Balkan Economic Development Outlook
BALKAN ECONOMIC DEVELOPMENT OUTLOOK
This conference session, including questions for discussion by the guest panel members, is based on the following background information:
- Balkan Economic Growth Prior to the Global Financial Crisis
- Consequences of the Global Financial Crisis
- World Bank Group and IMF Forecasts for 2015 Balkan Economic Growth Rates
- Common Challenges Shared by Balkan Countries
- Impact of Greek Financial Crisis
- Impact of Current Immigration to and Migration through the Balkans
- Climate Change Impacts on the Economy
- Economic Growth Opportunities
Balkan Economic Growth Prior to the Global Financial Crisis
For 3 years prior to the 2008 global financial crisis, the average annual growth rate for all of the Balkan countries was higher than that of the EU. Pre-global financial crisis growth rates generally ranged between 5-7% per year with the Montenegrin annual economic growth rate reaching an all time high of 10.7% in the fourth quarter of 2007; however, the lack of Balkan financial reserves, social safety nets, access to capital and financial leverage – which many other European countries have to fall back on – left the Balkan countries with fewer options to cope with the global economic downturn which followed closely on the heels of the devastating 1990s Balkan conflicts.
Consequences of the Global Financial Crisis
The two main transmission channels for the spread of the global financial crisis between countries around the world were international trade and the exchange of private capital between states in the form of foreign direct investment.
There were severe consequences to the Balkans, principally including (i) an increase in national debt levels and (ii) a decline in (a) European and international market demand for Balkan products and raw materials, (b) foreign direct investment (FDI), and (c) remittance payments which are the wages and savings that are repatriated by Balkan emigrants living elsewhere and which represent significant and valuable foreign currency exchange.
National Debt Levels Increase
Prior to the 2008 global financial crisis, the Balkan region as a whole had national deficit levels below the EU average; however, since the crisis, slower economic activity reduced government tax receipts and increased government expenditures to deal with the consequences of rising unemployment, compelling governments to go to capital markets to make up shortfalls. This created new pressures for structural reform as debt levels rose accordingly.
In contrast to pre-crisis debt levels, debt levels as a percentage of GDP in 2009 soared in the region to 59% in Albania, 47% in Croatia, 43% in Bosnia and Herzegovina, 38% in Montenegro, 37% in Serbia and 26% in FYR Macedonia. In several cases, the IMF provided emergency credits to shore up government balances and defend exchange rates. By the first quarter of 2015, national debt levels as a percentage of GDP in the Balkans reflected a mixed picture: 168.8% in Greece, 29.6% in Bulgaria, 39% in Romania and 88% in Croatia.
Decline and Recovery of Balkan Exports
Balkan intra-regional trade is relatively resilient and strong, especially since the 2006 Central European Free Trade Agreement. Intra-regional trade includes such product categories as iron and steel, steel products, aluminium, mineral fuels, electrical machinery and equipment, and beverages.
The most important export markets for the Balkan countries are in the EU where more than half, and in some cases up to two thirds or three quarters, of many Balkan country exports are destined. Export products include base metals, machinery and mechanical appliances, cars and automotive parts, chemical products, wood and wood products, textiles, agricultural products and footwear. The sudden drop in the European demand for Balkan exports due to the global financial crisis adversely affected components of Balkan economies, such as manufacturing output, employment, foreign currency reserves and national trade deficits. For example, in 2009, Croatian exports fell by 15% from the previous year, Greek exports fell 21.4% and Bulgarian exports fell 22.5%.
As global economies have been recovering since the crisis, the Balkan export outlook is generally favourable (and, in some cases, hinges on supplemental factors other than EU demand, such as the Serbian currency devaluation in 2010 that boosted exports). Although Montenegro experienced a 10% decline in 2014 exports compared to the previous year, in Croatia, 2014 exports rose 9.3% over the previous year, and FYR Macedonia exports were 17.4% higher during the first 8 months of 2014 compared to the same period the previous year. Turkey’s 2014 exports, which increased 4% over the previous year, reached $157.6 billion which was an all time record for the country. In 2014 the Bulgarian exports to the EU increased by 3.2% compared to the previous year, although the country’s exports to non-EU countries have been mixed, especially as exports to Russia and China have been affected by sanctions imposed against Russia and a slowing Chinese economy.
Impact on Foreign Direct Investment (FDI)
The Balkans have been highly dependent on foreign capital. During the global financial crisis, many foreign companies cancelled new projects and some even withdrew capital that had already been invested in short term projects. Some privatisations of large, state-owned enterprises were cancelled due to the low purchase prices that were offered.
