WESTERN BALKANS 12 s up Pick ion eat Cr ob J FALL 2017 Highlights of the Western Balkans Regular Economic Report No. 12 yy Economies in the Western Balkans continue to grow, with real GDP growth in the region expected to expand by 2.6 percent in 2017. Growth was stronger and investment-led in Albania, Kosovo, and Montenegro, and stable in Bosnia and Herzegovina, driven by consumption. The political crisis earlier this year subdued growth in FYR Macedonia, as a formidably cold winter did in Serbia. yy Despite staggeringly high unemployment, about 230,000 jobs were created in the region in the 12 months through June 2017 (a 3.8 percent increase); more than half were in the private sector. As a result, employment returned to pre-2008 levels in all Western Balkan countries except Bosnia and Herzegovina. yy Ensuring fiscal sustainability continues to be a priority for the Western Balkans, given still high public debt levels. In all countries except Serbia fiscal deficits are projected to be higher in 2017 than in 2016. Although revenues went up, budgets continue to be overburdened by nonproductive recurrent spending, which limits the scope for growth-enhancing policies. yy The medium-term economic outlook for the region is positive: growth is projected to reach 3.6 percent by 2019, driven by domestic demand supported by private consumption and investment. Exports are also expected to go up as growth in the Euro Area gains momentum. yy The economic outlook is, however, vulnerable to the risks of policy uncertainty and policy reversals that would negatively impact investment and growth. Strong growth in Europe would give the region a tail wind. Yet, as global interest rates normalize, countries in the Western Balkans will see their borrowing costs rise. To sustain growth, it will be necessary that they reduce fiscal and external imbalances and undertake bold structural reforms to make progress on the EU accession agenda. Western Balkans Regular Economic Report No.12 Job Creation Picks Up Fall 2017   Acknowledgements This Regular Economic Report (RER) covers economic developments, prospects, and economic policies in the Western Balkans: Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia. The Western Balkans RER succeeds the South East Europe RER. The report is produced twice a year by World Bank economists working on the Western Balkan countries. The authors are Ekaterina Vostroknutova and Marco Hernandez, task team leaders, Jeff Chelsky, Maria Davalos, Agim Demukaj, Sandra Hlivnjak, Johanna Jaeger, Suzana Jukic, Alena Kantarovich, Maryam Ali-Lothrop, Edith Kikoni, Sanja Madžarević-Šujster, Darjan Milutinovic, Trang Nguyen, Monica Robayo, Asli Senkal, Lazar Šestović, Hilda Shijaku, Bojan Shimbov, and Cevdet Cagdas Unal. Anne Grant provided assistance in editing, and Budy Wirasmo and Artem Kolesnikov assistance in designing. Valentina Martinovic, Nejme Kotere, Samra Bajramovic, Ivana Bojic, Enkelejda Karaj, Hermina Vukovic Tasic, Jasminka Sopova, Boba Vukoslavovic, Dragana Varezić, Mismake Galatis, and Leah Laboy assisted the team. The dissemination of the report and external and media relations are managed by an External Communications team comprised of Lundrim Aliu, Anita Božinovska, Paul A. Clare, Ana Gjokutaj, Jasmina Hadžić, Carl P. Hanlon, Artem Kolesnikov, Vesna Kostić, John Mackedon, Mirjana Popović, Kym Louise Smithies, and Sanja Tanić. The team is grateful to Linda Van Gelder (Regional Director for the Western Balkans); John Panzer (Director, Macroeconomics and Fiscal Management Global Practice); Gallina A. Vincelette (Practice Manager, Macroeconomics and Fiscal Management Global Practice); and the Western Balkans Country Management team for their guidance in preparation of this report. The team is also thankful for comments on earlier drafts of this report received from the Ministries of Finance and Central Banks in Western Balkans countries. This Western Balkans RER and previous issues may be found at: www.worldbank.org/eca/wbrer/ © 2017 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Contents 1. Overview 1 2. Growth dynamics expose vulnerabilities 4 3. Employment returns to pre-crisis levels and reduces poverty, helped by low inflation 6 4. Exports grow, but external vulnerabilities remain 11 5. Fiscal deficits increase, and fiscal space to support growth is limited 13 6. Credit recovers, driven by lending to households 17 7. A positive outlook, with a broad reform agenda ahead 20 Country Notes 27 Albania29 Bosnia and Herzegovina 34 Kosovo39 FYR Macedonia 44 Montenegro49 Serbia54 Key Economic Indicators 59 vi  | Contents JOB CREATION PICKS UP List of Figures  tronger growth in Albania, Kosovo, and Montenegro, and weaker Figure 2.1. S growth in FYR Macedonia and Serbia 4 Figure 2.2. Except in FYR Macedonia, investment supported growth in 2017 5  n all Western Balkan countries except Bosnia and Herzegovina, Figure 