The one problem with sharing is that you get the negatives together with the positives. In a global market there’s plenty of both and one has to be prepared to carry the common burden. It becomes heavier if one doesn’t know the magnitude of what is to come, but has the expectation of it. And yet, it will come, as an uninvited guest at the peak of a party.
As the global financial crisis transfers itself to the real economy, the world economists and politicians continue to stand with their mouths wide open as the crisis extends. The surprises keep coming, alas, the bad ones, world institutions and specialists keep posting report after report of terrorizing economic forecasts only to conclude that more studies are needed. Because we have yet to hit rock bottom.
The chaos of insecurity reigns the Albanian environment too. At the end of 2008, PM Berisha claimed a victorious GDP growth of 9.9% when the rest of world’s economies were feeling short of breath, only the Minister of Finance, Mr. Bode replied back, in a whispering manner, that the real growth was closer to a natural 6%.
When US and British banks were being bailed out one after the other by their respective governments like an Easter egg hunt, BoA governor, Mr. Fullani, declared our banking system to be safe and sound from the toxic material of world finance. Of course, that was slightly assuring, but there is also the possibility to skin a cat in more than one way. And the crisis knows it.
Despite the general optimism and the precautionary measures, the Albanian economy is still fragile. The high average growth of 6% in recent years, rather than a sign of an economic boom, is in fact the score of an undeveloped economy where even little progress can make a huge difference in percentages from year to year and then be used for political acclaim.
As of late, all declarations have become more and more cautious about the Albanian economic prospects for 2009. The government hopes to keep a growth rate of 6%, but other institutions, such as BoA, IMF, and the World Bank forecasts growth in the 3.5-4% range. Since everyone is slow to collect the current data, all one can do is suppose, but one thing is sure: the crisis is affecting us and its impact will depend on its depth and duration.
There are many ways in which the crisis can affect Albania and the accumulative damage can hardly be estimated
Remittances drying up slowly
There’s a problem with the remittances flow from Albanian immigrants. For years it has been one of the major sources of income for Albanian families, coming in at over $1 billion, boosting consumption and more. It has also made up for the endless economic shortcomings in Albania by keeping the economy going. Now, it is coming to an end, mainly for two reasons which unfortunately are happening at the same time; the global economic crisis and the natural end of a cycle.
Firstly, most Albanian immigrants live and work in the EU, mainly in the neighboring countries of Italy and Greece. With the EU suffering from the current recession, immigrants cannot but share the same fate. Jobs are lost, wages are cut, and bonuses have disappeared. Thus, with immigrants having a hard time to make ends meet, the money they send home keeps diminishing. And some of them have to return back home themselves.
Secondly, according to a recent study, diminished immigrant remittances is part of a natural process coming to a conclusion that all countries in Eastern Europe, characterized by mass exodus at some point, have to deal with. After years in immigration, most immigrants slowly integrate into their respective country of immigration by making it their home. They start families, careers and old family ties with the motherland become weaker. By investing more in their new lives, the immigrants send less and less home. It is also true that as Eastern European economies improved, the families of the immigrants have less and less need for their money. The remittances from abroad are replaced by the economic output at home.
Albania is thought to be experiencing the same process, which has lasted much longer than the rest of Eastern Europe, because of the strong ties in the Albanian family, typical of a society that has suffered extreme isolation in its past (that being one reason out of many).
The problem with diminishing remittances, as is usually the case, is that it will mainly affect the poor. Consumption will be diminished to a certain degree, lowering demand and cause the economy to shrink. In addition, Albania is not yet ready to replace the loss of this source of income, the expected economic success has not delivered, and there are no plans in place to make up for it. New jobs need to be created and the social assistance network needs to be reformed to assist the poor and their loss of income.
Industry/Construction: A ghost town nightmare
Industry has been the most productive part of the economy with a growth of 32.8% in 2008 and employment increased at 6.8%. The construction sector is the main cause of the impressive industrial growth scoring an 86% growth last year and experiencing an employment increase of 38%.
The main reason behind the construction boom in 2008 has been the construction permits “liberalization” in late 2007 and onwards after a drought of permits in the years before, especially for residential buildings.
However, sales have decreased. According to data from the Bank of Albania, apartment sales in the first 9 months of 2008 were only 50% of sales from the same period in 2007. Reasons are many but two are key to the problem.
The diminished remittances are having their impact in home sales. Secondly, Albanians rely on bank loans to buy their homes, and banks have made the criteria for borrowing more difficult and more costly as a reaction to the global crisis in the financial sectors. In addition, prices are high due to rising costs. Construction materials increased by 1.3% last year and wages and transport fees were 7.5% higher.
It doesn’t take a diploma to realize that a growing supply facing a diminished demand would bring the sector to its feet.