Important Balkan economic sectors targeted by FDI include energy, telecommunications, banking and insurance, real estate, industrial production, and retail trade. There are five significant variables usually associated with legitimate FDI: trade liberalisation, competitiveness, the number and nature of restrictions on direct investment, the method of privatisation, and political stability. By contrast, it has been argued by some analysts that unusually large inflows of capital to certain locations could be suggestive of money laundering and corruption, which would be a relevant factor during consideration of the FDI amount documented by an allegedly affected country.
Important sources of FDI in the Balkans have generally included the Netherlands, Austria, the UK, Germany, Norway, Belgium, France, Cyprus, Russia, Switzerland, USA, Italy, Luxembourg and Spain, while Greece was formerly a noteworthy source. Prior to the global financial crisis, FDI in the Balkans had risen substantially. In 2007, for example, FDI represented 21.8% of GDP in Montenegro, 6% in Albania, 13.5% in Bosnia and Herzegovina, 12.6% in Kosovo, 8.5% in FYR Macedonia, 8.2% in Croatia, and 4.4% in Serbia. In that same pre-crisis year, Turkey received $22 billion in FDI which represents a record high for the period 2005-2015; however, this level declined to $8.5 billion in 2009 during the crisis and has only since recovered to $12.5 billion in 2014 which is only 57% of its previous high level. In another example of the impact caused by the crisis, Croatia’s annual FDI dropped from €3.5 billion in 2007 to approximately €400 million in 2010.
Although the crisis has considerably slowed the influx of investment into the region, some Balkan countries are well positioned to attract a renewed increase in FDI. One example of a Balkan country with an advantageous position is Bulgaria. In 2014, the country registered a 1.7% growth rate which exceeded the EU average, inflation was at 1.6%, and its public debt was 18.9% of GDP. In addition, Bulgaria is an EU member, has one of the region’s lowest tax rates, has a currency fixed to the Euro under a currency board arrangement, and has relatively low costs for a well educated labour force. Serbia has been experiencing a positive FDI trend of late, especially in its key business sectors such as IT (Siemens, Microsoft), the auto industry (Fiat), building materials (Lafarge), food and beverages (Coca Cola, Nestle, Carlsberg) and metal processing (US Steel).
It must be noted, however, that the FDI outlook remains mixed for individual Balkan countries, such as FYR Macedonia which has seen its FDI fluctuate from €506 million in (pre-crisis) 2007, to €337 million in 2011, to €104 million in 2012, and €270 million in 2013. The outlook for FDI in the Balkans remains fragmented as FDI depends heavily on investor confidence which to a great extent is based on a country’s implementation of economic and institutional reforms that will ensure a globally competitive market economy in a stable economic, social and political environment in which to conduct long term, profitable business activities.
As FDI also supports the host country’s exports, prioritising the attraction of future FDI to a country’s industrial, financial and other self-sustaining business sectors – with less reliance on single event privatisations – will help to mitigate the effects of future crises when (not if) they occur.
Decline and Slow Recovery of Remittance Payments
Remittances represent a significant part of many Balkan economies and are a source for growth; however, the global financial crisis caused a serious decline in remittance payments as global consumer demand and trade plummeted, economies contracted and unemployment soared. As an example of the importance of remittance payments, the number of migrants working in Greece has in the past reached as high as 700,000-1 million individuals. Two-thirds of these migrants came from neighbouring Albania where remittance payments accounted for an estimated 10-12% of annual GDP before the global financial crisis yet represented only 5.7% of GDP in 2014. Kosovo has an unemployment rate of roughly 30% which not only fuels a significant unreported economy but encourages emigration to mainly Germany, Switzerland and the Nordic countries from which remittance payments are estimated to account for 15% of Kosovo’s GDP.
While emigration has historically been a safety valve for many unemployed Balkan citizens, remittance payments are expected to recover very slowly due to undesirably high and persistent unemployment rates in various parts of Europe.
World Bank Group and IMF Forecasts for 2015 Balkan Economic Growth Rates
The IMF World Economic Outlook forecast of 2015 economic growth rates listed Montenegro at 4.7%, Bosnia and Herzegovina at 3.5%, Kosovo at 3.3%, FYR Macedonia at 3.2%, Turkey at 3.1%, Albania at 3.0%, Romania at 2.7%, Greece at 2.5%, Bulgaria at 1.2%, Croatia at 0.5%, and Serbia at 0.5% (the latter rate is due in part to the severe floods in 2014).
