‘No-deal Brexit could have implications for Albania, region,’ EBRD warns

Tirana Times
By Tirana Times November 5, 2018 13:32

‘No-deal Brexit could have implications for Albania, region,’ EBRD warns

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  • “Unless other member states increase their contributions, Brexit will lead to a 10 to 15 per cent decline in structural and accession funds available to countries in central and south-eastern Europe, amounting to a reduction of up to 0.4 percentage points of GDP in EU-supported investment. Brexit may also weaken the (perceived) prospects of EU accession for candidate and potential candidate countries. A slower reform momentum in these countries will then weigh on growth,” says the EBRD report

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TIRANA, Nov. 5 – A no-deal Brexit would hit Albania and other Western Balkan countries through indirect trade links, lower EU accession funds and delayed accession prospects, London-based European Bank for Reconstruction and Development has warned.

In a recent report examining a possible departure of the United Kingdom from the EU with no agreements on trade and investment, the EBRD says south-eastern European countries where it invests, a region that includes six EU aspirant Western Balkan countries as well as EU members Greece, Cyprus, Romania and Bulgaria, would be the hardest hit in case of a no-deal Brexit.

While trade and investment links between Albania and Europe’s second largest economy are quite modest, the EBRD says a disruption of cross-border supply and value chains between the UK and advanced economies that are key trading partners for Albania and other countries in the region could lead to spillover effects.

“The economic impact of a no-deal Brexit is projected to be largest for economies of south-eastern Europe, mainly through disruption to trade linkages encompassing the UK and other advanced economies in Europe, the impact on the EU accession reform momentum and a reduction in the EU structural and cohesion funds,” says the EBRD regional economic prospects report.

The report estimates lower expected purchasing power in the UK compared to a no-Brexit scenario will affect the UK’s demand for imports and lead to lower exports from Europe’s advanced economies to the UK, indirectly affecting demand for imports of intermediate goods from the EBRD regions.

Albania conducts almost half of its trade with Italy, the Eurozone’s third largest economy whose growth prospects have slowed down in the aftermath of its recession and after a populist government has taken over. Albania exports the overwhelming majority of its low-value added garment and footwear products to Italy, which is often not the final destination of the top Albanian exports.

While the modalities of Brexit still remain to be determined two and a half years after the UK’s shock Brexit referendum result, scenarios range from the UK staying in the EU customs union to the no-deal scenario of the UK departing the EU with no special agreement governing trade, investment and other aspects of bilateral relations, says the EBRD report.

Back in mid-2016 soon after the UK voted to leave the European Union, Albania’s central bank also warned that while the Albanian economy and financial system are largely immune to the Brexit, the country could face indirect spillover effects from blows to Albania’s main trading partners.

“Albania has a larger exposure to indirect blows that Brexit could have on the European economy and financial system in countries which are Albania’s main trading partners and every negative Brexit reaction by them would attempt transmission even to Albania,” central bank governor Gent Sejko  earlier warned.

 

Lower accession funding

“Unless other member states increase their contributions, Brexit will lead to a 10 to 15 per cent decline in structural and accession funds available to countries in central and south-eastern Europe, amounting to a reduction of up to 0.4 percentage points of GDP in EU-supported investment. Brexit may also weaken the (perceived) prospects of EU accession for candidate and potential candidate countries. A slower reform momentum in these countries will then weigh on growth,” says the EBRD report.

The UK, which in mid-2018 hosted an EU-Western Balkan Summit, has said Brexit will not affect its support to the six EU-aspirant countries, vowing increased support to boost security, investment and fight organized crime.

The European Union has committed a total of €650 million in financial assistance under the Instrument for Pre-Accession Assistance II from 2014 to 2020, but Albania’s absorption capacities remain poor with the country managing to absorb only more than a third of funds allocated for the 2007-2013 period due to problems with the quality of tendering, property rights and time-consuming procedures. Albania had only €184 million disbursed in IPA funding from 2007 to 2013 out of €504 million committed by the European Commission, in one of the region’s poorest absorption rates, according to a regional report examining IPA II absorption capacities.

An earlier EBRD report has shown Albania and other Western Balkans EU aspirant countries could need up to two centuries to catch up with EU living standards. The 200-year gap is the pessimistic convergence scenario that the EBRD predicts for the region to fully converge with average EU living standards compared with a baseline scenario of 60 years and an optimistic scenario of 40 years.

Some catch-up with EU living standards has already taken place in the past 15 years when the Western Balkan economies grew by an average of 3.2 percent from 2001 to 2016 compared to a growth rate of 1.4 percent in the European Union.

An EU-candidate since mid-2014, Albania is hoping to launch accession talks next year, but EU leaders have said an eventual green light will depend on further progress with reforms strengthening rule of law and the judiciary as well as fighting organized crime and corruption.

