WESTERN BALKANS Regular Economic Report No. 14 (Fall ) Higher But Fragile Growth Prishtina, 11 th October,
Regional Messages Growth in the region strengthened primarily due to higher public spending. Limited private sector dynamism reflected in the slow response of employment. High and rising public debt is coupled with fiscal and external imbalances. Positive outlook, but vulnerable to tightening in financial markets and domestic politics defining the speed of structural reforms.
Main Messages for Kosovo Kosovo is the fastest growing country in the region, and strong growth is expected to stabilize at about 4.2 percent in. Fiscal deficit is projected to increase due to higher public investment, mainly infrastructure, and untargeted social protection spending, will remain within the fiscal rule. Growth is projected to reach 4.5 percent in 2019-2020, but the outlook is vulnerable to external and domestic (including political) risks. While the headline fiscal policy has been in line with the fiscal rules, improving the allocation of spending to invest in human and physical capital is essential for faster and sustainable growth.
Growth in the region strengthened in, driven by public investment 4.2 4.0 3.8 3.5 3.2 2.5 3.5 2.1 Kosovo: Good growth performance is expected to continue through with a projected 4.2 percent, supported by public investment, service exports and consumption Real GDP growth, percent Percent 5 2016 2017 f 4 3 2 1 0-1 -2 KOS ALB MNE SRB BIH MKD WB6 EU28 Source: World Bank staff calculations based on data from national statistical offices. Note Kosovo data based on SAK recent revision.
Employment recovered to pre-2008 levels across Western Balkans Kosovo: Labor market performance weakens in the first half of. Labor market dynamics (2016-) Labor force participation, 2015 and June 80 70 60 50 40 30 20 10 ALB SRB MNE MKD BIH KOS Female LFP Male LFP Source: National statistical offices and World Bank staff estimates. Source: Kosovo Statistics Agency and World Bank staff estimates.
FDI flows continue to finance external imbalances, but FDI is not necessarily growth enhancing Kosovo: Net FDI inflows fell by 40 percent y-o-y in the first half of due to weaker firm performance and higher repatriation of profits. FDI outflows in construction and manufacturing led to a decline in net FDI (million euros) Greenfield FDI flows in the region are mainly in nontradable sectors (million euros) 170 Other MNE 120 Real estate, renting and business activities Financial intermediation KSV MKD 70 20 Wholesale, retail trade, repair of motor vehicles etc Construction BiH ALB SRB -30 H1 2017 H1 Manufacturing 0% 20% 40% 60% 80% 100% Real Estate Alternative/Renewable energy Other manufacturing Food&tobacco -80 Agriculture, hunting, forestry, fishing Coal, Oil and Natural Gas Communications and financial services Automative components/oem Hotels & Tourism Other services Building & Construction Materials Source: Central Bank of the Republic of Kosovo and Statistics Agency of Kosovo; World Bank staff estimates, FDImarkets data
Revenue increases did not contribute to growthenhancing spending Kosovo: Higher investment, particularly on roads, and spending on untargeted social benefits and transfers (veterans and pensions) will widen the fiscal deficit. The deficit is expected to be within the fiscal rule. Contribution to change in public spending, percent of GDP Public and publicly guaranteed debt, percent of GDP 4 Wage bill Capital expenditures Social benefits Total expenditures 80 70 e 2017 2007 3 2 60 50 40 1 30 0 20-1 -2 BIH KOS MKD ALB SRB MNE WB6 10 0 MNE ALB SRB MKD BIH KOS WB6 Sources: National statistical offices, Ministries of Finance, World Bank staff projections.
NPLs are declining in WB, while banks remain well-capitalized and liquid Kosovo: Banks are well capitalized; NPLs are the lowest in the region and continue to decline Capital adequacy ratio, percent and percentage point Non-performing loans (% of total loans) 25 Mar-17 Mar-18 Average (2006-08) Capital adequacy ratio Percentage point change 30 Mar-17 Mar-18 Peak since 2008 Pre-crisis level (end 2007) Non-performing loans (% of total loans) 20 25 15 20 10 15 10 5 5 0 SRB KOS ALB MKD MNE BIH 0 ALB BIH SRB MNE MKD KOS Source: National Central Banks Source: National Central Banks
POSITIVE NEAR-TERM OUTLOOK
Positive growth prospects, but vulnerable to risks Real GDP Growth, percent, 2017-20 2017 e 2019f 2020f Albania 3.8 4.0 3.6 3.5 Bosnia and Herzegovina 3.0 3.2 3.4 3.9 Kosovo 4.2 4.2 4.5 4.5 Macedonia, FYR 0.0 2.5 2.9 3.2 Montenegro 4.3 3.8 2.8 2.5 Upside risks: o o Better absorption capacity of IFI investments. Better performance of exports, due to higher than expected growth in the EU and higher-than-expected base metal prices Downside risks: o Political instability. o Further increases in unproductive spending (untargeted benefits). o Global decline in trade and capital inflows Serbia 1.9 3.5 3.5 4.0 Source: Data from Central Banks and National Statistical Offices, World Bank staff projections. Note: *Western Balkans is a weighted average.
Western Balkans Regular Economic Report # 14 www.worldbank.org/eca/wbrer/ Thank you! www.worldbank.org/eca/seerer