Ex-Yugoslavia’s Brooding Breakup Scars

S&P Ratings offered a 25-year retrospective on the former Yugoslav republics since independence in a November report, with most in the “B or BB” category topped by Slovenia’s “A” grade. Creditworthiness has dipped over the decades due to legacy issues, including ineffective institutions, low income levels and poor public finances. EU accession is a long path, monetary regimes are often fragile, and current account deficits are large as history and economic fundamentals remain deterrents to sustained modernization and recovery, the agency points out. When Tito died as the unifying figure of the original bloc external debt was out of control with only a sliver of FDI to offset it, and a balance of payments crisis was soon followed by hyperinflation and revival of ethnic and religious hatred. Croatia and Slovenia were the first to break away, but the single market imploded and Bosnia and Herzegovina with its pluralist makeup descended into civil war. Corruption and governance are still roadblocks with bottom rankings in the Transparency International Index and the World Bank’s Doing Business indicators. Slovenia is the only dual EU and euro member, and Macedonia and Montenegro are in the back of the entry queue. Three countries use currency pegs, and euro use is heavy throughout the zone with limited local unit confidence. On fiscal policy loss-making state-owned firms are the “Achilles heel” with inefficiencies and bad management inherited from the federation era, according to the review. Slovenia had to rescue three government-run banks in 2013 at a EUR 3 billion cost and debt/GDP ratios are in the 65 percent range for the sub-region, almost double the average for peer sovereigns. Domestic capital markets are underdeveloped and in four countries 40 percent is foreign currency-denominated. Traditional heavy industry emphasis left an uncompetitive company base and bureaucratic tendencies and lagging infrastructure aggravated the predicament. Hundreds of public banks and companies stymie the private sector and divestiture programs have proceeded slowly, typically under IMF-ordered adjustments.  Big shadow economies and emigration and “brain drain” have resulted from formal lack of employment and productive capacity, and the low savings rate further impedes urgent investment, S&P comments.

War destruction and incomplete market transitions have fueled capital goods import demand, and consumption was also financed by external credit leading to late 2000s crisis. Remittances and tourism have helped bridge the trade gap but inward direct and portfolio inflows remain weak. Companies and banks have deleveraged since the collapse but government foreign debt loads continue to increase. The analysis concludes that 45 years “under the Yugoslav flag” is a lingering burden, with a few bright spots but a massive unfinished agenda. Incomes are growing and conflict has been absent for 15 years, but public and international finances are stretched and currencies and institutions suffer from minimal trust. Medium-term annual GDP growth is in the 2-3 percent range, and although rating outlooks are stable, credit metrics will improve “very gradually.” EU and NATO membership should be anchors, but expansion sentiment has waned as the organizations focus on their own survival and future direction. More liberal exchange rate regimes could develop eventually but not in the immediate rating horizon still blocked by Tito period darkness, the report cautions.