TIRANA, Aug. 14 – The escalating crisis in Albania’s top trade partners Italy and Greece means harsher times for the Albanian economy which has strong trade, investment and remittance ties to these countries. Data published this week by Eurostat, the statistical office of the European Union, show the Italian economy continued shrinking for the third quarter in a row, plunging into official recession. In the second quarter of 2012 the shrink in Italy grew to 2.5 percent year-on-year up from 1.4 percent in the first quarter and 0.5 percent in the final quarter of 2011.
Meanwhile, the situation in Greece, Albania’s second top trade partner remains severe with the GDP shrinking by 6.2 percent in the second quarter of 2012, slightly down from 6.5 percent in the first quarter.
Eurostat data show that compared with the same quarter of the previous year, GDP fell by 0.4% in the euro area and by 0.2% in the EU27 in the second quarter of 2012, after 0.0% and +0.1% respectively in the previous quarter.
The escalating Eurozone crisis and especially the situation in Greece and Italy, Albania’s top trade partners and hosts to more than 1 million migrants, is expected to further aggravate matters. The IMF expects Italy, the destination of around half of Albanian exports to face recession in 2012 and 2013. Neighbouring Greece whose influence on Albanian trade and investments has been declining is expected to face another year of recession.
The International Monetary Fund and the European Bank for Reconstruction and Development expect the Albanian economy to grow by 0.5 percent to 1.2 percent while the World Bank has made a 1.6 percent forecast, citing high public debt levels and spillover impacts from the crisis in Greece and Italy. Government is also expected to cut its overoptimistic 4.3 percent growth forecast for 2012 next autumn.
Exports to top trade partner Italy, the destination of more than half of Albanian exports, have also been affected by the crisis there. Exports to Italy in the first six months of this year decelerated to 5.7 percent to 54.3 billion lek, accounting for 54 percent of the total exports. Meanwhile, exports to Greece, the country’s second most important trade partner rose by 3.4 percent to 5 billion lek, accounting for only a 5 percent share. Greece is the second most important partner for imports with trade exchanges accounting for 12.5 percent of the total.
Detailed central bank data show Greece remains the key foreign investor in Albania despite being in recession since 2008. Greece’s total foreign investments at the end of 2010 were estimated at 724 million Euros, down from 771 million euros in 2007 before the neighbouring country plunged into recession. Second comes, Italy with 401 million Euros of FDI at the end of 2010. FDI inflows from Italy the country’s top trade partner, and the destination of 50 percent of Albanian exports have been on a rising trend climbing from Euro 213 million in 2007 to Euro 401 million in 2010, according to BoA data. Italian businesses are also actively engaged in the country’s top sectors such as banking, industry, and the footwear and garment manufacturing which produces Albania’s top exports.
“Albania’s strong trade, investment and remittance ties to Greece and Italy are likely to continue to constrain growth in the coming year, while public debt is close to the statutory limit of 60 per cent of GDP, limiting the room for fiscal manoeuvre,” says the EBRD in its latest report.
Lower domestic consumption, stagnating exports, some of the key industries in crisis, lending and deposits growth rates slowing down and government revenues far below targets are some of the symptoms of the ailing Albanian economy in the first half of 2012. Poor performance in early 2012 when the economy officially shrank by 0.2 percent and top sectors such as industry and crisis-hit construction dropping by double-digits of around 20 percent proves the difficult situation.
Official data show the Albanian economy slightly improved in the second quarter of 2012 with exports ending their negative growth rates and government revenues slightly accelerating. However, domestic consumption, the key driver of the Albania economy continues struggling as shown by the performance of value added tax and excise tax. VAT, which indirectly measures consumption, grew by a mere 1.4 percent while the excise tax levied on so-called luxury products such as fuel, tobacco and alcoholic beverages was down by 0.4 percent compared to the first half of 2011.
INSTAT data show total exports during the first half of this year grew by 2.1 percent while imports were down by 2 percent.
Exposure to Greece, Italy
Sovereign debt crisis in Greece has shown little impact on the Albanian economy due to the limited role Greece plays in exports and imports and due to the recent flexibility shown by exporting firms to diversify geographically, says the Finance Ministry in its 2012-2014 economic and fiscal programme. Exposure to Greece is small. Foreign direct investment from Greece has been declining in recent years, although total foreign direct investment has increased. Foreign banks with Greek capital operating in Albania are well capitalized but the share of their assets to total banking assets has been declining in recent years. Their portfolio of loans has been reduced and other banks have increased their market share. From this aspect, the effect of the debt crisis in Greece in the real economy is expected to be limited, says the Finance Ministry.
However, the exposure of Albanian economy toward the Italian economy is greater. The share of Albanian exports to Italy is significant bigger at over 50 percent. Until now, financial problems in Italy have had little impact on trade, possibly due to the fact that this country is not always the ultimate destination of Albanian exports. However, a further deterioration in Italy would have a major impact on our economy. Remittances, which are used mainly to finance household consumption, are expected to fall significantly (in combination with those from Greece). Influence through foreign direct investment is expected to be smaller, as FDI from Italy decreased and their share of Albania’s GDP is relatively small.
