Albania in a Snapshot Deloitte Albania. Tirana May 2018

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1 in a Snapshot Deloitte Tirana May

2 This Economic Snapshot present an overview of, in terms of country s perspectives for development in comparison with Western alkan region. What does have to offer? What are the key performance indicators based on the latest economic reports? How do they change in short-term and long-term projections? How is the market developing? Next new opportunities Deloitte aims to provide a general understanding on opportunities and risks of the current economy in order to support local and international companies in pursuit of their key objectives.

3 Glossary AKEP Autoriteti I Komunikimeve Elektronike & Postare ARPU - Average Revenue Per Unit &H osnia and Hercegovina CAGR Compound Annual Growth Rate CPI Consumer Price Index EIU - Economist Intelligence Unit FDI - Foreign Direct Investment GDP Gross Domestic Product NPL Non Performing Loans ROE Return on Equity ROA Return on Assets SEE6- South Eastern Europe 6 countries :, osnia and Hercegovina, Kosovo, Macedonia, Montenegro, Serbia. TAP- Trans Atlantic Pipeline

4 Economic Insights GDP Trends Forecast in Dec Actual Forecast in Estimate in Dec Dec Forecast in Forecast in Forecast in Forecast in Forecast in Dec Feb Feb Feb Feb 3.8% 1.9% 2.8% 3.0% 3.0% 3.9% 2.7% 2.2% 3.0% 3.2% 2.6% 4.0% 2.6% 2.5% 3.3% 3.70% 1.9% 3.60% 4.2% 3.40% 0.5% 3.80% 3.50% Real GDP Growth rate 3.30% 3.50% 3.90% GDP growth - vs. SEE countries 4.00% Macedonia Montenegro Serbia &H EU Source: Economist Intelligence Unit As per EIU, preliminary GDP growth in is at 4.0%, surpassing forecasted GDP growth of 3.5% as a result of election-related additional government spending and strong import demand from the booming euro zone economies. In, actual GDP growth registered 3.5%, higher compared to forecast data for the same period of 3.3%. GDP growth is expected to remain steady in, before slowing to an average of 3.6% per year in -22 due to the Industrial Output decline and the growth in import demand in 's main euro zone markets moderates. Country GDP growth change (forecast vs. estimation) 0.5% &H 0 Macedonia 2.7% Montenegro 1.2% Serbia 1.4% The GDP of South-eastern European region is expected to increase during by 2.9%, and at the country level, the highest growth is projected to be registered in at 3.9%, while the lowest is expected in Macedonia at 2.6%. The increase of real GDP is driven by an exponential growth in Serbia and Macedonia, where the latter is expected to grow at 2.6% compared to the 0.5% during. The SEE6 counties will continue to grow in terms of GDP also during with 2.97% and 2020 with 3.4%.

5 Economic Insights CPI, FDI, Exchange rates trends &H Macedonia Household consumption Source: Economist Intelligence Unit Serbia A significant portion of the FDI in is due to two large energy projects financed by foreign private capital, such as the Trans-Adriatic Pipeline (TAP) and the Devoll Hydropower plant in the south of the country. ased on World ank reports, in FDI was projected at 8.0% of GDP, but the actual value was registered at 8.3%, which is equal to USD 1.01 bn. FDI in (% of GDP),bn USD and SEE6 CPI (%) Household consumption (USD mln, global ranking in ) The projections for show an increase by 2.1% of the n CPI, whereas the registered inflation was slightly higher, at 2.2%. The reasons for the CPI upsurge are the expansion of economic activity, the increase of prices in international markets and the increase in the domestic demand and consumption. 10.0% 8.0% 8.1% 8.0% 8.9% 8.3% 7.0% 7.0% 6.0% 4.0% 2.0% 0.0% SEE6 Source: World ank, SEE Economic Report No. 12, Fall Source: World ank, SEE Economic Report No. 12 i P6, Fall Chinese Invasion on Western alkan countries As per Economist Intelligence Unit, China has invested billions of euros to the Western alkans (, osnia and Hercegovina, Macedonia, Montenegro and Serbia). Most of the Chinese companies committed in the alkans are state-owned or heavy state-controlled, focused mainly in construction services. Additionally, according to UN data, trade in goods between China and the Western alkans grew by 6.4% per year in Serbia is the country with the highest number of Chinese investments focused in project financing of udapest-elgrade Highway, Kostolac 3 HPP, elgrade-ar(montenegro) Highway. Chinese companies have not so far implement large scale finance projects in, still the country is in the focus of the Chinese investors. The presents of Chinese Porjects has been noticed through the Chinese Communications Company which is currently upgrading the Port of Shengjin, Chinese Geo-Jade Petroleum which has recently acquired an interest in two n off-shore oilfields. Meanwhile, Tirana International Airport has been taken over by a Hong Kong company. However, hardly any of the Chinese projects in the region represent FDI. The majority of Chinese projects in the Western alkans are in the form of Chinese construction services, which are financed by loans.

