B a n k of A l b a n i a ANALYSIS OF DEVELOPMENTS IN THE EXTERNAL SECTOR OF THE ECONOMY 217 Q3 Enian Çela Monetary policy department january 218 The views expressed herein are solely of the author and do not necessarily reflect those of the Bank of Albania. Bank of Albania 1
2 Bank of Albania
C O N T E N T S CONTENTS 3 I. BALANCE OF PAYMENTS HIGHLIGHTS 4 II. CURRENT ACCOUNT 6 III. CAPITAL ACCOUNT 1 IV. FINANCIAL ACCOUNT 1 V. PROFILE OF CURRENT DEFICIT FINANCING 13 Bank of Albania 3
I. BALANCE OF PAYMENTS HIGHLIGHTS 1 The net position of the current account recorded a deficit of EUR 133.1 million in 217 Q3, narrowing by around 1.5%, annually. It was estimated at 4.6% of nominal GDP, or around 1. percentage point lower than in the same quarter of the previous year. According to the composing items of the current account, the contribution on the narrowing side is related to the expansion of the positive surplus in the services account, and partly because of the secondary income. In the case of services, the positive impact is firmly associated with the "Other Business Services" sub-account, with suplementary effects also from travel services. Goods and services exports increased by around 19.8% annually, affected mainly by the expansion in annual terms of services exports by 22.8%. Also, the export of goods expanded by around 1.%. General import expanded by around 1.9% in annual terms, with the main contribution from the growth in the import of goods by around 1.% compared with the previous year. Import of services also grew rapidly by 12.6%, mainly owing to outbound tourism services. As a result of these developments, the overall trade balance of goods and services narrowed by 9.1% in annual terms, driven mainly by the expansion in the services account surplus by around 41.3%. On the other hand, the trade deficit of goods expanded by 6.5%. The surplus of the secondary income account expanded by.9%, in annual level. Net remittances expanded by around 3.9%. Regarding the primary income account, the positive surplus narrowed by 8.6%, mainly due to the increase in investment income outflows by 62.3%. At the same time, the net inflows in the compensation of employees grew by 5.7%, but this was not enough to offset the impact of the investment income sub-account.. Net inflows in the capital account recorded EUR 3.4 million, standing EUR 27.4 million higher compared with the same quarter a year earlier. The net position in the financial account indicates an expansion of net liabilities by around 15.2%, in annual terms. The main contribution to this dynamic came from a decline in Other Investment assets by about 73.2% (about EUR 224.3 million). Meanwhile, net direct investment expanded by around 1.1%, in annual terms. Non-debt-creating flows provided the main contribution in terms of deficit financing profile 1 The most recent data on the balance of payments are as at 217 Q3. As of 28 Q1, the Bank of Albania prepares the Balance of Payments Statistics, in compliance with the IMF s BPM6 standards, published by the IMF. The main differences between the actual and previous methodologies are synthesised in the following guideline: https://www.bankofalbania.org/web/pub/1_commentary_for_changes_in_the_ publication_of_external_sector_statistics_according_to_bpm6_june_214_6689_1.pdf For the purposes of analysis, the Balance of Payments data from 22 to 27 are reclassified in line with the new methodology by the Monetary Policy Department 4 Bank of Albania