3.1. I employment reached pre-2008-crisis levels in 2017 7  lthough unemployment declined across the region, it remains high by Figure 3.2. A international standards 7 Figure 3.3. Labor force participation rates remain low, especially for women 7 Figure 3.4. More people seem to be joining the labor force and finding jobs 7 Figure 3.5. Youth unemployment has fallen 9 Figure 3.6. Public wages are higher than private ones 9  y yearend-2017, the current account deficit is expected to widen slightly Figure 4.1. B in all countries in the region 11 Figure 4.2. The widening of the CAD is mainly driven by goods imports 11 Figure 4.3. FDI in the region has been relatively stable 12 Figure 4.4. Portfolio inflows trended up indicating that sovereign debt was repaid 12 Figure 5.1. Except in Serbia, deficits edged up in 2017 13 Figure 5.2. Revenue gains helped finance higher capital spending in most of the region 13 Figure 5.3. Greater capital investment largely drove the regional increase in spending 14 Figure 5.4. Spending on public wages and social programs is high 14 Figure 5.5. Public debt-to-GDP ratios fell in Serbia, Albania, and Bosnia and Herzegovina 15 Figure 5.6. External PPG debt declined in countries that pursued fiscal consolidations 15 Figure 6.1. Expanding credit supported economic growth 17 Figure 6.2. Credit to households grew faster than credit to firms in most of the region 17 Figure 6.3. Nonperforming loans are declining 18 Figure 6.4. Banks are adequately capitalized 18 Contents  |  vii WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 List of Tables Table 1.1. The medium-term growth outlook for the Western Balkans is positive 1 Table 7.1. A positive medium-term growth outlook 20 List of Boxes Box 3.1. Unemployment: A Major Concern for Citizens throughout the Western Balkans. 8 Box 7.1. How EU prospects may affect the economic outlook for the Western Balkans 21 Box 7.2. Addressing structural issues in Kosovo’s labor market 23 Western Balkan progress on the EU accession agenda: Collaboration rather Box 7.3.  than competition is essential 24 viii  | Contents JOB CREATION PICKS UP 1. Overview In 2017 economies in the Western Balkans except Bosnia and Herzegovina. About have continued expanding by an estimated 230,000 jobs were created in the region in the 2.6 percent. The region’s projected growth is 12 months ending in June 2017. More than less optimistic than the 3.2 percent expected half of these were in the private sector, mainly when the Spring issue of this report was in services, both formal and informal. Kosovo published and also lower than the 2.9 percent recorded the highest employment growth for achieved in 2016, for several reasons. Albania, the 12-month period (8.5 percent). Although Kosovo, and Montenegro should grow faster unemployment fell across the region, it is still in 2017 than in 2016, thanks to large projects high, ranging from 11.8 percent in Serbia financed by foreign direct investment (FDI) to 30.6 percent in Kosovo. In particular, a and a recovery in private consumption, as well disproportionate number of the unemployed as higher exports in the case of Kosovo. Bosnia have been without a job for a considerable and Herzegovina is projected to grow steadily time. Youth unemployment is also a concern: at a similar rate as in the last two years. In more than half of the youth are unemployed in FYR Macedonia and Serbia, however, growth Kosovo, with Albania having the lowest rate in is expected to weaken. In FYR Macedonia, June of 26.4 percent. political turmoil significantly affected investment. In Serbia, the region’s largest Growth, jobs, and relatively low inflation economy, a cold winter significantly depressed helped to reduce poverty in the Western agricultural output and construction activity. Balkans. The combination of economic growth and job creation contributed to a Table 1.1. The medium-term growth outlook decline estimated at 1 percentage point in the for the Western Balkans is positive region’s poverty rate, which is projected to be Real GDP growth, 2016 2017f 2018f 2019f 23.6 percent for 2017.1 This implies that about percent 124,000 people in the region have been lifted Albania 3.4 3.8 3.6 3.5 out of poverty since 2016.2 Household budgets Bosnia and Herzegovina 3.1 3.0 3.2 3.4 were supported by still-subdued inflation and Kosovo 3.4 4.4 4.8 4.8 growth in real wages as private sector wages Macedonia, FYR 2.4 1.5 3.2 3.9 gained slightly on wages in the public sector. Montenegro 2.9 4.2 2.8 2.5 Serbia 2.8 2.0 3.0 3.5 While exports continued to rise, their WB6 2.9 2.6 3.3 3.6 contribution to growth was offset by rising Source: Central banks and national statistics offices; World Bank staff imports of consumption goods, energy estimates and projections. 