6 Economic Insights Labor market in Age group Official unemployment rate 26.6% % Employment rate 33.0% 67.5% Labor force participation rate 44.9% 76.0% Country ,930 2,664 (9.1) (0.3) (0.7) &H 3,507 3,058 (12.8) (0.4) (0.5) Macedonia 2,083 1,931 (0.2) (0.7) (0.2) (0.5) 8,791 7,447 (0.5) (0.8) Montenegro Serbia Source: Instat, Labour market, 57.3% Labor force participation rate 49.2% Employment rate (7.3) (6.5) (15.3) % working age growth per year Average wage (ALL, ) Occupation Teaching Science & Engineering 57,000 Health Chief executives, legislators 52,057 usiness associates 52,259 68,344 81,870 Source: EIU, 14.2% Offical Unemployment rate Population % according to gender 1,453,541 male 50.5% of population -50 % % population growth per change year 1,423,050 female 49.5% of population Low birth rates and an ageing population mean that the total population SEE6 countries is projected to fall from to 2050 by 0.5% per year on average. follows the same pattern as the region countries expected to decrease annually by 0.3%, while the decline of the working age is expected to be higher at 0.7%. The unemployment rate has decreased significantly in - period and it is projected to reach a rate of 6% in There is a positive correlation between the degree area chosen and the average wage of occupation. Thus, the highest number of graduates preferred social sciences, business, and law studies which are associated with chief executives, legislators, and business associates occupations. 15% 14% 13% 12% 11% 10% 9% 8% 7% 6% 5% Unemployment rate 13.5% 13.3% Graduates according to the degree area, in 000 Source: INSTAT, Labor market 13.3% 10.3% 7.7% % 6.9% Education Arts Social science 2013 Natural science Engineering Agriculture Health Services

7 Economic Insights Risk Assessment Sovereign Currency anking Political Economic Country risk risk sector risk risk structure risk Risk... February CCC CCC... February CCC... Improvement Upgrade... Sovereign risk The risk score remains unchanged, at 53, due improved tax collection and renewed fiscal tightening expectancy to cut the deficit to 1.4% of GDP in. Currency risk Improved to, from, as the political stability increased since the June parliamentary election. The Lek is expected to strengthen against euro and more strongly against the US dollar in. anking sector risk The rating remains steady with a score of 56, as the banks are well capitalized and liquid but the level of non-performing loans remains high. Political risk Upgraded to, from CCC, as the political environment became calmer after the June election. Economic structure risk The rating remains steady, as the current-account deficit remains large and the export dependence on the poorly performing Italian and Greek economies.

8 Economic Insights Economy sectors growth (%) 5.4 Economy Sectors in Source: EIU, country report, During 2006-, services sector has contributed the most towards GDP with an average growth of over 50%, followed by agriculture which has increased with approximately 3%. On the other side, industry sector, has decreased by 3%, during the same period. From the aggregate supply optics is expected that all main sectors to perform in line with their average historical growth rates. Specifically, agriculture is expected to grow in real terms considering the focus of the government and the financial support to farmers and agro-processing sector from United Nations and EU funds (IPARD, SARED, National scheme, etc.). Due to its weight to aggregate supply structure, services are expected to contribute significantly more than the other sectors in the GDP growth.

