Albania Business Forecast Report Q4 2009

Falling Remittances: The Impact On Growth

In the inaugural Albania Business Forecast Report, we focus on the key challenges threatening to undermine the Western Balkan state's political and economic risk profile through 2010. While Tirana's recent accession into NATO and a broad cross-party consensus in favour of EU membership should act as a policy anchor through the medium term, we caution that 2009's recession (we forecast real GDP contracting by 2.0%) poses a considerable risk to economic policy formation, particularly as unemployment spikes to a multi-year high of 16.0% by end-year. Moreover, while the risks of a financial crisis emanating from the domestic banking sector remain low, we caution that a marked deterioration in asset quality through 2010 will inevitably lead to a further slowdown in loan growth, which will ensure that Albania's economic recovery through 2013 takes place at a lower trajectory than pre-crisis levels.

While preliminary results reveal that Prime Minister Sali Berisha appears likely to hold on to power following June 24's parliamentary election, we caution that political stability remains far from assured.

Indeed, as the Central Election Commission is yet to publish official results, and the opposition appearing set to contest the outcome on various grounds, we are concerned that we will likely see a bout of renewed instability in Tirana. With Albania's democratic institutions remaining in a fairly nascent state of development, we are wary of the potential for an extended period of extra-parliamentary contestation, and the risks of an uptick in public unrest and legislative gridlock which would most certainly accompany such a scenario.

Our guarded outlook on the health of the Western Balkan economy underpins our relatively bearish view for the Albanian lek, as a distinct slowdown in capital inflows weighs on the unit's potential to appreciate to its pre-crisis levels above ALL128.00/EUR by end-year. To this end, a key factor pointing towards lek weakness is the rather bleak outlook for remittance inflows during this unprecedented global economic slowdown. With remittances accounting for approximately 15% of GDP, and unemployment rising across the region, we expect to see this key source of foreign capital dry up, which in turn will put substantial downwards pressure on the currency through the medium term. We project the unit coming in at ALL131.00/EUR and ALL128.00/EUR at end-2009 and 2010, respectively.

Austrian utility EVN and Norway-based Statkraft started the construction of three hydropower plants on the Devoll River in Albania in mid-June. The hydropower plants, with a combined capacity of 320MW, are expected to produce about 1,000GWh of energy. The total investment in the project is expected to reach EUR1.0bn (US$1.4bn). Hydropower is a key source of electrical generating capacity in Albania, accounting for approximately 90% of total electricity produced. The Devoll River power project will increase the Western Balkan state's hydropower production by 20%. However, we note that although this will undoubtedly be a boost to Albania's overall power supply, it will only further aggravate the problems associated with not having a diverse source of electricity.