TIRANA, Aug. 11 – The direct Brexit implications on the Albanian economy are quite insignificant due to poor trade and investment links between the two countries, but the small Albanian economy could face spillover effects if the UK’s exit from the EU block triggers a new Eurozone recession, says the country’s central bank.
In a report examining the possible Brexit implications on the Albanian economy, the Bank of Albania says the direct effects of the Brexit vote and the UK’s eventual exit from the EU are quite small due to the small level of trade exchanges and British foreign investment on the Albanian economy, although remittances from some 15,000 Albanian migrants in the UK hold a significant 11 percent share.
Albania’s trade exchanges with the UK were at Euro 39 million in 2015, accounting for only 0.6 percent of the country’s trade volume.
“The curb of Albanian exports to the UK, at only Euro 3.3 million in 2015, would have quite a marginal effect on the Albanian economy,” says the central bank.
Likewise, the withdrawal or a curb in British foreign direct investment in Albania, would have an insignificant impact. The stock of British FDI in the Albanian economy was at Euro 20 million in 2014, accounting for only 0.44 percent of total FDI.
The central bank says the Albanian economy could be more affected by a cut in migrant remittances from the UK, accounting for a considerable 11 percent of total remittances to the country, although Britain hosts only about 15,000 Albanian migrants compared to 1 million in neighboring Italy and Greece.
“A total stop of remittances is a low-probability event while a reduction could have marginal effects on consumption and economic growth,” says the central bank.
Despite slightly recovering to €598 million in 2015, remittances have been on a downward trend in the past eight years and remain almost 40 percent below their peak level of €952 mln in 2007 just before the onset of the global financial crisis.
The central bank says indirect implications such as a new Eurozone recession could have more negative effects on the Albanian economy by affecting exports, FDI inflows and fuel increased insecurity.
A new crisis in the European banking and financial system could also affect the expansion of local banks in Albania, overwhelmingly foreign-owned and with EU capital, or trigger deleverage as has happened with a key commercial bank in the past crisis years by lowering its exposure to government debt.
“However, it must be noted that the Albanian banking system would not be directly affected by the funds withdrawal as locally generated deposits are more than enough to cover credit and government securities,” says the central bank.
Credit in the Albanian banking system is largely funded by local deposits with the loan-to-deposit-ratio at about 60 percent.
The Albanian banking system has been liquid and profitable following the outbreak of the global financial crisis in 2008 although non-performing loans still stand high at 18 percent, compared to peak level of 25 percent in mid-2014. The high level of NPLs remains a key barrier for the recovery of credit which has been struggling to recover to positive growth rates in the past couple of years.
The central bank warns a sharp depreciation of the Euro against the U.S. dollar could also affect Albania’s export, 85 percent of which are exposed to Europe’s single currency.
In fact, the Euro has already hit a five-year low against the Albanian lek, dropping to as low as 136 lek, compared to an average of 140 lek in the past few years, negatively affecting the country’s exports, already on a downward trend due to a slump in commodity prices hitting oil and mineral exports.
The British pound has lost about 12 percent against the Albanian currency since the June 23 Brexit vote but its weight on the Albanian banking system is quite small as deposits in British pound account for only 1.17 percent while credit in GBP is almost non-existent.
Central bank governor Gent Sejko has earlier noted the Albanian economy and financial system are quite immune to direct Brexit shocks.
Larger Brexit exposure by Italy and Greece, Albania’s top trading partners, could however indirectly also affect Albania.
Experts says the UK’s Leave decision in its Brexit referendum will likely mostly affect Albania’s EU integration efforts as the EU candidate country hopes to open accession talks after approving a long-awaited justice reform last July.
The Bank of Albania expects the Albanian economy to slightly pick up to 3 percent this year, slightly lower compared to government and IMF forecasts of 3.4 percent, saying that uncertainties continue holding back business and consumer confidence.
