Economic slowdown expected in WB: Tourism sector remains most affected in Albania

Tirana Times
By Tirana Times April 24, 2020 16:24

Economic slowdown expected in WB: Tourism sector remains most affected in Albania

TIRANA, April 24 - Albania's tourism sector will be hit particularly hard by the coronavirus pandemic, according to OECD's latest study on the COVID-19 crisis response in SEE countries. Due to the strong linkages between tourism and agriculture, the negative impact will also be strongly felt in rural areas where the majority of the poor are employed in agriculture. This applies to all of the Western Balkan countries, but especially to Albania and Montenegro considering that tourism revenues exceed 20 percent of GDP in both countries' economies, OECD stated.

The COVID-19 crisis has already curtailed global international travel demand and will certainly lead to a collapse in tourism ahead of the summer season. Moreover, xports across the region will fall due to depressed demand, as well as disruptions in value chains. Although all economies will be affected, Romania and Serbia would likely bear the greatest cost, as their manufacturing sectors are more highly integrated into global supply chains and contribute the most to their economies in terms of value-added and employment, the report reads.

The economic slowdown will also come at a bad time for Albania and Croatia, as both economies have been recently hit by earthquakes that have taken a toll on physical infrastructure and economic activity. This will add an additional burden to their budgets, which are already stretched by efforts to counter the damaging economic effects of the coronavirus outbreak

In general, the COVID-19 outbreak poses a major challenge to the fragile health systems in the SEE region, which have been suffering from low health expenditures, lack of medical equipment and insufficient, yet well-educated personnel. In particular, the number of physicians per 1000 inhabitants in the Western Balkan region was lower (2.3) than the OECD average (2.9) in 2015, with only North Macedonia and Serbia counting 2.9 in 2015 and 3.1 respectively in 2016. In Bulgaria and Croatia, on the other hand, the number of physicians is higher than the OECD average, with Romania being at the Western Balkan average. Furthermore, the number of nurses and mid-wives (per 1000 people) in the Western Balkan region is significantly lower (5.1) than in the OECD countries (8.0) in 2015, whereas Croatia was the only economy to approach the OECD average (8.0) in 2015.

The Western Balkan region has 4.1 hospital beds per 1000 inhabitants compared to an average of 4.6 among OECD countries, with Albania having under 3 beds per 1000 people and Bosnia and Herzegovina under 4. In this regard, the situation in Bulgaria, Croatia and Romania is, however, a bit more optimistic, with all three economies recording the higher number of hospital beds than the OECD average.

The report adds the Western Balkans rely heavily on the steady inflow of remittances, financing domestic demand and investment. The consequences of the pandemic are expected as remittances are likely to diminish due to travel restrictions and an increased unemployment, linked to the anticipated economic contraction in the EU. In Kosovo remittances account for 15 percent of overall GDP. In addition to the high volumes, the remittances are also quite concentrated in terms of source countries - Germany, Italy, Austria - further exacerbating the Western Balkan economies' vulnerability to the crisis' impact in these economies, according to OECD data.

The initial trends in local currency exchange demonstrate volatility in the exchange rates, signalling capital outflows and rendering international trade and investment decisions more difficult. All of the currencies in the Western Balkans have depreciated since the outset of the COVID-19 crisis; with the Albanian LEK being the worst hit after the euro and U.S. dollar witnessed a surge for several weeks. The depreciation of local currencies directly affects enterprises' ability to make payments denominated in foreign currency, which is especially problematic for the Western Balkans as foreign exchange denominated loans represent 58 percent of all loans (excluding Kosovo and Montenegro).

However, OECD adds that monetary stimulus such as policy rate cuts or asset purchases can lift confidence and support financial markets in order to offset the risk of a sizable tightening in financial conditions. In this context, the central banks across the region were quick to react with monetary policy tools. The Bank of Albania cut its key policy rate by 50 percent basis points to a new historic minimum of 0.5 percentage points. The national banks of North Macedonia, Romania, Serbia have also cut their key policy rates by 0.25 percent to 1.75 percent, and by 0.5 percent to 2 percent and 1.75 percent respectively.

Access to low-cost liquidity will enable banks to facilitate implementation of policies that, in turn, ease the burden on companies and individuals facing suffering from sharp disruption. Kosovo and Montenegro, which have unilaterally adopted the Euro and abandoned independent monetary policy, cannot make full use of the usual monetary policy tools, and depend on the monetary decisions taken at the EU level.

Furthermore, the COVID-19 pandemic will put labour markets in the Western Balkans under enormous pressure, adding to existing constraints such as high unemployment levels (especially youth unemployment), high shares of informality and sustained outflows of skilled labour. These structural weaknesses will be further aggravated by a potential new wave of bankruptcies and job losses; informality in the six Western Balkan economies remains high both in the share of total output and in the number of people employed. Informal employment in 2018 stood at 37 percent for Albania, 19 percent for North Macedonia and 20 percent for Serbia.

The negative effects of the pandemic will be uniformly felt across the world, but for smaller economies that are more integrated into the world's trade the immediate effects may be more severe. This is the case for the Western Balkans (with the exception of Albania), as they are more open to trade and have a high reliance on cross-border financial flows. This increases the region's exposure to global reduced demand and to disruptions in global supply chains. North Macedonia is particularly exposed in that regard, as foreign inputs represent a major share of exports. In 2018, its foreign value added in exports accounted for almost 15 percent as a share of GDP – the highest in the region.

The report suggests that in the short term, developing measures to address SMEs' cash-flow problems is vital. This would prevent businesses from going bankrupt, and avoid a long-term economic depression and recession in the aftermath of COVID-19 crisis. The measures adopted by the Western Balkans are largely aligned with those taken across the OECD states to mitigate the immediate challenges faced by SMEs crisis.

Providing guarantees on loans and introducing dedicated working capital credit lines can ease SMEs access to finance by allowing them to cover operational costs, such as staff salaries and rents. Several economies in the region, such as Albania, Bosnia and Herzegovina and Kosovo, already offer guarantees. In contrast, North Macedonia and Montenegro established dedicated funds for SMEs, providing credit with simplified application procedures and relaxed eligibility criteria. Serbia is the only economy in the region that provides both state guarantees and direct loans. As the current fiscal space in the Western Balkan economies is comparatively limited, the feasibility of large-scale grantand subsidy programmes is questionable. Nonetheless, a number of economies in the region already subsidise rent payments (Kosovo) and employee salaries (Bosnia and Herzegovina, North Macedonia and Serbia) for the period of April and May.

Tirana Times
By Tirana Times April 24, 2020 16:24