The World Bank Group (WBG) Regular Economic Report on South East Europe (Issue No. 8 Fall 2015) identifies private investment as “the main driver of growth” in Albania, Bosnia & Herzegovina, Kosovo, FYR Macedonia, Montenegro and Serbia which are the countries covered by this report. With the help of low oil prices, low inflation and modestly growing consumer demand in the EU which is a key Balkan target export market, the WBG expects economic growth in this region to average 2.6% in 2016 as global financial markets remain volatile due to the uncertainty about China’s economic growth rate and the U.S. interest rate rise.
The 2015-2016 expected growth rates are also attributed to increased domestic consumption (especially in Bosnia & Herzegovina and Kosovo) and private sector investment resulting from greater access to credit and the investment of more retained earnings. Exports are also outpacing imports especially in countries supported by strengthening Foreign Direct Investment such as Serbia and FYR Macedonia.
In analysing the foreseeable Balkan economic outlook, however, the WBG reports that productive capacity, government revenue receipts and economic growth rates will be tempered by: high unemployment; the emigration of young, educated Balkan citizens to other countries in search of better employment opportunities; a high level of non-performing loans in the banking sector which must be reduced in order to increase access to credit thereby supporting entrepreneurship and job creation; ageing societies in which the average Balkan inhabitant is now 13.5 years older than the global average and the difference will widen to 21.1 years in the next 50 years with the added UN forecast that the Balkan population will shrink 25% during that time period; and gender gaps in labour participation.
The WBG reports that gender gaps in labour participation and entrepreneurship represent a missed opportunity for lifting Balkan per capita income as per capita income loss due to gender gaps is significantly higher in the Balkans than in the EU. For example, in Kosovo only 21.4% of women were active in the 2014 labour market which translates to more than a 28% per capita income loss in Kosovo compared to the estimated 10.5% average per capita income loss due to gender gaps in the EU. According to 2013 WBG data, women’s labour force participation rates for other Balkan countries are: 32.2% in Turkey, 42% in Bosnia and Herzegovina, 51.1% in FYR Macedonia, 51.7% in Albania, 52.1% in Montenegro, 53.5% in Serbia, 56.9% in Romania, 58.4% in Croatia, 58.6% in Greece, and 63.7% in Bulgaria.
Analysts widely agree that structural reforms are still needed to: improve revenue collection by governments; broaden the tax base; stimulate employment by reducing labour law rigidity and introducing labour market reforms; reduce bureaucracy and establish one-stop registration offices; deepen international integration and connectivity to improve global competitiveness and expand business trade networks beyond established markets and products; improve energy efficiency and the management of natural resources on which key industries depend; and support investment through improved governance such as applying the law in a non-discriminatory manner as well as protecting all forms of property and contract rights.
Common Challenges Shared by Balkan Countries
There are certain common challenges currently shared by many Balkan countries, and these are associated with 4 types of transformations that are concurrently taking place: post-conflict reconstruction; post-Communist transition; social, economic and political reforms that aim to achieve a market economy open to competition and with labour market reforms; and deeper integration in Euro-Atlantic institutions. Within the context of these challenges, many countries are dealing with ethnic tensions, corruption, organised crime and political cronyism amidst unsatisfactory levels of media freedom and judicial independence along with high unemployment which pushes economies underground and creates black and grey markets.
Impact of Greek Financial Crisis
Not to be overlooked is the impact that the Greek financial crisis has had on other Balkan countries. The prolonged Greek debt crisis has diminished domestic demand and available credit for business and consumers. As a result, this situation, which is exacerbated by capital controls, has already reduced the country’s importance as a trading partner and source of foreign direct investment for the rest of the Balkans. As an example, for many years Greece was Albania’s second largest export market but now ranks in fifth place. Between 2008 and 2014, Bulgarian exports to Greece contracted by 1.9%, but during that period Bulgarian exports to the EU as a whole soared by 50%. Similarly, Greece, which was formerly one of the largest foreign investors in the region, has become less significant in recent years. For example, in Bulgaria between 2008 and 2014, foreign direct investment from Greece declined by 7.6%.
Despite Greece’s diminished economic activity in the region, however, in the short to medium term, the Balkan countries that have been impacted by the Greek debt crisis are expected to boost exports to other destinations which have been emerging from recessionary or negligible growth periods. And as many of these countries become more closely integrated with the EU by actions such as harmonising their banking regulations, integrating their energy network and implementing market economy reforms, the impacts once sustained from the Greek debt crisis will be mitigated over time.