1 The regional average excludes Bosnia and Herzegovina and Kosovo Almost a decade after the global financial due to the difficulty in calculating PPP welfare aggregates. crisis, employment has recovered to pre- 2 These poverty figures reflect the middle-income country standardized benchmark of living on less than US$5.5 per day in 2008 levels in all Western Balkan countries 2011 purchasing-power-parity terms. 1. Overview  |  1 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 imports due to bad weather, and project- sector; yet nonperforming loan (NPL) related capital imports. On average, external levels remain high. At just above 15 percent positions in 2017 were relatively unchanged of total loans, Albania has the highest NPLs from 2016. Thanks to buoyant services in the region, although NPLs have steadily exports, Albania’s external deficit narrowed by declined from over 20 percent after the global 1.3 percent of GDP. Because of rising imports of financial crisis. NPLs also fell in other Western intermediate goods, energy, and consumption Balkan countries, thanks to targeted reforms goods, Serbia’s external deficit widened by and write-offs. Some countries are working to 1.5 percent of GDP. Montenegro’s already build up financial sector supervision in order vulnerable external position deteriorated, with to avoid future accumulation of NPLs. This external deficit projected to be 18.6 percent in year Albania and the Bosnia and Herzegovina’s 2017, mostly due to the high import content Republika Srpska passed new insolvency of the Bar-Boljare highway construction. laws, and Montenegro has adopted a law on The highway was also responsible for a steep voluntary financial restructuring. Meanwhile, 5.7 percent increase in 2017 in Montenegro’s Kosovo introduced a new system to enforce external public and publicly-guaranteed (PPG) recovery on collateral. Overall, NPLs in the debt, pushing it up to 58.6 percent of GDP. region are concentrated in a small number of domestic banks. Thus, more forceful political Ensuring fiscal sustainability remains a commitment may be required to reduce them priority for all Western Balkan countries. further. Doing so is important because high Fiscal deficits are projected to be higher in 2017 stocks of NPLs deter credit growth. Further than in 2016 in all countries except Serbia, but measures including deepening the financial the dynamics vary. After several years of fiscal sector so that it gives stronger support to consolidation, Serbia is expected to record economic growth; diversifying bank funding a 2017 fiscal surplus of 0.3 percent of GDP. sources; and building up the nonbank financial Albania kept its deficit quite stable, despite sector would help reduce NPLs. the subsidies to the energy sector necessitated by a summer drought. Highway construction The medium-term economic outlook for pushed up Montenegro’s deficit and PPG debt, the Western Balkans is positive: Growth is but in 2017 the country launched ambitious projected to rise from 2.6 percent in 2017 to reforms to reduce the deficit and adopted a 3.3 percent in 2018 and 3.6 percent in 2019. strategy to stabilize its debt by 2019. Higher Private consumption is likely to continue to deficits are projected in FYR Macedonia due to drive growth, with support from investment increases in social benefits and, as in Bosnia and and heightened exports. In particular, upgraded Herzegovina and Kosovo, increases in public growth in the Euro Area would drive up investment. Notably, the fiscal consolidation demand for Western Balkan exports. Albania’s efforts of Serbia, Albania, and Bosnia and growth rate is expected to moderate with the Herzegovina in recent years have reduced their completion of two large FDI projects. Growth public debt. in Bosnia and Herzegovina is expected to pick up, supported primarily by domestic demand. Gradual improvement in asset quality is An expected expansion in public investment supporting a recovery in credit to the private and broad-based exports and production 2  |  1. Overview JOB CREATION PICKS UP growth should push up growth in Kosovo. In growth prospects. And just as important as FYR Macedonia, growth is likely to recover not overspending is spending better. To this as confidence improves with the resolution end, all Western Balkans countries can improve of the political crisis. In Montenegro, growth the quality of their fiscal policy by reallocating is projected to slow significantly in 2018–19 spending from a multitude of untargeted social as the planned fiscal consolidation suppresses benefits to productivity-enhancing investment. consumption and as construction of the Bar- This would support growth and, during difficult Boljare highway is completed. In Serbia, over times, help safeguard gains already achieved. To the medium term higher consumption and bring in more revenue, broadening the tax base, investment and a recovery in agricultural reducing tax exemptions, and collecting taxes production should drive growth. more