Heavy reliance on short-term debt makes Albania vulnerable to a tightening of international bank-lending conditions – even if these were not associated with a wider crisis, says the World Bank
TIRANA, Jan. 18 – Developing countries should prepare for further downside risks, as Euro Area debt problems and weakening growth in several big emerging economies are dimming global growth prospects, warns the World Bank in the newly-released 2012 Global Economic Prospects (GEP) uncertainties and Vulnerabilities.
Citing global crisis impact, including high public debt levels, falling remittances and lower exports to the European Union, the World Bank expects the Albanian economy to grow by 3 percent in 2011, 2 percent in 2012 and 3.5 percent in 2013. The forecast is far more optimistic compared to other international financial institutions such as the IMF and the World Bank. London-based EBRD has made the most pessimistic forecast about the 2012 growth for the Albanian economy at only 1 percent at a time when the Albanian government expects it to grow by 4.3 percent. The current account balance is expected to recover to -9.7 percent in 2012, from -11.7 percent in 2011.
Heavy reliance on short-term debt makes Albania, Belarus, Montenegro, Romania, and Serbia vulnerable to a tightening of international bank-lending conditions – even if these were not associated with a wider crisis, says the World Bank. Moreover, the Europe and Central Asia Region would be particularly affected by weaker activity in the European Union, which buys more than half the region’s exports. The countries most likely to suffer from a sharp downturn in EU demand include Romania, Lithuania and Latvia because of their large exposure to Europe in general, and Albania, Macedonia FYR, and Bulgaria because they rely particularly on the high-spread European economies that are likely to be hardest hit. Albania’s merchandise exports to the EU as a share of total from 2008 to 2010 account for 44 percent in the EU 27 and 37 percent in high-spread Euro Area economies, putting them at serious risk as the Eurozone is expected to face a recession this year.
Migrant remittances are also a very importance source of both foreign currency and domestic incomes for several countries in the developing Europe and Central Asia region. Overall, they represent about 1.3 percent of regional GDP, but rise to 10 or more percent of GDP for countries like Albania, Armenia and Bosnia and Herzegovina, and between 20 and 35 percent of GDP for the Kyrgyz Republic, Moldova and Tajikistan.
As of the second quarter of 2011, total foreign claims by European banks reporting to Bank for International Settlements (BIS) were $0.6 trillion in the region. Albania’s rate at around 60 percent of the GDP in this respect is among the highest in the Europe and Central Asia Region.
“Developing countries need to evaluate their vulnerabilities and prepare for further shocks, while there is still time,” said Justin Yifu Lin, the World Bank’s Chief Economist and Senior Vice President for Development Economics.
Developing countries have less fiscal and monetary space for remedial measures than they did in 2008/09. As a result, their ability to respond may be constrained if international finance dries up and global conditions deteriorate sharply. To prepare for that possibility, Hans Timmer, Director of Development Prospects at the World Bank, said: “Developing countries should pre-finance budget deficits, prioritize spending on social safety nets and infrastructure, and stress-test domestic banks.”
