TIRANA, Oct. 16 – Representatives of key international financial institutions have urged Albanian authorities to continue with economic growth reforms and be well-prepared for timely reaction in case of external or internal shocks. The warning came in meetings that Albania’s central bank governor Gent Sejko held last weekend in Indonesia’s Bali as part of the IMF and World Bank annual meetings.
While Albania’s central bank does not specify the threats that the small Albanian economy could face, the IMF and the World Bank have earlier warned of a series of threats related to both external and internal developments.
Current external threats are mainly related to developments in Turkey, one of the world’s fastest growing emerging economies, whose growth prospects have received a severe blow this year after the Turkish lira lost 40 percent of its value against the US dollar leading to double-digit inflation and a sharp downgrade in GDP growth forecasts.
The World Bank says a possible escalation in trade disputes among the world’s leading economies such as the US and China could also have implications for the Western Balkan region by reducing investor confidence and negatively affect much-needed investment in an EU-aspirant region that is already not well-perceived due to weak rule of law and corruption.
Due to stronger trade and investment ties with Turkey, a possible escalation of the crisis in Turkey could affect Albania more than the current round of trade disputes involving the United States, China and other U.S. trading partners, which a recent World Bank report says may create both opportunities and risks for Western Balkan countries.
The IMF says it expects Turkey’s 2019 GDP growth to drop to a mere 0.4 percent in 2019, down from an expected 3.5 percent in 2018, less than half of last year’s 7.4 percent expansion.
Examining the channels for a possible transmission of Turkish market volatility to the Western Balkans, a recent World Bank report shows Albania is little exposed in terms of exports, but to a higher degree if imports, foreign direct investment and the banking sector assets are concerned.
Albania’s trade exchanges with Turkey are at about 50 billion lek (€395 mln) annually, representing 6 percent of Albania’s total but overwhelming dominated by Albanian imports from Turkey. Meanwhile, the stock of Turkish FDI to Albania, at €565 million in mid-2018, represents about 8 percent of total FDI stock in Albania, according to Albania’s central bank.
Turkey is more actively engaged in Albania’s banking sector, with the country’s largest commercial bank, Turkish-owned BKT, accounting for 28 percent of banking assets in the country, but not estimated to pose any significant risk due to operating as a separate legal entity and with modest exposure to Turkish government lira-denominated securities.
In a recent report, the European Commission says the exposure of the Albanian banking sector to Turkey is low with only 6.6 percent of total assets related to Turkish companies, mainly involved in hydropower and steel industry in Albania.
However, due to stronger trade, investment and human ties with Italy, a possible slowdown in GDP growth in the Eurozone’s third largest economy and Albania’s top trading partner, could affect the Albanian economy more than the Turkey and global trade dispute spillover effects.
The IMF has cut Italy’s growth forecast to around 1 percent over 2018-19 and expects its economy to grow below 1 percent by 2023 over fears that the breach of EU spending rules by its populist government could trigger a debt default.
Albania conducts about 36 percent of its trade exchanges with Italy, the host of some 500,000 Albanian migrants who are a major source of remittances for Albanians at home. Over 90 percent of Albania’s garment and footwear products, an industry relying on cheap labor costs but employing about 100,000 people and producing the country’s top exports, go to Italy.
The IMF also expects GDP growth in Greece, Albania’s traditional second largest trading partner, to linger around 2 percent over the next six years after the neighboring country overcame its 8-year recession in 2016.
Recessions in Italy and Greece, Albania’s main trading partners, top investors and the hosts of 1 million Albanian migrants, had a series of negative effects on Albania through lower trade, investment and remittance flows in the aftermath of the 2008-2009 global financial crisis.
Internal threats
International financial institutions have warned the Albanian economy could face a spiral of risks related to its ambitious but controversial €1 billion public private partnership program posing a threat to the public debt reduction agenda and an expected slowdown in foreign direct investment following the completion of two major energy-related projects that drove growth in the past four years.
The International Monetary Fund has earlier warned public private partnerships and the accumulation of new arrears pose two of the key threats to Albania’s public finances.
Both the IMF and the World Bank have expressed concerns over lack of transparency and cost-benefit analysis concerning PPPs whose contracts are being mostly awarded through unsolicited proposals favoring companies that propose them in tenders with little competition.
The International Monetary Fund has earlier warned the Albanian government’s ambitious €1 billion public private partnership project will not only fail to bring public debt down to 60 percent by 2021, but could create hidden costs which if included in the debt stock could take it to 71 percent of the GDP. The government’s target is to bring public debt to a more affordable 60 percent of the GDP by 2021.
The World Bank has upgraded its 2018 growth forecast on Albania to 4 percent supported by weather-related spike in hydroelectric power production and a strong tourism season but expects medium-term growth to slow down to 3.5 percent with risks to the outlook involving the international situation in emerging markets, growth in the EU, and the success of the fiscal consolidation and tax reform.
Meanwhile, the IMF has also revised upward its 2018 economic outlook on Albania to 4 percent, but expects the country’s growth to linger around 3.7 percent to 4 percent over 2019-2023.
Europe’s single currency currently trading at a 10-year low against Albania’s national currency, having lost 6 percent since late 2017, with a series of negative effects on Albania’s highly euroised economy, primarily hitting Eurozone-destined exports, but also sizeable Euro-denominated savings and remittances, is also considered a threat to the Albanian economy in case of further shocks.