9 Mobile services usersmarket share breakdown Telecommunication Sector- Mobile 6.8% 8.2% 13.6% 16% 39.7% 34.3% 39.9% 41.5% Vodafone 4.3% 4.5% 14.2% 14% 32.1% 32.2% 49.4% 49.2% Telekom Albtelecom Plus There are three mobile companies operating in the n market, Vodafone, Telekom (Deutsche Telecom group), Albtelecom (majority shareholder is a Turkish company). Plus Communication stopped providing services on Jan 1st, after sold to Vodafone and Telekom. Vodafone is the company who has the largest mobile network infrastructure, valued at c. EUR 99 mln in, followed by Telekom with c. EUR 48 mln. ased on AKEP annual reports, Vodafone has the highest revenues in -. Regarding the ARPU (EUR/monthly), Vodafone has the highest rate in, then in it is slightly overpassed by PLUS ARPU, which increases significantly in. Mobile Operators 000' EUR 118,442 84,531 17,054 13, ,793 85,532 16,358 16, ,425 78,568 15,693 22, % 13.1% (44.7%) (61.2%) 3.6% 0.6% (63.0%) (34.8%) 2.3% (4.5%) (7.2%) 46.8% 10,555 18,097 (14,857) (10,202) ,675 4,007 (16,346) 650 (2,503.4) (3,563) 163 (9,220) 7,008 (1,402.8) Revenues Vodafone Telekom Albtelecom Eagle Plus Communication EITDA Margin Vodafone Telekom **Albtelecom Eagle Plus Communication 54.7% 50.7% Vodafone Telekom Albtelecom Plus Source: AKEP Quarterly Report % Telekom Vodafone Albtelecom % Vodafone Telekom **Albtelecom Eagle Plus Communication Average Net Profit % % % % % % % % % % Average revenue per unit (EUR/unit monthly) roadbend services users Market share breakdown Net profit Plus Communication Throughout the years (2011-), Vodafone has the highest percentage of market share in terms of Mobile Services users, in addition to roadband services (-), followed by Telekom, Albtelecom, and Plus in the respective order.

10 Financial Service Industry - ank ank Assets to GDP 95.7% &H 83.7% Kosova Macedonia FYR has a total number of 16 second tier banks. The largest five banks hold about 75% of the system s total assets and deposits. During -, average total assets for the second tier banks has increased by a CAGR of 4.7%, reaching ALL 1.44 bn. 86.4% 70.2% Montenegro Serbia Total assets to GDP, captures the overall size of the industry. The chart illustrates that among regional countries Montenegro and has the highest rate, more related to a low GDP levels rather then the development of the banking sector. 96.6% 72.7% General Data for the anking System in ALL million FY15 Total assets Total loans Retail loans Corporate loans Total deposits Retail deposits Corporate deposits Profit (net,cumulative) Equity Capital Capital adequacy in % ROE ROA Problem loans/total loans Ratio No. of outlets FY16 FY17 1,317, , , ,396 1,100, , ,755 15,699 1,407, , , ,700 1,157, , ,860 9,270 1,445, , , ,874 1,165, , ,302 22,074 CAGR 4.7% 1.3% 7.3% (1.0%) 2.9% 1.8% 9.2% 18.6% 125, % 1.2% 18.2% , % 0.7% 18.3% , % 1.5% 13.2% % 2.7% 9.3% 13.4% (14.8%) (2.3%) Source: n Association of anks, ank Ratio Analysis 51.5% 53.3% Profit (net,cumulative) ased on ank of, the structure of regulatory capital appears favorable as regards its capacity to cover any potential losses, since Tier 1 capital continues to dominate. The higher increase in the regulatory capital to risk weighted assets led to rise in the capital adequacy ratio to 16.6%, from 15.7% a year earlier. Loan to total assets Loan to deposit market Net Interest Income/Assets 22.3% 4.4% Net Interest Income to total assets in higher in compared to peers of 3.3%, in line with interest expense to interest income ration. 4.2% 26.1% 41.6% 42.7% 44.5% Total deposit volume in the market increased by 4.6% during -17, resulting in a decline of loan to deposit ratio from 53.3% in to 51.5% in, significantly lower compared to the regional data of 71.5%, which have higher loan portfolio level (more developed financial sector). 51.9% Source: Deloitte analysis The average loan to total assets in the banking sector decreased from 44.5% in to 41.6% in, lower compared to the peer banks in the region. Interest Expense/ Interest Income ROE/ROA While overall NPLs have steadily declined by over 20% in the region in, the n NPL (15.7%) and Serbian one (12.2%) still account for the highest rates in the region. At 3.9%, Kosovo has the lowest NPLs in the region. In, the ankruptcy Law and old loans write-offs have improved n NPL ratio over total loans to 13.2%, or c.5% less than a year before.

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