Impact of Current Immigration to and Migration through the Balkans
The financial impact of immigration to or migration through a country is dependent upon a number of factors including: the characterisation of the migrants (e.g. economic migrants, or asylum seekers from war and persecution), the level of skills and education of the migrants, the countries of origin which affects the prioritisation of migrants seeking legal residency, and the extent of the immigration or migration; the ability or inability of the host country to effectively organise, process and assimilate, transfer or deport the immigrants; the extent to which the remaining immigrants become legally documented or remain undocumented and go “underground”; and the degree of resulting socio-economic isolation or assimilation of immigrants into their new host societies which will affect levels of social harmony or dissent, crime and the underground gray economy that expands with undocumented and disenfranchised workers. These factors, in turn, impact economic growth depending on the effect that the immigration has on such factors as the labour market and GDP productivity; the amount of various types of tax revenues generated for the host country by the consumption and economic activity of the immigrants; and the level of government expenditures associated with immigration such as for social welfare, administrative and security services.
Migration to and through Europe is largely comprised of economic migrants and asylum-seekers. According to the World Bank Group bi-annual Regular Economic Report on South East Europe, Issue No. 8 Fall 2015: “The SEE6 countries (Albania, FYR Macedonia, Kosovo, Montenegro, Serbia and Bosnia and Herzegovina) are among the top migrant-sending regions in the world. Today the equivalent of one quarter of the current population of SEE6 lives outside their home countries.” “Since the early 1990s, there has been a steady flow of migrants from the SEE6 to the EU with roughly 4.9 million people having left their countries.” “Low growth since the global financial crisis, chronically high unemployment, income levels at a third of the EU average, and vulnerability to external shocks and natural disasters, have constrained domestic income generation in the region. As such, people continue to emigrate in search of better economic opportunities.”
Based on reports by Frontex, the UN Refugee Office and national government data, during the first 7 months of 2015, 340,000 asylum seekers entered the EU. Of these, 158,456 refugees and migrants arrived in Greece by sea, while 1,716 entered by land through Turkey, which represents five times more individuals than the number for the corresponding period of the previous year. Of the individuals arriving in Greece which is a main entry point for immigrants arriving in the Balkans, roughly 89,000 were Syrians and 32,000 were Afghans fleeing war-torn regions. By 19 September 2015, UNHCR reported that 442,440 migrants had entered Europe. In an effort to reach northern European nations, most immigrants attempt to travel through FYR Macedonia, Serbia and Hungary, except many of the traditional routes have recently been blocked by the construction of border fences, thus impeding the Balkan departure of many immigrants, a significant percentage of whom are robbed and left without money or resources to continue to their destinations.
One type of financial impact on the Balkans from the current wave of asylum seekers from war-torn countries can be illustrated by the case of Germany where, in 2015, the country is expected to face a total influx of around 800,000 refugees mainly from the Middle East and Africa that is estimated to cost Germany up to €10 billion. Germany currently has a population of 81 million people of whom 10 million are immigrants as reported by the 18 September 2015 Financial Times. According to German Foreign Minister Frank-Walter Steinmeier on 29 August 2015, 40% of all refugees who migrate to Germany are residents of Western Balkan countries; however, individuals seeking asylum from war-torn countries are prioritised over individuals from safer countries seeking asylum or the right to remain. As a result, the Balkan migrants to Germany are potentially facing a return to their native countries. On 5 September 2015, Reuters reported 5 that Germany is expected to reject up to 75,000 asylum requests this year by migrants mainly from South Eastern Europe as Germany considers expanding the list of countries deemed safe which may include Kosovo, Albania and Montenegro. Among the countries already deemed safe are Serbia, FYR Macedonia and Bosnia-Herzegovina. This will cause a reduction in the level of remittance payments to Balkan countries and impact the countries’ unemployment rates which, in turn, will impact the relevant Balkan economies.
The current scale of immigration and migration will have a mounting financial impact on the Balkans as subsequently documented as well as undocumented immigrants become absorbed into legitimate businesses (e.g. health care, financial services, engineering services, construction, agriculture, textile and garment production, maintenance, tourism support, fishing, odd jobs – and in many cases become subject to exploitation) or organised crime (e.g. sale of illegal drugs and counterfeit products, theft, prostitution). The conclusive net impact of this migration wave is yet to be calculated from data that is currently being compiled from documented as well as reasonably estimated financial revenues and expenditures associated with the subject.
This issue requires broad, strategic planning without undue delay by the wider European region which has demonstrated a need for migrants in a balanced and sustainable way, especially with European labour shortages looming on the horizon as the EU’s working-age population is projected to shrink by 13 million by 2030. For example, Serbia’s population has declined by more than 5% since 2002 due to low birth rates and the emigration of young professionals to other nations, while Germany’s population is expected to decline by 18 million individuals by 2060 due to low birth rates and an ageing population.
