TIRANA, Feb. 12 – Concerns over spillover effects that a potential Italian recession could have on the small Albanian economy have been mounting after a sharp cut in 2019 growth outlook and some predictions that the eurozone’s third largest economy and Albania’s top trading partner will modestly contract after slipping into new recession during the second half of 2018.
Albania has strong trade, investment and migrant remittance ties with Italy whose economy is now forecast to grow by a mere 0.2 percent for 2019, down from earlier predictions of growth modestly picking up to 1.2 percent, according to the latest winter forecast by the European Commission.
US-based JPMorgan analysts even forecast the Italian economy could shrink by 0.3 percent in 2019, in the gloomiest forecasts by a major US bank as the Italian economy has been slowing recovering from a decade of average negative growth rate until 2014.
Albanian economists says a possible escalation of the situation in Italy, whose debt burden at around 132 percent of the GDP is the second highest in the eurozone, lower only compared to Greece’s 180 percent, could affect Albania’s external borrowing costs by triggering a hike in euro-denominated bond rates.
“The main effect it could have on economies such as Albania is related to the fact how financial markets react to the Italian debt. Italy has a high debt level and Albania has a sizeable part of its debt denominated in Europe’s single currency and as a result the cost of debt servicing could increase. In this respect, this could be the main channel for the transmission of the expected results,” says Albanian economy expert Selami Xhepa.
Around two-thirds of Albania’s external debt is denominated in Europe’s single currency, making the country vulnerable to possible spillover effects although the current situation with key rates at a historic low and Europe’s single currency trading at a 10-year low has significantly cut Albania’s external debt costs.
In October 2018, Albania successfully tapped international markets to raise €500 million in its third ever Eurobond at an interest rate of 3.55 percent, down 2.2 percent compared to three years earlier, but yet higher compared to regional EU aspirants having lower debt burdens. The 7-year Eurobond also included €200 million in a buyback from a previous five-year Eurobond that was due to mature by November 2020.
Albania’s public debt at around 70 percent of the GDP, including government arrears of 1.5 percent of the national output, is considered too high for the size of the Albanian economy, with authorities having undertaken fiscal consolidation program targeting to bring it down to a more affordable 60 percent of the GDP by 2021.
Economy expert Arben Malaj has also warned the tough economic situation in Italy could be long-term and the Albanian government should be well-prepared to handle negative effects on thousands of Albanian households relying on migrant remittances from Italy and create opportunities for potential migrants considering coming home in case of massive loss of jobs.
“It has been proved that the stronger the trade partnership between two countries, the higher the positive or negative effect coming from the trading partner,” economist Arben Malaj has earlier told a local TV.
Italy is the destination of half of Albania’s poorly diversified exports, one of the top investors in the country, and the host of around half a million migrants with a key contribution to thousands of households in Albania through remittances that fund consumption and investment.
Adrian Civici, another economy expert, thinks spillover effects will depend on the severity of the Italian crisis.
“The spillover effects could start being felt the same to the crisis in Greece and mainly involve a cut in remittances and a slowdown or decline in Italian investment in Albania. In the meanwhile, trade exchanges will an economy not performing well could also become tougher, not to mention the impact it could have on the employment of the Albanian community there,” Civici has told reporters.
However, due to the low-value added products exported to Italy, mainly garment and footwear, Albanian exporters are more worried over Europe’s single currency having lost around 7 percent against the Albanian lek and continuing trading at a 10-year low in a situation that has significantly cut their profits, rather than the economic situation in Italy, which is not always the final destination of Albanian exports going there.
Unlike the severe recession in Greece which led to a sharp cut in trade and a thousands of migrants settling back home, the 2008-09 and 2012-2013 recession in Italy did not have any significant effect on trade and investment ties between Albania and Italy that have in general followed an upward trend, although the flow of migrant remittances suffered a major blow.
The Italian economy is ten times larger than that of Greece and any possible debt default could trigger a European banking crisis with global economic and financial market ramifications, economists have warned.
The European Commission expects the Italian economy to slow down to 0.2 percent in 2019 and slowly recover to 0.8 percent in 2020.
“The growth outlook is subject to high uncertainty. A weaker than-expected global economy and the impact of heightened policy uncertainty on sentiment and financing conditions of the private sector could lead to a more protracted downturn,” says the EU’s executive arm.
Italy’s recession is mainly a result of declining manufacturing activity and investor confidence dropping over soaring debt amid lower than expected growth after Italy’s populist government struggled to reach a late 2018 deal with EU leaders over higher spending plans running against the EU’s fiscal rules.
IMF warning
In its latest country report, the International Monetary Fund warned GDP growth and employment levels in Italy and Greece, Albania’s top trading partners, can affect Albania not only through trade, but also through remittances and investor’ confidence.
“Albania is a small open economy, strongly exposed to macroeconomic and financial shocks from its main trading partners. Albania has a flexible exchange rate regime and an open capital account. It depends substantially on remittances—around 10 percent of GDP—to finance its large current account deficit,” says the IMF.
“Trade is concentrated, with few partners (Italy, Greece, Macedonia) and limited diversification across products. On the financial side, the high-degree of euroization and the dependence to euro-denominated foreign funding amplifies the transmission of shocks and limits the strength of countercyclical policies,” the Washington-based lender of last resort adds.
The International Monetary Fund has reiterated its warning over the growing use of public private partnerships and the accumulation of new unpaid government bills to the private sector as a threat to Albania’s GDP growth and debt reduction agenda over the next five years.
IMF representatives expect Albania’s economy to slow down to 3.7 percent in 2019, down from an expected decade-high of 4 percent in 2018, and linger around 3.9 to 4 percent over 2020-2023 in considerably more pessimistic scenario compared to the Albanian government.
