Estudios Económicos
Albania

Albania

Population 2.9 million
GDP 4,545 US$
C
Country risk assessment
C
Business Climate
Change country
Compare countries
You've already selected this country.
0 country seleccionado
Clear all
Add a country
Add a country
Add a country
Add a country
Compare

Synthesis

major macro economic indicators

  2016 2017 2018 (e) 2019 (f)
GDP growth (%) 3.4 3.8 4.0 3.8
Inflation (yearly average, %) 1.3 2.0 2.3 2.7
Budget balance (% GDP) -1.8 -1.4 -2.0 -1.8
Current account balance (% GDP) -7.6 -6.9 -7.0 -7.0
Public debt (% GDP) 73.2 71.8 71.0 69.0

 

(e): Estimate. (f): Forecast.

STRENGTHS

  • Candidate for EU membership
  • Mineral (oil, chromium, copper, iron-nickel, silicates, coal) and hydroelectric potential
  • Coastline with several ports
  • Abundant and inexpensive labour
  • Strength of the lek against the euro

WEAKNESSES

  • Large informal economy (30% to 40%)
  • Poverty (GDP per capita: 30% of the European average); low priority given to education (3% of GDP)
  • Dependent on rainfall: agriculture (25% of GDP for 45% of jobs) and hydropower (95% of electricity)
  • Ineffective and politicised court system and administration
  • Corruption and organised crime, in some cases linked to drug trafficking

RISK ASSESSMENT

Growth supported by domestic demand

Despite decelerating slightly since the second half of 2018, growth is expected to remain high in 2019. Household consumption will again receive support from falling unemployment, including among young people (from 34% to 22% since 2015), as well as from a rising participation rate linked to the decline in the informal economy and increased employment for both women and men. Economic activity will continue to benefit from ongoing foreign investment in infrastructure, particularly in energy with the continued construction of the TAP to transport Azeri gas to Italy, and the second plant (Moglice) of the Devoll river hydroelectric complex. As would be expected, the electricity grid is being developed to ensure internal and external distribution of the additional power that is expected to be generated. These facilities will take over from local oil production, which peaked in 2014. Conversely, local investment, including the building or upgrading of roads and railways (Tirana-Durres line), will be constrained by fiscal consolidation and prudent lending by banks. Banks, most of which are subsidiaries of Turkish (one third of assets), Italian, and Austrian groups, will continue to lower the percentage of doubtful loans in their portfolios (13% in August 2018 compared with 21% two years earlier), while also reducing the share of the euro (about half) in their deposits and loans. Under these circumstances, growth in corporate credit should remain low while the average interest rate on loans in lek and euro is expected to remain relatively high. Despite the strength of the lek and the stabilisation of energy prices, inflation is set to rise, fuelled by strong domestic demand. This would prompt the central bank to raise its key interest rate, which was lowered to 1% in June 2018 in order to ease the upside pressure on the currency. While all sectors are expected to perform well, electricity production, which is reliant on rainfall, is difficult to predict.

Fiscal consolidation necessary to reduce the debt burden

After a hiatus linked to the June 2017 elections, fiscal consolidation will slowly resume in 2019. The stakes are all the higher as the debt burden, while decreasing, remains high. Despite recent issues, including the EUR 500 million 7-year eurobonds with a coupon of 3.55% issued in October 2018, which are aimed at extending the maturity and lowering the cost of debt, two-fifths of the debt is still short-term. Moreover, 60% of the debt is held by local banks and makes up 25% of their assets. Refinancing the debt is estimated at 20% of GDP (2018). Adding to the debt burden, the state is responsible for up to €1 billion under contracts carried out in partnership with the private sector in areas ranging from roads and health to education. The objective is to achieve a primary surplus (i.e. excluding interest) sufficient to provide debt relief. The cost of the electricity sector to the state is expected to decrease with the installation of meters, infrastructure upgrades and the phase-out of subsidised prices. Pension and territorial administration reforms should also help in this regard. Tax collection is benefiting from the reduction of the informal sector and computerisation, while improved investment management has made it possible to eliminate arrears of payments to suppliers.

Large trade deficit financed by FDI

Goods trade will continue to show a large deficit (22% of GDP in 2018), despite a smaller increase in imports due to the completion of major energy projects. This reflects the narrow production base (textiles, footwear, oil, minerals, electricity, construction materials), which means the country has to import many capital and consumer goods. Half of Albania’s exports are destined for Italy. In addition, the balance is sensitive to rainfall, which can cause hydroelectric power sales to fluctuate. The services surplus (9% of GDP) is expected to increase thanks to tourism and outward processing arrangements in the clothing sector. Remittances from emigrants (8%) could suffer as a result of poor economic conditions in Italy. The current account deficit is largely financed by FDI, which means that infrastructure-related imports are self-financing. Despite the importance of non-debt-generating financing, external debt represented 67% of GDP at the end of June 2018. It is denominated in euros, much of it is long-term (80%), and it is primarily due to public creditors or connected with FDI.

Reforms are set to continue

Prime Minister Edi Rama and the Socialist Party obtained an absolute majority in the June 2017 elections. Structural reforms will continue with a view to EU membership, despite tension with the opposition. This is a condition not just for EU membership but also for encouraging foreign investment. Much remains to be done to improve the effectiveness of administrative and court systems, make local agencies accountable and fight corruption, organised crime and smuggling between Albania and Italy. The legislation is there and prosecutions are taking place, but this is not yet borne out in convictions. In addition, hydroelectric projects are increasingly opposed for their environmental impact.

 

Last update : February 2019

Parte superior