April 3, 2012 / 10:26 PM / in 7 years

UPDATE 1-Moody's cuts Bosnia rating one notch to B3

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By Daniel Bases

NEW YORK, April 3 (Reuters) - Moody’s Investors Service cut Bosnia and Herzegovina’s speculative credit rating one notch further to B3 from B2 and warned of potentially more downgrades, citing deteriorating fiscal conditions and heightened political risks.

In a statement, Moody’s said the government’s fiscal position is deteriorating, “including the emergence of large structural deficits at the sub-national level and limited access to external financing.”

The firm has put the sovereign’s credit on review for further downgrade, meaning they could cut further within a three month time frame.

Bosnia and Herzegovina is now rated one notch higher by Standard & Poor’s with a rating of B. Both are deep down in the junk status category on their respective ratings scales.

Moody’s points out that “antagonistic” political dynamics are a consideration in the rating given they briefly interrupted payments to “several multilateral financial institutions” and on one commercial bank loan in 2012.

These political conditions, which caused the interruption of payments, are expected to persist.

After 10 days of protests by veterans of the 1992-1995 civil war, cutting across Bosnia’s ethnic divide, the government agreed to pay pensions promised more than a year ago.

A law passed before the October 2010 general election promised pensions to 1,750 soldiers who retired from the armed forces.

However the election was followed by 16 months of political paralysis over forming a government. In February a coalition took power but pensions were not included in the 2012 draft budget, until now.

The government is amending the legislation and that will result in back payments of 30 million marka ($20 million) with cuts to be made elsewhere.

Moody’s said its rationale for a downgrade included the “expensive multi-layered government as well as unaffordable, politically driven decisions related to pensions and other social transfers in years past.”

Bosnia’s frozen 2009-2012 standby funding agreement with the International Monetary Fund forced provinces of the nation to rely more heavily on short-term Treasury issuance to finance relatively large structural deficits, Moody’s said.

Negotiating a new agreement with the IMF “is likely to be arduous given the number of incomplete tasks left over from the 2009 program,” and the complex government decision making process, Moody’s said.

Foreign direct investment is falling, exacerbating fiscal strains and further contributing to lower economic growth prospects that are a result of slow structural reforms. Moody’s said. (Additional reporting by Caryn Trokie; Editing by Andrew Hay)

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