Opportunities and Risks for Western Balkans

Bank of Albania Annual ConferenceTirana, November 2017

Bas B. Bakker Senior Regional Resident Representative

for Central and Eastern Europe

Life in Western Balkans has become brighter

2

Nightlights intensity

2002 2013 Change 2002-2013

-6

-4

-2

0

2

4

6

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

After recessions in 2009 and 2012, the region is growing again, supported by activity in main trading partners

3

GDP Growth in Western Balkans(Percent)

ITADEU

Max

Min

Western Balkans average

And unemployment is finally coming down—although it remains too high

4

0

5

10

15

20

25

30

35

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

MKD

BIH

SRB

ALB

Unemployment Rate(Percent)

MNE

Immediate outlook is good

5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

EuroArea

USA BIH MKD MNE SRB UVK ALB

Real GDP growth(Percent)

2018

2017

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

MKD UVK EuroArea

BIH ALB USA MNE SRB

CPI Inflation(Percent)

2018

2017

What are the remaining challenges and vulnerabilities?

Address overhang of the 2009-12 crisis, including in The banking system The public finances

Complete transition Speed up convergence

6

The Banking System

(This is discussed in depth in upcoming REO)

7

In run up to global financial crisis large inflows of foreign bank funding fueled and financed a credit boom.

8

0

1

2

3

4

5

6

7

8

SRB MKD BIH MNE ALB

GDP Growth (Percent)

2002 2008

Bank funding dropped in the global crisis

9

1/ Does not include Kosovo; includes Serbia and Montenegro from 2007.

0

5

10

15

20

25

2000 2002 2004 2006 2008 2010 2012 2014 2016

Capital Inflows to Western Balkans 1/(Percent of GDP)

The result was a sharp drop in credit growth, in large part supply driven

10

NPLs rose and profits plunged

11

NPLs have come down, but remain high

12

0

5

10

15

20

25

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

MKDUVK

MNEBIH

SRB

ALB

Non-Performing Loans to Total Loans(Percent)

Banking sector challenges

Banks need to address NPLs Banks need to manage deleveraging and expand

funding sources Address non-bank obstacles to credit

13

Dealing with NPLs require multipronged approach

14

Summary of Key Policy Actions and Recommendations Fostering Bank Balance Sheet Repair

ALB SRB BIH MNE UVK MKD

Loan classification and provisioning

Write-offs

Sale/Transfer of NPLs

Bankruptcy Law

Private bailiffs law

Taxation

Cadastral information

Policy measure completed Policy measure ongoingPolicy measure recommended Source: Regional Economic Outlook, CESEE, November 2017

Banks need to manage deleveraging and expand funding sources

Deleveraging: Monitor banks; ensure that bank maintain

contingency plans Remain in close communication with parent

banks and home supervisors New funding:

Tackling overbanking to attracting fresh foreign capital

Develop local capital markets

15

Governments need to address non-bank obstacles to credit

Improve land and property titling Accelerate slow court procedures Upgrade insolvency frameworks:

Personal bankruptcy Limit power of minority holdouts in corporate

restructuring

16

Public finances

17

Fiscal deficits have come down, particularly in countries with IMF Programs

18

-8

-7

-6

-5

-4

-3

-2

-1

0

1MNE MKD UKV ALB SRB BIH

8.5 7.0

General Government Balance(Percent of GDP)

trough

2007

2017

Countries with ongoing or recently completed IMF programs

However, public debt is far above pre-crisis levels

19

Public Debt(Percent of GDP)

0

10

20

30

40

50

60

70

80

UKV MKD BIH ALB SRB MNE

peak

2007

2017

Much of which is financed externally

20

External Public Debtin Western Balkans(Percent of GDP)

0

5

10

15

20

25

30

35

40

45

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

External Public Debt(Percent of GDP)

