What is a credit rating, who determines it, how and what is its practical and theoretical application?
A credit rating is, in the simplest terms, a confidence rating. It shows how credible a country, company or institution is in the eyes of investors, and how likely it is that it will regularly settle its obligations. When international agencies such as Standard & Poor’s, Moody’s or Fitch Ratings issue this rating, they actually send a signal to the entire market – whether the country is stable, predictable and capable of maintaining fiscal and monetary discipline in the long term.
In their analysis, the agencies look at the whole picture: political stability, institutional framework, economic growth, inflation, public debt, budget deficit, foreign trade balance, foreign exchange reserves and the strength of the banking system. In the case of Bosnia and Herzegovina, a currency board also plays an important role, which is a key element of monetary stability.
The practical application of a credit rating is very concrete. It determines how much interest a country will pay on international markets, what borrowing terms it can get, and whether it will be interesting to investors looking for security. The rating acts as a “gate” – the higher it is, the more capital flows into the country. Theoretically, the rating summarizes hundreds of economic variables into a single number or label that says everything about the perception of risk. It is the global language of investors.
In other words – good economic policy and stable institutions create trust, and trust opens markets, lowers interest rates, brings in investments and accelerates growth. A credit rating is exactly that – institutionalized trust in a country.
Why has BiH maintained the same rating for more than 20 years, in the "speculative activities" category?
Bosnia and Herzegovina has had the same credit rating for more than two decades, and this is not a coincidence, but a consequence of structural limitations that have been recurring for years. To be quite clear - Bosnia and Herzegovina is currently in the B+ category according to S&P, or B3 according to Moody's, which is the lower end of the so-called speculative rating. This is a message to international markets that it is a country with solid macroeconomic fundamentals - primarily a stable currency board, well-capitalized banks and moderate public debt - but at the same time a country that remains vulnerable due to political tensions, weaker institutional coordination and a slow pace of reforms.
Two levels above us is the BB category (according to S&P), or Ba3 (according to Moody's), which indicates lower risk, while only in the BBB- (according to S&P), or Baa3 (according to Moody's) zone is the first level of investment rating. Entering this category opens the door to the broadest base of institutional investors and dramatically lowers the cost of borrowing. That is why every reform step is important: a move of just one “notch” – say from B+ to BB- – can save a country tens of millions of euros a year in interest. Two “notches” of progress means entering a completely new league of investors – pension funds, insurance companies and large global portfolios that, by rule, invest exclusively in the investment category. Progress in the rating almost always spills over to the domestic market, lowering the cost of capital for both companies and banks.
Why has Bosnia and Herzegovina not progressed?
The first reason is institutional fragmentation that slows down decision-making and prevents coordinated reforms. Rating agencies very clearly emphasize that reforms in Bosnia and Herzegovina often stop at the level of political differences, not economic arguments. The second reason is the insufficiently accelerated restructuring of public enterprises, limited efficiency of the administration and slow progress in the rule of law. The third reason is political uncertainty, which creates a perception of risk even when economic fundamentals appear stable.
In other words: we as an economy have stability (monetary stability, a healthy banking sector and moderate public debt), but we do not have enough progress. A credit rating does not reward the mere fact that a country maintains the existing framework – it rewards credible steps forward, it rewards stability that moves forward. Until we demonstrate consistency in reforms and institutions, our rating will remain a reflection of a country that has potential but has not yet proven its willingness to translate it into results.
How long would it take for BiH to catch up with its neighbors and who should be involved?
If we are talking about catching up with neighboring countries in terms of credit ratings, we must first be completely realistic about where Bosnia and Herzegovina stands today. Compared to the countries in the region, Bosnia and Herzegovina has by far the lowest credit rating. All neighboring countries monitored by international rating agencies are better positioned: Slovenia has enjoyed a high investment-grade rating for many years (AA, according to S&P / A3, according to Moody's), Croatia is in the investment zone (A-), Serbia is at the very edge of investment-grade (BBB- by S&P) or just below (BB+ by Fitch), while Montenegro, North Macedonia and Kosovo have better ratings than Bosnia and Herzegovina, mostly in the BB- to B+ range. This means that practically all Western Balkan economies have a stronger signal of stability and credibility towards investors than Bosnia and Herzegovina.
The differences cited by the rating agencies mostly relate to institutional efficiency and decision-making capacity. Most countries in the region – regardless of their own challenges – have shown continuity of reforms in the last ten years, built more stable investment and fiscal frameworks and made significant progress in the rule of law and public sector management. Croatia and Slovenia have an obvious advantage due to their membership in the EU and the eurozone, but Serbia, Montenegro and North Macedonia have also made measurable progress in fiscal consolidation, market liberalization and public debt management. In contrast, Bosnia and Herzegovina is perceived as a country with solid macroeconomic fundamentals, but with the weakest institutional coordination, slow reforms and frequent political blockages that make policy predictability difficult. This is the key to why all these countries – including the smallest economies in the region – have better ratings and easier access to capital than Bosnia and Herzegovina.