Construction is vital to the Albanian economy for the simple fact that it is mainly developed on domestic capital, unlike other sectors like finance, telecommunications, energy, and the mining industry. It is in many ways the locomotive of our economy. It also accounts for 77% of bank loans for construction businesses or for buying homes. Therefore it is of outmost necessity that banks should encourage borrowing in the sector, especially for buyers, by reducing costs to help revitalize the sector.
Foreign Delayed Investments
Albania scored wonderfully in Doing Business 2009, a yearly World Bank report that ranks business environments in countries worldwide by using 10 indicators involving business regulation reforms. Albania was ranked 3rd overall for its performance in 2008 and progressed 30+ positions, ranked 86th, in general performance since it became part of the report. Naturally, the report was recognized by the current government as an advertisement of their work and achievements.
Meanwhile, FDI in 2008 amounted to 540 million Euro, or 10% less than 2007. The usual suspects were the financial sectors with 70% of FDI, and then energy and telecommunications. No word about tourism and agriculture, supposedly the government’s priorities for Albania. How come a country like Albania, recognized by many as a virgin market with great natural resources for tourism, cannot attract foreign investors?
It is easy to justify the drop in FDI with the current global crisis and that line of reasoning makes sense. The problem with FDI in Albania is that it is usually half the amount of the other countries in the region. Montenegro and Bosnia & Herzegovina experienced over $1billion in FDI respectively last year.
It is not difficult to realize that unresolved landownership, a corrupted administration, a court system foreign to justice, and terrible infrastructure don’t exactly call for attractive investment, despite legislative reforms and beneficial fiscal policies for business. The Club Med saga is a perfect example.
In 2005, Club Med was supposed to start construction of its exclusive resort of 350 luxury villas in the pristine bay of Kakome, along the Albanian southern coast. Work was interrupted by a strong resistance from locals who pretended to have rights to the lands where the project was to take place. Since the fall of communism, all legislations have failed to distribute the land, nationalized under communism, back to the original owners. It is a major problem that hurts our economic progress the most. Despite the land not being distributed, the owners exist and they try to claim their rights.
Locals in Kakome would not accept to “give” the land away without having a chance to be part of negotiations or be compensated. In the end they weren’t compensated. To make the story short, after three years of legal battles in courts, Club Med was able to finally restart its project in January 2009.
Clearly the fault lies with the Albanian government for not making the situation transparent either to the investor, or to the locals, this being an example out of many.
Reforms should not remain lost on papers covered by dust. It is implementation that matters. Cutting taxes won’t matter in an environment where the courts cannot force the contracts.
Paradoxically, the global crisis might benefit Albania. With the global economy shrinking, global corporations are forced to reshape their expansion strategies, downsize investments, and search for proper new markets. Albania might fit the profile in question, if, in a manner of speaking, it plays its cards right. But first, it needs to add substance to its marketing, or else the situation not only will persist, but it will worsen.
Public Investments
With the approval of the 2009 budget, the government shifted the focus from fiscal policy toward public investments. At first sight it seems a good move with the aim to stimulate the economy in the face of the crisis. However, that doesn’t seem to be the story.
First, economic experts and opposition leaders criticize the government for not having a proper plan of public investments. 85% of PI is allocated to infrastructure alone. 57% of PI goes for roads and about 33% of PI will be allocated to the Durres-Kukes Highway, a.k.a. The Patriotic Highway. What is left is a mere 15% to stimulate industry, tourism, agriculture etc.
“The aim of PI is to stimulate the social economic environment of the country and the business by investing in infrastructureŢ said Deputy Minister of Finance, Mr. Sherefedin Shehu, in an interview for Monitor, an Albanian business magazine.
However, business experts strongly disagree towards the government’s approach which ignores the real economic areas that need stimulus in times of crisis.
Second, addressing 1/3rd of PI into only one project, the Durres-Kukes Highway, is irresponsible when all over the country there is need for infrastructure.
The government justifies its stance with the economical, social, and political importance of the project that will ease communication, trade, and ties between Albania and Kosovo, two countries of the same ethnicity.
“It is as bad as it can get” says Dritan Prifti, a former KESH director and member of LSI, an opposition party. “While the importance of Durres-Kukess is undeniable, we can’t neglect the rest of Albanian roads, such as the southern axis, that also need developing and that will directly stimulate sectors such as tourism and agriculture and create a uniform economic growth where impact over population is bigger. The planned PI completely neglects the real concentration of development in the country”
He is right. Take agriculture for example with only 5 billion Lek (4 million euros; 5.5 million US dollars) allocated in overall expenses from the public spending. Only a few days ago, the spokesman for PM Berisha, declared euphorically that “the Berishian and Jeminian (referring to Jemin Gjana, Minister of Agriculture) Model had returned the dignity to the Albanian farmer”. A striking declaration that cannot differ more from a reality where farmers cannot meet domestic demand despite the huge potential and can hardly compete with imported agricultural products. Perhaps the spokesman was actually addressing the Macedonian farmer, whose products dominate the Albanian market. I bet farmers won’t be short of shoes to throw at spokesman and his employers, all thanks to the J&B Model.
