Slow Economic Growth Likely for Region in 2010

While the states of the Balkans certainly felt the effects of the global economic crisis over the past year, they were not the most severely hit countries, according to Milica Uvalic, a professor of economics at the University of Perugia.

Uvalic noted overall regional trends that negatively affected countries in Southeast Europe, such as reduced inflows of capital from remittances, FDI and foreign loans, and reduced demand for exports.

But she also identified some factors that lessened the impact of the crisis on the region, pointing out that remittances declined less than expected, loans from international lending institutions were secured, and regional integration increased. Uvalic also noted that the economies in the Western Balkans region are generally less open than in EU countries, another factor which likely made the effects of the crisis less severe.

As countries around the world struggle to emerge from the difficult past two years, Balkan Insight looks into the economic situation in the region in 2009 and examines the outlook for the coming year.

 

Steady Optimism for Macedonian Economy

After several years of steady economic development that peaked in 2008 with an annual growth rate of over five per cent, Macedonia was hit hard last year by the global crisis.

The country's export oriented sectors, such as the metal, textile and construction industries, suffered the most and projections from the government and international financial institutions suggest the country ended last year with a negative growth of some 1.5 per cent.

Nevertheless, the government, the International Monetary Fund, and the European Bank for Reconstruction and Development have all came out with optimistic projections for the next year. Forecasts predict the difficult but gradual recovery of the country’s economy.

They predict an annual growth rate of some two per cent in 2010, and if all goes well the country should be back to its 2008 rate of over five per cent annual growth by 2011.

Deputy Prime Minister in charge of Economic Issues Zoran Stavreski told media recently that the Macedonian economy would come out of recession in the first quarter of 2010, basing his optimism on the positive results shown in the final months of last year.

“Considering the data from the last two months of 2009, i.e. the industrial production growth of 4 per cent in November and 20 per cent in December, Macedonia’s economy has actually been coming out of recession,” Stavreski told reporters.

However, the country’s minister of economy, Fatmir Besimi, advised “cautious optimism”.

“We think that 2010 will be a year of recovery but it’s not all that simple. The problems will not suddenly vanish, the trends will fluctuate,” Besimi told media recently.

Some experts see the gradual increase in the price of metals as a good sign. Macedonia would benefit from such a development, given that nearly half of all annual exports are in this sector.

Kosovo, which also has a large metal manufacturing sector, has seen a significant effect of the crisis on its metal producers. Kosovo's two major metal manufacturers, Trepca and Ferronikeli, have suffered as sales to international markets decreased.

Other Macedonian experts have argued that in times of decreased production, massive lay offs, high banking interest rates and a dip in foreign investments, the state should tighten its belt.

 

Serbia Expects Limited Progress

With the Serbian economy forecast to return to growth rates of 2 per cent in 2010, experts say that Serbia will need to reduce its high public spending, increase the production of goods for export and strengthen the national currency against the euro in order to increase its credit activity.

Goran Nikolic, a research associate at the Institute for European Studies in Belgrade, told Balkan Insight that such growth is quite optimistic. “I don’t really see how this is possible with frozen wages and pensions and inflation at some 6 per cent. The industrial sector will grow, which is a trend I can detect now, but as for the rest, especially services, things will not get much better in 2010,” he said.

An International Monetary Fund, IMF, mission was in Belgrade from February 8-23, during which an agreement with Serbian government for the third revision of the country's standby agreement was reached, enabling Serbia to withdraw the third tranche of its loan worth €350 million.

With the standby arrangement, which the IMF granted on May 15, 2009, Serbia approved a loan of €2.9 billion for the strengthening of its foreign currency reserves. A total of €1.12 billion has been withdrawn in the past two tranches.

In December, the Serbian dinar began hitting record lows against the euro. This has prompted many big companies to call on the government to keep the dinar stable, while Serbian Prime Minister Mirko Cvetkovic told the public that the dinar should remain stable due to high foreign currency reserves.

Nikolic told Balkan Insight that Serbia needs serious reindustrialisation in order to strengthen its economy. "The only way to do this is to continue the EU integration process as it will bring more EU funds to Serbia and membership in the bloc will provide Serbia with other benefits, such as stable currency," he stressed.

In 2010, changes to pension growth will follow changes to public sector wages in Serbia, as was agreed with the IMF mission. Negotiations on the possible unfreezing of wages in the public sector are expected to take place in the second half of the year.

 

Albania Fears Further Economic Aftershocks

Although Albania was one of a handful of countries in Europe to register positive growth in 2009, experts believe that the worst of the aftershocks of the global economic crisis are yet to come.
 
Albania registered a 4.2 per cent growth of its gross domestic product, GDP, last year, a positive result many analysts attribute to strong government spending on public works projects.  
 
However, international financial institutions that monitor the local economy, such as the EBRD, are forecasting a decline in the rate of growth to 2 per cent in 2010 and 3.9 per cent in 2011.
 
The government of Albania issued a fiscal stimulus package of more than €750 million in 2009, almost 8 per cent of the country’s GDP, arguing that it was trying to fight the economic crisis. The opposition, however, claimed that such expenditures were simply intended to garner votes in the last general election, held on June 28, 2009.
 