Net inflows in the capital and financial account managed to cover 163.3% of the current account deficit. The overall balance of payments resulted in the increase of the reserve assets by EUR 37.6 million. At the end of 217 Q3, the stock of the international reserves was sufficient to cover 6.5 months of goods and services imports, and 17% of the gross short-term foreign debt. Table 1 Balance of payments indicators (in EUR million) 216 Q1 216 Q2 216 Q3 216 Q4 217 Q1 217 Q2 217 Q3 Current account (in EUR million) -197.7-287.7-148.6-177.6-15.4-236.3-133.1 yoy (%) -5.6 148.7-44.4-39. -24. -17.9-1.5 /GDP (%) -8.3-1.3-5.6-6.2-5.8-7.7-4.6 Goods and services -43.3-555.1-41.9-436.9-311.8-486.1-373.7 yoy (%) 8.2 54. -13.7-22.6-22.7-12.4-9.1 Exports, f.o.b. 68.5 717.2 926.8 857. 773.2 894.2 111.1 yoy (%) 2.5 1.6 18.1 19.9 27.1 24.7 19.8 Imports, f.o.b. 111.9 1272.3 1337.6 1293.8 185. 138.3 1483.7 yoy (%) 4.7 19.3 6. 1.1 7.2 8.5 1.9 Net Travel 67.3 72.8 153.1 95.7 75.6 8.1 18.9 Primary income 36.5 5.6 52. 34.9-7.6 36.4 28.4 Credit 89.3 116.3 97.6 15.5 79.6 122.9 94.4 Debit 52.8 65.7 45.6 7.6 87.2 86.5 65.9 Net income from Direct Investments -15.6-36.2-18.3-26.8-55. -62.8-41. Secondary income 169.1 216.8 21.3 224.4 169. 213.4 212.2 Credit 25. 25.1 25.7 255.4 198.3 242.2 236.7 Debit 35.9 33.2 4.5 31. 29.3 28.7 24.5 Net Remittances 135.7 153.8 159.6 165.4 135.1 162.7 165.8 yoy (%) -4.2-4.8 14.2 7.4 -.5 5.7 3.9 Capital account 6.6 7.2 3.1 49.4 23.8 25.3 3.4 Net Borrowing/Net lending -191.2-28.5-145.5-128.2-126.6-211.1-12.6 Financial account -139.1-267.1-91. -119.4-29.7-198.1-186.8 yoy (%) -6. 65.5-18. -38.9 19. -25.8 15.2 /GDP (%) -5.8-9.6-3.4-4.2-11.2-6.4-6.4 Direct investments -126.4-25.9-32.4-256.7-21.3-217.6-35.7 yoy (%) -5.2 27.7 21.9 113.9 59.2-13.3 1.1 Portfolio investments 111.1-5.7 5.7 114.1-137.5-21.6 31.2 Financial derivatives....... Other investments -74.2-1.5 261.7-13.1 39.4 117.3 5.1 Reserve assets -49.6. -56.1 153.3 8.6-76.2 37.6 Errors and omissions 52.1 13.4 54.5 8.9-164.1 13. -84.2 Source: Bank of Albania Bank of Albania 5
II. CURRENT ACCOUNT The net position of the current account recorded a deficit of EUR 133.3 million in 217 Q3, narrowing by about 1.5% annually, slowing down compared with previous quarters (in 217 Q2, the current deficit narrowed by 17.9 % in annual terms, while in 217 Q1 it narrowed by 24.%). It was estimated at 4.6% of nominal GDP, or around 1. percentage point lower than in the same quarter of the previous year. Compared with Q2, the ratio is 3.1 percentage points lower. In terms of contributions, the annual narrowing of current account deficit was determined broadly by the annual expansion of the services account surplus and slightly by the secondary income. On the other hand, goods and primary income sub-accounts affected the current deficit on the expansion side. Chart 1 Contribution by category (in p.p.) to the annual current deficit (%) 2 15 1 5-5 -1 214Q1 214Q2 214Q3 214Q4 215Q1 215Q2 215Q4 216Q1 216Q2 216Q3 216Q4 217Q1 217Q2 217Q3 Goods Services Primary income Seconday income Current account The net balance of services account recorded an expansion of its surplus during the period under review. Net income from services resulted in around EUR 38.1 million, from around EUR 269.1 million in the same quarter of the previous year, up by around 41.3%. The dynamic was determined mainly by the expansion of exports of services, by around 22.8%, annually. "Other Business Services" provided the main contribution to the growth of this category. Their exports expanded by about 214.6%, in annual terms. This sub-category has been rapidly growing since the fourth quarter of the previous year. At the same time, the sub-account of travel services related to tourism contributed positively. The respective exports grew by about 12.8%. In this case, the annual growth rate slowed down compared with the previous quarter (17.9%), as well as compared with 216 Q3 (25.4%). Lastly, the category of "Manufacturing services on physical inputs owned by others" contributed significantly to the increase in the export of services, owing to the high export of textile products during the period in question. 6 Bank of Albania