Serbia and Montenegro are the only two regional countries to have opened accession talks that could join the EU by 2025, according to the new EU enlargement strategy and forecasts by experts.

 

International trade conflict impact

While estimated Brexit impacts are smaller in a scenario where the UK remains within the EU customs union, the EBRD report shows the escalation of trade conflicts such as China-US or spillover effects from the economic slowdown in Turkey is a major risk to the outlook.

“If trade conflicts remain confined mainly to bilateral China-US trade, economies in the EBRD regions will be relatively little affected, as most of the region’s trade takes place within or with the European Union. In contrast, a scenario in which trade tensions escalate globally and international supply chains become severely disrupted entails high risks for the region’s economies that are strongly integrated into global value chains,” says the EBRD report.

“Spillovers from the projected deceleration of growth in Turkey to the economies in the EBRD regions are expected to be limited owing to the relatively modest extent of economic linkages via trade, cross-border investment and remittances,” it adds.

The World Bank has also recently warned Albania is almost immune to current global trade tensions between leading economies and Turkish market volatility to the Western Balkans, but a possible escalation of trade conflicts between key players could also affect the small Albanian economy as it did in the aftermath of the 2008-09 global financial crisis.

Due to stronger trade and investment ties with Turkey, a possible escalation of the crisis in Turkey, where the Turkish lira has lost about 40 percent of its value against the US dollar this year could affect Albania more than the current round of trade disputes involving the United States, China and other U.S. trading partners, which a World Bank report says may create both opportunities and risks for Western Balkan countries.

 

Albania-UK trade, investment ties

The UK has a stock of only €56 million of foreign direct investment in Albania, although two key companies, leading Vodafone mobile operator and Shell oil giant which has made some key oil discoveries in the country and is planning a multi-billion dollar investment stage, originate from the UK.

Trade exchanges between the two countries are quite modest at about 6 billion lek (€48 million) and dominated by Albanian imports of machinery and equipment, according to Bank of Albania and INSTAT data.

Some 14,000 Albanian are officially reported to live in the UK, where Albanians need visas to get to and often enter illegally, but are a key source of remittances for poor northern Albanian regions.

The British pound currently trades at a decade low of 141 lek against the Albanian national currency but not with any significant impact to the Albanian economy due to modest trade, investment exposure. A weaker British pound against the Albanian lek, mostly affects recipients of remittances from the UK, accounting for about 10 percent of total remittances.

Remittances from more than 1.2 million Albanian migrants mostly settled in Italy and Greece slightly increased in 2017 when they recovered to €636 million, up from €616 million in 2016, but yet were about a third below their peak level of €952 million in 2007 just before the onset of the global financial crisis.

London-based EBRD is one of the country’s largest lenders with investment of almost €1 billion in some 80 projects in the country.

 

Growth prospects slightly improve

In its latest economic outlook, London-based EBRD slightly revised Albania’s 2018 economic growth outlook upward to 4 percent and left unchanged its 2019 forecast at 3.9 percent, rating the Balkan country as one of the fastest growing economies in its South-eastern Europe region.

“The short-term outlook remains positive but risks remain. We expect growth of 4.0 per cent in 2018 and 3.9 per cent in 2019, with private consumption and investment being the main drivers of growth,” says the EBRD.

The London-based financial institution says some ‘unrecorded cross-border activities’ may also be contributing to the appreciation pressures on the Albanian lek which it says reflects the ongoing de-euroisation policy initiative of the central bank in the financial sector, as well as the capital conversion of some banks.

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 now considered a threat to the Albanian economy by local experts in case of further shocks.

The Albanian economy grew by an average of 4.4 percent in the first half of 2018, in a decade-high growth fuelled by heavy rainfall lifting the state-run electricity sector out of crisis, but yet not producing any significant hike in consumption or investment which experts estimate can receive a boost only in case the Albanian economy manages to grow by 6 percent annually, a growth rate it enjoyed for about a decade until the 2008-09 global financial crisis.

The EBRD expects Greece, Albania’s traditional second largest trading partner and top foreign investor whose six-year long recession came to an end in 2016, to grow by an average of 2.2 percent in 2018-19.

The Western Balkan’s largest economy, Serbia, is expected to grow by 4.2 percent this year after its economy expanded by an annual decade-high of 4.9 percent in the year’s first half on the back of stronger demand and investment.

The EBRD expects Macedonia to register growth rates of 2 to 3 percent over the next couple of years after overcoming a political stalemate that brought down growth to zero in 2017. Macedonia, where more than a quarter of population is ethnic Albanian, recently made it as the top 10 country for the ease of doing business in the World Bank’s 2019 Doing Business report and is heading for a solution to its decade-long name dispute with Greece, paving the way for its Euro-Atlantic integration.

Tirana Times
By Tirana Times November 5, 2018 13:32