Public expenditures increased by 22 per cent compared with the previous year, while revenues increased by just 6 per cent, thus creating difficulties in respecting contractual obligations, and many economists warn that the situation will get worst before it gets better.
 
An organisation that represents Albania’s biggest construction companies says that the government owes its members roughly €70 million in unpaid public works bills, creating difficulties for contactors.
 
“The companies have accepted exorbitant interest rates for loans from banks in order to respect their contractual obligations toward suppliers and employees,” Maksim Muçi, executive director of the Albanian Construction Association, said in December.
 
On February 25, workers of a local company building the Levan-Vlore highway went on strike because they had not been paid in more than eight months.
 
On top of its own liquidity problems, local experts warn that the debt crisis in Greece could have worrying implications for Albania.
 
Roughly 664,000 Albanians currently live in Greece, making up to 10 per cent of the total workforce there. An important immigrant population with strong ties to Albania, they send home hundreds of millions of euros in remittances every year.

“Half the rural population in Albania survives on these remittances and if this source of income is closed off, it will have dire consequences for their standard of living,” said Zef Preci, executive director of Albania’s Center for Economic Research.


Economic Development Crucial for Kosovo

Among various challenges that Kosovo faces, the development of its economy in the coming year will be crucial. In 2009, Kosovo marked more then 40 per cent unemployment, while some 15 per cent of the population lives in extreme poverty.

The economy grew in 2009 by 4 per cent, but Kosovo’s Central Bank said that this was due to public sector spending rather than development in the private sector. Foreign investment fell in Kosovo last year for the second year in a row.

Two of the most important successes for Kosovo’s government in the past year were its membership in the International Monetary Fund and the World Bank.

Kosovo is considered to be the least developed economy in the region and in Europe. It has a GDP per capita of only €1,400, compared to an average GDP per capita of around €28,000 in EU countries.

Kosovo's government has said that the economy is a top priority for 2010. This year, the government is planning to privatise the telecommunication company and the international airport in Pristina. It also intends to bring in an international company to build two 500 MGW energy providers.

The Kosovo Chamber of Commerce, OEK, argues that the economy in Kosovo will not progress unless the rule of law functions properly. Rule of law and economic development are closely linked to the EU integration process as well, the OEK says.

“If we are not entirely focused on all three points, Kosovo’s future will not be bright,” Safet Gerxhaliu, OEK vice-president said.

“It's time we move to a proper economy, it's time we support local businesses and it’s time we support producers in Kosovo,” Gerxhaliu added. Long term political stability is impossible without more economic stability, he concluded, saying: “The priority should be economic development if we seek a better future for Kosovo.”

 

Slow Recovery Forecast for Bosnia

Giulio Moreno, the head of the EBRD office in Bosnia, noted that Bosnia's decline in GDP in 2009 of -4.5 per cent was smaller than the regional average, but pointed out that a slow recovery in this area was expected.

Moreno also called attention to the fact that the financial sector in Bosnia was helped by the Vienna Initiative, a deal through which the EU and the IMF agreed to provide help to countries in the region, and in return western European banks agreed not to withdraw capital from their subsidiaries in the region, and to keep existing credit lines in place.

According to Bosnia's statistics office, in January 2010, total industrial production in Bosnia fell by 11.2 index points compared to average industrial production in 2009.

The greatest fall had been registered in the sector of mining and stone extraction, followed by the processing and manufacturing industries.

The unemployment rate in the country in December 2009 was 42.7 per cent, meaning that 510,534 people were registered as unemployed. Official unemployment figures, however, do not reflect the estimated 290,000 Bosnian workers who are believed to have found work in the grey economy last year, according to economic analyst Rajko Tomas, who conducted a study on the issue for the German Friedrich Ebert Stiftung.

 

Slim Hopes for Short Term Growth in Romania

The economic situation in Romania has varied significantly over recent years. While in 2008 the Balkan country reported economic growth of 7.1 percent, the fastest pace in the European Union, last year Romania suffered its worst recession in at least 20 years as the economy was heavily affected by the global financial downturn and contracted by some 4.0 per cent.

The IMF, the European Council, as well as some independent analysts predict that growth will resume in 2010. The country’s future economic prospects are seen to be tied to its increasingly important integration with other European Union member states.

The IMF, which is leading the €20 billion bailout package for Romania, recently announced that Romanian economy is expected to grow 1.3 percent in 2010.

The worst may be over for Romania, but the human cost is expected to continue to be high: unemployment is predicted to stay around 10 per cent, almost double compared to last year’s levels.

Furthermore, the government seems to be firm in its intention to freeze state wages and pensions in 2010.

There are limited incentives for investors, as the government is to maintain a flat tax rate on individual income and corporate profit at 16 per cent and to keep the value added tax rate at 19 per cent. Additionally, it plans to keep profit tax exemption on reinvested profit.

For this year, government targets include consolidating the deficit at 5.9 per cent of gross domestic product, compared with an estimated 7.3 percent in 2009. It hopes to gradually reduce the fiscal gap to below 3 per cent by 2012.

The government also aims to maintain the goal of receiving approval for eurozone entry in 2014 and start using the single currency from 2015.