On 9 November 2015, Mr. George Bouma, from the Sustainable Development Division of the United Nations Development Programme Regional Hub for Europe and the CIS in Istanbul, Turkey, reported at the Balkan Economic Forum conference in Athens that 1 out of every 22 people in the world is a refugee, internally displaced or seeking asylum; one half of the refugees are children; an average of 42,500 people are displaced each and every day of the year; and the average time of displacement for a refugee is 17 years. The subject of human migration and its socio-economic impacts is, therefore, a global issue.
Climate Change Impacts on the Economy
Mark Carney, Governor of the Bank of England, has warned of the potential risks to global financial stability from a new threat to world economies: climate change. The Bank of England reported the global insurance industry’s annual weather-related losses at $200 billion a year which is a fourfold increase in just 30 years.
The Balkans have already begun to experience severe weather-related losses. In 2014, Serbia and Bosnia & Herzegovina sustained roughly €4 billion in losses from record-breaking floods that damaged roads, railways, power generation, energy and water deliveries, agricultural land, mining, homes, schools and hospitals. The IMF World Economic Outlook forecast of the 2015 growth rate for Serbia was listed at 0.5% as a result of the flood damage to its economy while growth rates in some other Balkan countries unaffected by such weather-related losses were listed for Montenegro at 4.7%, Bosnia-Herzegovina at 3.5%, Kosovo at 3.3%, FYR Macedonia at 3.2%, Turkey at 3.1% and Albania at 3%.
Governor Carney is also chairman of the Financial Stability Board, which is the international body set up by the G20 in 2009 to monitor risks to the global financial system. In September 2015, Governor Carney said “The challenges currently posed by climate change pale in significance compared with what might come. The far-sighted amongst you are anticipating broader global impacts on property, migration and political stability, as well as food and water security. The horizon for monetary policy extends out to 2-3 years. For financial stability it is a bit longer, but typically only to the outer boundaries of the credit cycle – about a decade. In other words, once climate change becomes a defining issue for financial stability, it may already be too late. So why isn’t more being done to address it?”
In addition to the direct weather-related impacts on property and business infrastructure, additional global financial risks have been calculated by The Economist Intelligence Unit which has warned that private investors are expected to lose $4.2 trillion on the value of their holdings from the impact of climate change by 2100 if global warming is held to 2C.
Economic Growth Opportunities
The challenges to Balkan economic development create both deterrents as well as opportunities for private sector investment in the region which is a proven engine for economic growth. Most Balkan countries to their credit have universal primary education, high literacy rates, reasonably well-developed transportation links and public health systems, and relatively efficient agricultural sectors. Except for Kosovo, their populations are rapidly ageing and diminishing as several Balkan countries are exporting skilled and unskilled labour due to high unemployment rates. Planning by a central government is giving way to planning that is activated by market forces which is resulting in a re-allocation of capital. Today, EU membership aspirations have become a common organising factor for the region’s governments and a force for reconciliation among them as well as their constituents. Integration with Euro-Atlantic institutions has helped to raise investor confidence and galvanise foreign investment and capital flows into the region.
Although the trade partners for each country in the region vary, Germany, Italy, Austria and Slovenia are among the region’s most important trading partners. In addition, Balkan inter-state trade is also increasing. For example, Bosnia and Herzegovina’s main export trade partners are Croatia, Serbia, Slovenia and Montenegro along with Germany, Italy and Austria. Montenegro’s largest export client is Serbia. Bulgaria’s main trading partners include Romania, Greece, Germany and Italy. Eight percent of Romania’s 2014 world-wide exports were shipped to Turkey and Bulgaria. Kosovo’s largest export markets are Albania and FYR Macedonia along with Italy and Germany. As a result, Balkan countries hold a shared stake in each other’s success and prospects for a strengthened Balkan trade network continue to be favourable.
Turkey is one of the fastest growing emerging economies. Between 2004 and 2014 during which the global financial crisis hit world markets, GDP in Turkey increased by 105%, with an annual average real GDP growth rate of 4.2%. Public debt decreased from 74% to 35% of GDP and the budget deficit decreased from 10% to 0.8% of GDP. This performance has put Turkey in the list of one of the fastest growing emerging economies. Living standards have also increased significantly in the country as per capita GDP more than doubled during this period.
Although the Balkans remain highly dependent on recovery in Europe where the region conducts most of its commercial trade, the ultimate responsibility for economic development and regional integration rests with the region’s elected officials and community leaders who should be held accountable by citizens for a lack of progress in taking the necessary measures that will create a favourable Balkan economic development outlook.