Imports of services increased by around 12.6% in annual terms, mainly driven by the increase of travel imports, by around 1.7%. In terms of nominal GDP, the services account surplus was estimated at around 13.1%, up by 3. percentage points from the previous year, and 6.3 percentage points compared with 217 Q2. 45 4 35 3 25 2 15 1 5-5 -1 Chart 2 Main items in services account (net flows in EUR million) 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 213Q3 213Q2 213Q1 212Q4 212Q3 212Q2 212Q1 211Q4 211Q3 211Q2 211Q1 21Q4 21Q3 21Q2 21Q1 Other services Manufacturing services on physical inputs owned by others Travel Services In the trade of goods, the deficit expanded mainly due to the rapid growth of imports. Despite the general recovery of imports for some time, growth in this quarter has been even faster due to the high growth of fuel and electricity imports. The contribution of these categories of imports to total imports of goods is estimated at 4.8 percentage points. Excluding this effect, the import of goods would expand by 5.2% (instead of 1%) and the overall trade deficit in goods and services would narrow by 19.% (instead of 9.1%). Under these conditions, the current account deficit would amount to EUR 92.4 million, standing at 3.2% of the nominal GDP. The net balance of the primary income account was positive. Net inflows in this account resulted in EUR 28.4 million surplus, from EUR 52. million surplus in the same period a year earlier. The recorded surplus was estimated at around 1.% of nominal GDP, mainly determined by compensation of employees account. On the other hand, the narrowing of the account surplus in annual terms is determined by the increase in investment income outflows. Bank of Albania 7
Chart 3 Balance of primary income (net flows in EUR million, left) and direct investment income (net flows, in EUR million, right) 14 12 1 8 6 4 2-2 -4-6 -8 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 213Q3 213Q2 213Q1 Investment income Compensation of employees Primary Income 2 1 1 2 3 4 5 6 7 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 213Q3 213Q2 213Q1 Trend Net Direct Investment Income The net balance in the surplus of secondary income account expanded by.9 compared with the same quarter a year earlier. The relevant surplus was estimated at EUR 212.2 million, equivalent to 7.3% of nominal GDP. Remittances, inflows contributed to this performance, increasing by about 3.6% annually. Chart 4 Remittances (net flows, in EUR million, left) and financing of trade deficit from net primary and secondary income and from services (right) 3 25 2 15 1 5 25Q1 25Q4 26Q3 27Q2 28Q1 28Q4 29Q3 21Q2 211Q1 211Q4 212Q3 213Q2 Worker's remittances Trend 214Q1 214Q4 216Q2 217Q1 9 8 7 6 5 4 3 2 1 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 213Q3 213Q2 213Q1 Trade deficit financing Trend Net cumulative income from services, primary income and secondary income accounts financed around 82.3% of the trade deficit in goods. This ratio expanded by 4.2 percentage points compared with 216 Q3, and by around 16.3 percentage points compared with the previous quarter. 8 Bank of Albania
Box. Developments in the savings and investments gap The saving-investment gap of the private sector narrowed in annual terms during 217 Q3, being estimated at 3.2% of nominal GDP. This ratio is.9 percentage point lower compared with the same quarter in the previous year. Both private savings and private investments declined in terms of their ratio to GDP, but the decline in private investment resulted higher. The relevant ratio dropped to 18.9% over the quarter under review, compared with 2.% a year earlier. On the other hand, the ratio of private savings to nominal GDP fell by only.3 percentage point at 15.7%. The saving-investment gap narrowed in the public sector. The ratio for the third quarter of the year is estimated at 1.4% compared with 1.5% a year earlier. The main contribution came from the expansion of the public savings ratio, from 3.6% to 4.4%. Moreover, public investment also increased in their ratio to nominal GDP, but this growth has been slightly slower compared with savings. Public investment was estimated at 5.8% of nominal GDP, compared with 5.1% a year earlier. Overall, both national savings and national investments decreased in relation to GDP compared with the previous year, but savings were reduced at a slower pace. The ratio of