Slight 2017 FDI drop signals tough times ahead as major projects near completion

TIRANA, March 26 – Foreign direct investment slightly fell in 2017 when TAP and the Devoll hydropower project were at their peak level, signaling tough times ahead as the two major energy-related projects that led FDI in the past four years complete their investment stage by the end of this year and no major project in sight replaces them.

Bank of Albania data shows FDI dropped to €908 million in 2017, down from €943 million in 2016 and a historic high of €945 million in 2013, hinting of headwinds ahead at a time when oil and mineral prices slowly recover from the mid-2014 slump in commodity prices and an ambitious but rather controversial €1 billion PPP program and tax incentives for investment in the tourism sector are the only opportunities to fill an annual gap of more than €200 million left by TAP and the Devoll HPP.

FDI involving the construction of two hydropower plants by Norway’s Statkraft, one of which has already been made operational, and the Albanian section of the Trans Adriatic Pipeline bringing Caspian gas to Europe is estimated at a total of 14 percent of the GDP, about €1.5 billion for the 2014-2019 period.

According to the IMF, the two major energy-related projects had a positive contribution of 0.3 to 0.5 percent of the GDP from 2014 to 2016 before it dropped to 0.1 percent in 2017, turning into key drivers of Albania’s economic growth of 1.8 to 3.9 percent in the past four years.

The government’s ambitious €1 billion PPP program, regarded as a replacement for the FDI gap, has been criticized by the IMF as threatening to bring down public debt to its projected 60 percent of the GDP by 2021, down from a current 70 percent of the GDP, because of creating new accumulated unpaid bills to the private sector.

Meanwhile, tax incentives in the emerging tourism sector have sparked interest, but unclear property titles remain a key barrier for experienced foreign investors, in some cases having led them to abandon multimillion euro resort projects.

Albania’s FDI stock was at about €6.5 billion in 2017 with electricity and gas, information and communication, financial services and oil and mining industries as the key contributors.

Greece, Switzerland, Canada, the Netherlands and Italy were the main sources of FDI in Albania at the end of 2017.

While FDI only dropped by 3.8 percent in 2017, the transfer of profits hit a 7-year high of €291 million in 2017. The transfer of profits slightly dropped to about €203 million in 2016, down from a record high of €401 million in 2009 at the onset of the global financial crisis compared to a pre-crisis decade of €19 million to €57 million annually, according to the Bank of Albania.

Migrant remittances also slightly increased in 2017 when they recovered to €636 million, up from €616 million in 2016, but yet about a third below their peak level of €952 million in 2007 just before the onset of the global financial crisis, according to the country’s central bank.

The remittance hike is directly related to the economic recovery in Italy and Greece, Albania’s main trading partners and the hosts of about 1 million Albanian migrants, following several years of recession.

Tourism boom

The travel and tourism industry was one of the key drivers of the Albanian economy in 2017 when it generated a record high of €1.7 billion in income, up about 12 percent compared to a year ago as the country was visited by more than 5 million foreign tourists, according to central bank and INSTAT data.

However, Albanians spent about €1.14 billion in trips abroad, exactly the same amount to 2016, leaving the travel industry with a positive contribution of only €447 million for 2017, the highest ever, in the current account balance.

The rapidly growing industry now accounts for about 15 percent of the GDP, having turned into a key driver of employment and investment although the industry remains highly seasonal and coastline-based with summer bringing the overwhelming majority of tourists.

The travel and tourism industry currently directly supports 85,000 jobs, but the sector’s total contribution to employment including wider effects from investment, the supply chain and induced income impacts is estimated at about 267,000 jobs, about a quarter of the country’s total employment, according to London-based World Travel & Tourism Council, WTTC.

With tourism on top of the agenda as one of the emerging key drivers of Albania’s growth, the Albanian government is offering a series incentives for current and new investments in a bid to also promote luxury travel in the country in addition to the rapidly growing mass tourism.

New luxury accommodation units built by internationally renowned chained-brand hotels or under management or franchise contracts with them, will benefit tax incentives for a ten-year period for building and operating four-star hotels and resorts with an investment value of at least €8 million or five-star units worth at least €15 million, according to package of tax incentives Albania approved in late 2017.

Current account gap narrows

Albania’s current account gap hit a decade low in 2017 as foreign direct investment slightly dropped but tourism revenue registered a historic high, according to Bank of Albania data.

A key indicator of a country’s economic health measuring the flow of goods, services and investment into and out of the country, Albania’s current account registered a gap of €803 million in 2017, down from €813 million in 2016 and more than €1 billion from 2008 to 2013.

Albania’s current account deficit, currently at 7.6 percent of the GDP down from a record 15 percent in 2009, is predominantly funded by concessional borrowing and large FDI inflows, while official foreign reserves are ample.

The International Monetary Fund expects the current account deficit is expected to narrow, as import-intensive energy projects wind down, the Euro Area continues to recover, and higher non-energy FDI propels export diversification.

The Albanian government expects the economy to grow by 4.2 percent this year, up from an expected 3.9 percent in 2017, but the World Bank and the IMF predict the economy will slow down to 3.5 to 3.7 percent as major energy related complete their investment, curbing the FDI contribution.

(Source; Bank of Albania, data in million euros)