Therefore, my realistic but optimistic view is that Bosnia and Herzegovina, with a clear political decision and a coordinated reform plan, can achieve a shift of one to two “notches” within three to five years. This means moving from the lower part of the speculative level to the more stable range of BB (according to S&P), or Ba (according to Moody's). Catching up with the region – that is, entering the BBB- category (according to S&P) and approaching the investment zone – is realistic in a period of five to eight years, provided that there is continuity of reforms, and not cyclicality in their implementation.
We will need a little more time to move from the “speculative” to the “investment” category. If we were to make a joint decision today to make raising the credit rating a national goal – and that is a strategic goal – it would be realistic to talk about a period of five to eight years. This is not a process measured in days, but in continuity – the stability of reforms, fiscal policy, the investment environment and the rule of law.
What does this mean in concrete terms?
- A broad but coordinated structure of institutions must be involved in the process:
- The Council of Ministers and entity governments, which must take political ownership of the reforms;
- Ministries of Finance, which need to lead fiscal consolidation, debt management and the capital budget;
- The Central Bank of Bosnia and Herzegovina, whose role in monetary stability, the quality of statistics and data transparency remains crucial;
- Financial sector regulators, which must ensure the stability of the banking system and a stimulating capital market;
- Judicial institutions, whose progress in the rule of law directly affects the perception of risk;
- Public enterprises and their supervisory bodies, because corporate governance and the efficiency of the SOE sector make a key difference in a country’s rating profile;
- and of course the business community, which puts the greatest pressure for predictability and long-term stability of the business environment.
Rating agencies do not seek perfection. They seek evidence that a country knows where it is going and has the capacity to get there. They therefore look at the “country story”. In order for Bosnia and Herzegovina to tell a story of progress, it must have a clear strategy, responsibility, deadlines and communication. When continuity is demonstrated, the rating shifts. When it is demonstrated that the country knows how to resolve its own blockages, the rating changes permanently. If we make a step from the political cycle to the reform cycle, catching up with the region ceases to be an ambition and becomes a feasible, measurable and very concrete economic goal.
How does a sub-investment-grade rating affect companies and citizens?
When a country has a sub-investment-grade rating, it means that it is globally perceived as a risky destination. The consequences are very concrete: the state borrows more expensively, banks obtain funds more expensively, and this automatically spills over into the entire economy.
Companies from such a country pay higher interest rates on loans, find it harder to reach foreign investors, and domestic banks become more cautious. Less capital means less investment, slower growth, and fewer new jobs.
Citizens feel this through more expensive loans, unstable prices, and limited access to investments that would create new jobs. This is not an abstract assessment - it is a direct factor in the standard of living.
In contrast, countries with an investment-grade rating have access to cheaper capital, more stable financial flows, and more favorable lending. They create a climate of trust that drives the entire economy.
In other words, the difference between a “speculative” and an “investment” rating is not just a letter next to the country’s name – it is the difference between expensive and cheap money, between stagnation and growth.
In which elements has BiH improved, and where has the rating remained the same or deteriorated?
Bosnia and Herzegovina's progress in the rating analysis is most visible in macroeconomic and monetary stability. The currency board, which the Central Bank consistently maintains, remains a strong pillar of confidence. The banking system is stable and well-capitalized, public debt is moderate, and reserves are sufficient. These are the key points that have prevented Bosnia and Herzegovina from falling into a lower rating category during periods of global shocks.
There has also been positive progress in strengthening fiscal transparency and statistical capacities – today we have far more and better quality data than ten years ago, which instills confidence in the agencies.
However, weaknesses remain institutional and structural. The rule of law, corporate governance of public enterprises, labor market competitiveness, and the investment framework have remained unchanged or even deteriorated. When reforms stagnate, the rating stagnates.
Rating agencies particularly value predictability. Bosnia and Herzegovina must demonstrate that it can make decisions that go beyond daily politics and short-term interests. Then the rating ceases to be an obstacle and becomes a result.
Can BiH, despite its complex system, adopt a common strategy for raising its rating – and how?
It can. And it must. No complexity is an excuse for stagnation. In our system, there is enough room for coordination and for results, it is only necessary that there is a political decision to put economic stability above party interests.
The first step is to form an inter-institutional body, such as the “Committee for the Advancement of the Sovereign Rating”, which would bring together the ministries of finance, the Central Bank, regulatory bodies and relevant agencies. This body would monitor key macro indicators, the implementation of reforms and communicate with rating agencies on a quarterly basis. Or if not at this level, then at least at the level of a working group of a less formal nature that would bring together stakeholders willing to cooperate on improvements in this field.
The second step is to define reform priorities: corporate governance in public enterprises, fiscal rules, the labor market, energy transition and digitalization. Each of these segments has a direct impact on the perception of risk.
The third step is communication – because the rating is not just the result of economic numbers, but also of trust. Bosnia and Herzegovina must show that it knows where it is going and has the will to get there. When investors recognize this, change happens quickly.
So the answer to the question “can we?” is not technical but cultural. Yes, we can – if we decide that progress is a common language and stability is the result of cooperation, not compromise.
