Devastating floods and landslides affected Serbia and Bosnia and, to a lesser extent, Croatia. Serbia and Bosnia have already appealed for foreign aid to help with the recovery as damage is huge. Infrastructure, energy network and agriculture production – notably in Bosnia where Semberija, known as the granary of the country, has been particularly hit – are affected. As a result of the damages, both countries would need to increase imports, which would affect their growth and further widen their already important current account deficits. Food and energy prices are also likely to rise.

Impact on country risk

Even if the international community already pledged to help to finance the recovery, the huge economic damage caused by the flooding is likely to affect both countries. Indeed, Bosnia faces deep economic and social problems. Growth has been lacklustre over the past five years and unemployment is high. The complexity of the constitution set-up and the decision-making process, as well as the lack of a basic consensus among the three entities regarding government organisation, obstructs all political and economic progress and continues to cast doubt on the country’s ability to function effectively. In this context and in the run-up to the October 2014 election, rising food and energy prices and lacklustre economic growth are likely to result in new large-scale protests as witnessed in February 2014 where civil unrests were the worst since the end of the 1992-95 war. In Serbia, it will be more difficult for the newly elected parliament to implement the needed austerity package which includes a cut in public sector wages, state pension and privatisation of state-owned enterprises. These reforms aim to curb the high budget deficit which has pushed public debt to a dangerous level. The risk of social unrest caused by elevated unemployment and austerity measures is now further exacerbated by the economic impacts of the flooding.

Analyst: Pascaline della Faille, p.dellafaille@credendogroup.com