Third, due to the way projects are financed, Albanian businesses won’t be able to participate. According to law, all public investments with foreign financing cannot be developed by Albanian business. 50% of funds allocated to Education, Health Care, and Agriculture have foreign financing. In addition the Bechtel-Eneka, the company completing Durres-Kukes, which accounts for 1/3rd of all PI, is foreign despite the fact that the project has domestic financing. Basically, not only is there not a proper strategy of public investment to properly stimulate the economy, but also, the current plan hardly helps the domestic business. With the economy shrinking and businesses unable to expand, participation in public projects would have helped get by during crisis. As it is, such an opportunity has been denied.
Fourth, the eagerness of the current government to start public projects one after the other has led to costly borrowing from foreign financing. The infamous Durres-Kukes, which has sucked over 1/3rd of public investments in the last two years, is estimated to have cost 2-3 times the original costs. The financing of the highway was done with an interest rate higher than the market at the time of borrowing. And the former Minister of Transportation, Mr. Lulezim Basha, is under investigation for abusing funds allocated to the project amounting to more than 200 million euro. The bottom line is that it is all taxpayers’ money. And as we are about to get poorer, the burden of the government spending is about to get progressively heavier.
The credit crunch situation and the challenges ahead
The hope that the Albanian financial sector won’t suffer much from the crisis that devalued the global sector continues. One main reason is that the development stage of our sector is still primitive, stranger to derivative options that affected financial institutions across the globe. Clear of such “toxic” material, as Mr. Fullani stated in autumn many times, there is no reason for Albanians and banks to fear a liquidity crisis. In addition, Fullani dropped the possibility of any risks related to the fact that 90% of bank’s capital in Albania is foreign, with European banks from Austria, Italy and Greece being the main players in the Albanian banking market.
The risk of foreign capital is very much real. The liquidity problem that the banking sector in Greece just suffered, with loans overcoming deposits by 6 billion euro, is showing itself in Albania too. Greek banks in Albania have stopped credit altogether. Most of the funds are being transferred to their mother banks in Greece to feed liquidity needs. Despite an order from Bank of Albania that disallows transfer of funds outside the border, there is always the old way of smuggling money in the old cash fashion.
Imagine if the same would happen in Austria and Italy, despite their contingency plans. We would end up with a paralyzed banking system with no money coming out of it and feeding our economy.
With Greek banks out of the credit game (temporarily so) one can say the credit crunch has already hit Albania. However, it’s not only the Greek banks. All banking system has reduced credit, has made borrowing criteria much harder for businesses and individuals alike and has increased the costs of borrowing in general.
Last week, BoA finally decided to slash the interest rates by 0.5%. The aim was to encourage banks to lend more and therefore keep the rhythm of economic growth as high as possible. It is yet to see what effect such a decision will have on the credit market.
First, the market reaction is very slow to monetary policies. We might see more points slashed from interest rates by BoA before we actually feel the affect in the market.
Second, at this stage of the game, credit crunch or growth depends on other factors too. The risk of foreign capital being one of them stated above. General fear of the crisis depth and extend being another. During October and November, the banking system experienced a small liquidity problem when 50 billion Lek, 6% of bank deposists, were withdrawn in a clear sign a panic.
Decreased individual incomes and business revenues increase the risk of credit, because the paying ability of borrowers diminishes. Bad credit has grown in the 2d half of 2008.
The one problem with interest rates in Lek is that they are already artificially too high. Ironically, it might be the government’s fault. According to 2d tier banks, the government is borrowing more than banks can offer. The interest rates of government bonds have reached 9.1%, pretty close to what banks have asked and it is the same rate offered by banks for credit in Lek. In January, banks were able to satisfy only 88% of the government’s demand which makes one conclude that interest rates will remain high despite BoA’s moves.
Another problem the Albanian system faces are loans in foreing currency. Banks will have to turn to credit in Lek to reflect BoA moves. But most of credit in Albania consists in foreign currency. It made 62% of loans last year. Banks will surely turn toward credit in Lek but it will take time. And as Lek keeps losing ground on the Euro, paying up loans in foreign currencies will become harder and the transition slower
It remains to be seen if banks will gain enough confidence to meet the market demand for credit. Meanwhile, let us hope nothing happens to our neighbors. Fingers crossed!