national savings to GDP declined by 5.3 percentage points compared with the previous year, down to 2.1%. On the other hand, private savings to GDP narrowed by 7. percentage points, down to 24.7%. Chart 5 Annual change in p.p. to GDP of national savings-investments indicators (left) and their contribution to the annual change of the current account deficit (right) 25 2 2 15 1 5-5 15 1 5-5 -1 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 Public Savings Public Investment Private Investment -1 Private Savings Current Account (% yoy) 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 National Savings (p.p.) National Investment (p.p.) Current Account (% yoy) Source: Bank of Albania, Ministry of Finance. Bank of Albania 9
III. CAPITAL ACCOUNT The capital account debits and credits all the transactions on the acquisition and disposal of non-produced, non-financial assets/goods and the capital transfers between residents and non-residents (on which there is no economic value in exchange). In 217 Q3, the capital account s positive surplus was around EUR 3.4 million, higher by around EUR 27.4 million, compared with the previous year. Net capital flows in this account are estimated at 1.% of nominal GDP. Net capital transfers for the account of general government resulted with a positive surplus of EUR 13. million, while those in financial and non-financial corporations, households and non-profit institutions serving household, were EUR 17.4 million. The combination of net transactions of the current and capital accounts provides the net position of the domestic economy, as net lender (surplus), and net borrower (deficit) against non-resident economies. In quantitative terms, in 217 Q3, our economy represents a net borrower position, of around EUR 12.6 million, which is financed by the financial account and errors and omissions. This is 29.5% lower compared with the previous year, and about 51.4% lower compared with 217 Q2. IV. FINANCIAL ACCOUNT The financial account records a debt position of EUR 186.8 million for 217 Q3, with an expansion by 15.2% or EUR 95.8 million compared with the previous year. Net foreign currency flows of this account were estimated at around 6.4% of nominal GDP, and financed around 14.4% of the current deficit, recorded during the period under review. Chart 6 Financial account errors and omissions (net flows, in EUR million) 2 1-1 -2-3 -4 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 213Q3 213Q2 213Q1 Net Errors and Omissions Financial Account Net lending/borrowing 1 Bank of Albania
The reduction in domestic asset flows by 41.9% or around EUR 14.7 million was the main determinant for the expansion of the financial account net position. At the same time, the inflow of non-residents' liabilities decreased by EUR 11.4 million or about 2.6% compared with the previous year. The asset flows, narrowed, determined by the assets in the form of a "depository corporation" loans, which reduced by around EUR 129.6 million (part of the "Other Investments" account). Also, the asset flow of funds in the form of "Currency and deposits" decreased EUR 14.6 million (about 51.7%). As a result, the balance of net assets in "Other Investments" decreased by around EUR 211.6 million or around 8.8%. In the case of liabilities, "Direct Investments" flows remain the main determinant of the level of the net balance of the financial account. The flow of direct investment liabilities remained almost unchanged compared with the previous year (annual growth is estimated at.4%). By sector breakdown, a significant downward contribution has been related to the "Energy sector, where major projects dominate (about 7.1 percentage points); however, this reduction was almost entirely offset by other sectors. 4 3 2 1-1 -2-3 -4-5 -6 Chart 7 Financial account components (net flows, in EUR million) 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 213Q3 213Q2 213Q1 217Q3 Direct Investments Portfolio Investments Other Investments Financial Derivatives Reserve Assets Financial Account In the long run, Direct Investments constitute an important foreign currency inflow for financing the current deficit of Albania. In 217 Q3, net Direct Investment inflows financed around 229.7% of the recorded current deficit. This ratio was 26.3 percentage points higher than in the same quarter a year earlier, and 137.7 percentage points higher compared with the previous quarter. Bank of Albania 11
