigger faster expansion of the export-oriented branches of the processing industry, in particular the metal, chemical, and wood processing sectors. The labour market will be positively influenced by the higher economic activity and employment will rise from 2014.

External vulnerabilities are set to increase further in the near and medium term. Following a drop in 2012, exports are expected to expand at accelerating rates (to reach 7% in real terms in 2015), based on a strengthened economic growth in the region and in the EU (i.e. the country’s main exports markets). However, significant downside risks remain, related to a potential delayed recovery of the EU, as well as weak private sector productivity.

The authorities intend to increase further Bosnia and Herzegovina's trade integration with the EU while a geographical diversification of exports towards countries with higher external demand might bring benefits. Moreover, the export growth projection might prove optimistic, given the uncertainties around the future country’s exports to Croatia following its entry into the EU, even though the recently undertaken measures will undoubtedly reduce the expected adverse impact. As the imports of goods are projected to accelerate steadily -alongside the recovering domestic demand-, the foreign trade gap is expected to expand further in a trajectory far from sustainable. The projected stabilisation of the current account deficit at about 6% of GDP faces significant risks as the expected hike of exports of services and of net current transfers might prove overly optimistic. The expected FDI inflows -due to cover over 40% of the current account deficit- are highly dependent on investors’ sentiment, as they are projected to come mainly from several greenfield investment projects in the energy sector. The foreseen decline of foreign exchange reserves, given its magnitude, could potentially impact on macroeconomic and financial stability and thus requires careful attention and the development of policy measures on the part of the authorities.

Financial sector revival is crucial for stronger economic performance. The financial sector has not been very supportive to growth in recent years. On the one hand, foreign parent banks have decreased their exposure to local subsidiaries during the crisis, while, on the other, the banking system suffered a deterioration of the asset quality with the share of non-performing loans to total loans reaching 13.5% at end-2012. Moreover, private sector credit has been negatively affected by the high financing needs of the government, which crowded out private investments. Still, there are no immediate financial stability concerns. Banks are well capitalised, and liquidity and profitability indicators do not signal actual problems. Alongside the gradual economic recovery, the banks are expected to loosen the lending conditions, thus supporting faster economic expansion. The programme projects a gradual acceleration of the credit growth, from around 4% currently to 15% in 2015, while annual deposit growth is estimated to continuously lag behind and the loan-to-deposit ratio – reaching 119.7% at end-2012 – to further increase, thereby implicitly assuming that the banking sector will keep its growth model, based on foreign financing (mainly from the parent banks). In the light of still fragile recovery of the financial system in the EU and still continuing deleveraging pressures in the EU banks, risks are clearly on the downside.

Source:  EU Commision

 

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