0

10

20

30

40

50

60

70

BIH MKD ALB SRB MNE

2017

2007

-7

-6

-5

-4

-3

-2

-1

0MNE MKD UKV ALB SRB BIH

Unfortunately, little further consolidation is planned

21

-8

-6

-4

-2

0

2

4

6

8

10

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

GG Balance in Western Balkans(Percent of GDP)

Average

Min

Max

2017

2019

External vulnerabilities

22

Current account deficits have come down and are now almost fully financed by FDI

23

-20

-15

-10

-5

0

5

10

15

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Current Account and Capital Flows (-) in Western Balkans(Percent of GDP)

FDI

Reserves

CA

PortfolioOther

External debt remains relatively high as lower bank funding has been offset by higher public debt

24

External Debtin Western Balkans(Percent of GDP)

0

10

20

30

40

50

60

70

80

90

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Offi

cial

Bank

Oth

er

Completing transition

25

In past two decades Western Balkans have not done as well as the NMS: at similar income levels they have grown less

26

GDP PPP per capita in 1996 vs. its change in 1996-14

Note: Data for UVK not available.Source: Penn World Tables.

ALB

BIH

MKD

MNESRB

BGR

CZE

EST

HRVHUN

LTU

LVA

POL

ROU

SVK

SVN

BLR

MDA

RUS

TURAUT

BEL

CYPDNK

FIN

FRA DEUGRCISL

ITA

MLT NLD

PRTESP

SWE

GBR

0

50

100

150

200

250

0 5 10 15 20 25 30 35

Chan

ge in

GD

P PP

P pe

r cap

ita 1

996-

2014

(Per

cent

)

Real GDP PPP per capita in 1996(in thousands of 2011 USD)

Western Balkans are poor because relatively few people work and capital stock per worker is low (TFP is low as well)

27

ALB

AUT

BELBGR

BIH

CZE

DEU DNK

ESP

EST

FIN

FRA

GBR

GRC

HRV

HUN IRL

ITA

LTULVA

MDA

MKD MNE

NLD

POL

PRTROU

RUS

SRBSVK SVN

SWE

TUR

UKR

20

25

30

35

40

45

50

0 100 200 300 400 500 600 700

Empl

oym

ent t

o po

pula

tion

ratio

in 2

016

(Per

cent

)

Capital per worker in 2014(Thousands of PPP dollars)

Capital per Worker vs. Employment to Population Ratio

Note: Data for UVK not available.Source: ILO and Penn World Table.

2.0

2.5

3.0

3.5

4.0

BLR

UVK BIH

SRB

MD

A

UKR RU

S

MN

E

ALB

MKD SVN

ROU

BGR

HRV CZ

E

HU

N

LVA

LTU

SVK

POL

EST

EU accession process should lead to improved institutions / completion of transition

28

Average of Six EBRD Transition Indicators in 2014

EU countries

non-EU countries

Note: 2007 for Czech Republic.

Better policies would help, whether or not WB become EU members

What can be done to boost investment and create jobs so people stay?

Improve investment climate Better protection of property

rights Improve legal systems and

other government services Address infrastructural gaps

Address efficiency gaps in public investments and tax collection

29

Boosting government effectiveness would also help

30

ALB

AUT

BLR

BEL

BIH

BGR HRV

CYP

CZE

DNK

EST

FINFRA

DEU

GRCHUN

ISL

ITA

LVALTU

MKD

MLT

MDA

MNE

NLD

POL

PRT

ROU

RUS

SRB

SVKSVN

ESP

SWE

CHE

TUR

UKR

GBR

y = 17.19x + 17.55R² = 0.78

0

10

20

30

40

50

60

-1.0 -0.5 0.0 0.5 1.0 1.5 2.0 2.5

Government Effectiveness vs. GDP per capita in PPP dollars, 2015

GD

P pe

r cap

ita

(Tho

usan

ds o

f PPP

dol

lars

)

Government Effectiveness (WGI)Ranges from approximately -2.5 (weak) to 2.5 (strong) governance performance

Note: Data for UVK not available.

Thank you