Chart 8 Composition of direct investments (flows in EUR million, left) and the financing ratio of current deficit by net direct investments (right) 4 35 3 25 2 1 15 1 5 217Q3 217Q1 216Q3 216Q1 215Q1 214Q3 214Q1 213Q3 213Q1 212Q3 212Q1 211Q3 211Q1 21Q3 21Q1 29Q3 29Q1 28Q3 28Q1 27Q3 27Q1 26Q3 26Q1 FDI Inflow w/o Privatisations Privatisation Income 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 213Q3 213Q2 213Q1 Net Direct Investment/Current Account Net portfolio investments registered a net balance of EUR 31.2 million, from EUR 5.7 million in the previous year. This performance is largely determined by the expansion in domestic assets, by EUR 28.2 million. Meanwhile, liabilities expanded by around EUR 2.6 million, in annual terms. The overall balance of payments resulted in an increase of reserve assets by EUR 37.6 million. At the end of September 217, the stock of foreign reserves was around EUR 2.82 billion. This level was sufficient to cover 6.5 months of imports of goods and services and 17% of the gross short-term external debt. Chart 9 Errors and omissions to nominal GDP (% left) and to current account deficit (%, right) % 6 2 4 1 2-1 -2-2 -3-4 -6-8 Gabime dhe harresa 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 213Q3 213Q2 213Q1-4 -5-6 -7 213Q3 214Q3 216Q3 217Q3 Net errors and ommissions to current account deficit 12 Bank of Albania
As a result of problems that may be encountered in information sources and during the preparation of external sector statistics, the balance of payments may feature discrepancies. In the balance of payments, these discrepancies are summarized in the errors and omissions item, which is determined as residual (difference between the financial account balance and the current account balance plus the capital account balance). In 217 Q3, net omissions and errors recorded an outflow of EUR 84.2 million and was estimated at around 2.9% of nominal GDP. V. PROFILE OF CURRENT DEFICIT FINANCING Regarding the profile of the current deficit financing, it is important to monitor the reliance on debt-creating inflows, against the more desirable nondebt-creating inflows 2. Thus, non-debt-creating financial flows from net direct investment and from the capital account were estimated at 11.6% of nominal GDP. These were around.15 percentage points higher compared with the previous year. The debt-creating financial flows were estimated at -2.8% of the nominal GDP. The overall financing of the current deficit is calculated by adding net errors and omissions to net debt-creating and non-debt creating foreign-currency flows. During the quarter under review, the ratio of current account financing stood at 128.2%, implying an increase in the reserve assets by EUR 37.6 million. This ratio was 66 percentage points higher than in the same quarter a year earlier, and 6.5 percentage points higher compared with the previous quarter. Chart 1 Financial debt-creating and non-debt-creating inflows to nominal GDP (left) and total financing of current account deficit (right) 2 2 15 1 5 1-5 -1-15 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213T4 213Q3 213Q2 213Q1 217Q3 217Q2 217Q1 216Q4 216Q3 216Q2 216Q1 215Q4 215Q2 215Q1 214Q4 214Q3 214Q2 214Q1 213Q4 Debt creating flows Non-debt creating flows Current Account/GDP Current Account Financing MA (4 quarters) 2 This breakdown serves to monitor the impact of financial and capital flows on Albania s external debt. Non-debt creating flows include Direct Investments and net flows of the capital account, whilst debt-creating flows include portfolio investments and other net investment. Bank of Albania 13