TIRANA, May 9 – U.K.-based BMI Research, a unit of Fitch, expects Albania’s economy to slow down to 3.7 percent in 2018, from an estimated 9-year high of 3.9 percent in 2017 on increasing external Eurozone-related and internal political risks.
The Fitch unit says the main risk is related to a slowdown in the Eurozone, the destination of two-thirds of the country’s exports, with slowly recovering Italy and Greece as the main trading partners.
The main external threat is related to Italy, the destination of about half of Albania’s exports, which could be heading for another election this summer following a political deadlock after the inconclusive March 4 general elections that have failed to produce a ruling majority so far.
“The Albanian economy will slow over the coming quarters, in line with a broad slowdown in the eurozone. Indeed, there are already signs that economic growth in the bloc is losing momentum after peaking in 2017,” says BMI Research.
“In Italy, where around half of Albanian exports are sold, we are expecting real GDP growth to slow 1 percent in 2018, down from an estimated 1.5 percent in 2017, as political uncertainty and tightening monetary policy by the European Central Bank weighs on economic activity,” BMI experts say.
Recessions in Italy and Greece, Albania’s top trading partners, had a huge impact on the Albanian economy in terms of trade exchanges, remittances, and foreign investment flows for several consecutive years following the 2008 global financial crisis.
The host of some 500,000 Albanian migrants, the Albanian economy is very sensitive to developments in Italy as about half of Albania’s exports are destined there and about a third of imports are carried out through Italy. The neighbouring country across the Adriatic is also one of the top foreign investors in the country with Italian-owned companied dominating the foreign-owned companies in the country.
The Fitch unit says the tense political environment triggered by opposition-backed protests continues to present downside risks for the Albanian economy, tainting investor and lender perceptions.
“The relatively bright outlook for domestic demand remains exposed to political risk, which could lead to slower growth than we currently anticipate. There have been frequent protests by the supporters of the opposition Democratic Party and the Socialist Movement for Integration against alleged criminal activity by members of Prime Minister Edi Rama, which risk tainting foreign investor and lender perceptions of the country,” says BMI Research.
BMI experts say protests against public private partnerships, such as the late March protest against the country’s first toll road linking Albania to Kosovo which escalated into violence and the burning of the concessionaire’s offices and toll booths over the high tolls, could hamper PPP projects in the country.
“Given that the toll road was based on the PPP model upon which so much of the investment going into Albania depends, any escalation in attacks against such projects will likely see the pace of investment slow, with negative consequences for headline growth,” says BMI.
The Fitch unit has earlier warned protests against the government in early 2018 suggest political risk remains elevated in Albania. “Although we don’t think the protestors will achieve their stated goal of forcing the government to resign, they will taint investors’ perceptions of the country if they continue, and will likely add to the headwinds slowing Albania’s accession to the EU,” BMI Research has said in an earlier report.
International financial institutions have also warned Albania’s economic growth will slow down in the next couple of years as TAP and the Devoll Hydropower, two major energy-related projects that drove growth since 2014 complete their investment stage by the end of 2018 and no major investment appear to replace them, except for a controversial €1 billion PPP project which the IMF has warned could undermine efforts to reduce public debt, already at 70 percent of GDP.
The government hopes tax incentives in the tourism sector will boost investment in a key emerging sector while PPPs will improve road and health infrastructure despite IMF warning of creating new arrears that will not only fail to bring public debt down to 60 percent by 2021, but could create hidden costs which if included in the debt stock could take it to 71 percent of the GDP, a high burden for Albania’s current stage of development.
The ruling Socialist Party of Prime Minister Edi Rama holds a comfortable majority of 74 votes in the 140-seat Parliament, allowing the Socialists to rule on their own in the second consecutive term after a coalition government in 2013-2017, but lack the required three-fifths of votes to trigger reforms in the country.
Albania is currently implementing a long-awaited reform in the highly perceived corrupt judiciary that has seen dozens of judges and prosecutors voluntarily resign or being dismissed for failing to justify their assets in an ongoing vetting process. The reform is seen as key to Albania’s EU integration bid and improving the business environment if properly implemented.
The country is hoping to launch accession talks next June pending a decision by EU leaders at the European Council after a positive recommendation by the European Commission, the EU’s executive arm.