efficiently would generate additional resources to finance growth-enhancing policies. The risks to the outlook stem mostly from It is important to note that at current growth domestic sources, although there are rates, it would take about six decades for also risks related to the global outlook. average per capita Western Balkan income to Domestically, the main risk is policy converge to the average for EU residents. With uncertainty or policy reversals that could affect faster growth of 5 to 6 percent, convergence investment and growth. But with risk comes could be achieved in just two decades. That will opportunity: advancing structural reforms require a bold and sustained implementation of and the EU accession agenda will enhance the structural reforms and steady progress in EU growth prospects of Western Balkan countries. accession processes. Externally, stronger growth in the EU and still- favorable global liquidity conditions provide a tail wind for the Western Balkans. However, stronger EU growth is likely to be accompanied by an unwinding of the European Central Bank’s quantitative easing program, which will push up global interest rates and thus Western Balkan borrowing costs. In this scenario, countries like Serbia and Montenegro, with relatively high US dollar-denominated debt, could face additional pressures. Sustaining the reform momentum is vital for improving living standards and creating opportunities for all residents of the Western Balkans. For countries undergoing fiscal consolidation, it is particularly important to sustain reform momentum. Albania, Bosnia and Herzegovina, Montenegro, and Serbia are improving their fiscal positions, thus reducing risks and improving medium-term 1. Overview  |  3 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 2. Growth dynamics expose vulnerabilities Although more slowly than expected, in an estimated 1.5 percent for 2017, down from 2017 real GDP in the Western Balkans 2.4 percent in 2016 and 3.4 percent in 2015.3 region continued expanding by an estimated 2.6 percent. Regional growth for 2017 is A recovery in investment is supporting projected to be lower than in 2016 (2.9 percent). growth in Albania, Kosovo, and Montenegro But the regional growth rate masks diverging (Figure 2.2). In Albania, the trans-Adriatic  country trends (Figure 2.1). In Albania, pipeline and a hydropower plant, both Kosovo, and Montenegro, growth in 2017 is financed by foreign direct investment (FDI), expected to be stronger than in 2016, driven continued to boost growth. Investment in by higher investment and consumption, as well Kosovo strengthened in 2017 due to the rollout as higher exports in the case of Kosovo. Bosnia of public capital projects and some recovery in and Herzegovina, the region’s second largest FDI. In Montenegro, investment is projected economy, is projected to grow at a similar pace to contribute 2.6 percentage points to this as in the last two years (3 percent for 2017). year’s growth, boosted by the construction of Growth in Serbia, the largest economy in the Bar-Boljare highway and by residential the region, is expected to slow to 2 percent construction. In FYR Macedonia, political following a severe winter that affected the turmoil continued to deter investment, which agriculture and construction sectors. In FYR subtracted an estimated 0.6 percentage points Macedonia, the prolonged political crisis that from growth in 2017. In Serbia, a particularly culminated in the June 2017 inauguration of a harsh winter delayed construction, including new government significantly slowed growth to for the public investment program. Figure 2.1. Stronger growth in Albania, Net exports provided minimal or negative Kosovo, and Montenegro, and weaker growth support to growth in 2017. In Serbia, in FYR Macedonia and Serbia although exports continued to show strong Percent 5 broad-based growth, estimated at 11 percent, 4.4 4.2 surging demand for imports of energy and 4 3.8 intermediate goods resulted in net exports 3.0 slowing growth by 0.9 percentage points this 3 2.6 year. In FYR Macedonia, buoyant exports and 2 2.0 2.1 fewer investment-related imports turned net 1.5 exports positive. In Kosovo, exports grew faster 1 than imports (albeit from a low base) which 0 KOS MNE ALB BIH SRB MKD WB6 EU28 3 FYR Macedonia’s State Statistic Office recently published revised JJ 2015 JJ 2016 JJ 2017f GDP figures for 2015 (3.9 percent) and 2016 (2.9 percent). Source: Central bank and national statistical offices data; World Bank staff Nevertheless, the full data required for a complete growth estimates. accounting analysis had not been published at the time this report went to printing. 4  |  2. Growth dynamics expose vulnerabilities JOB CREATION PICKS UP Figure 2.2. Except in FYR Macedonia, investment supported growth in 2017 Decomposition of real GDP growth, percent 2016 2017f 12 6 10 8 4 6 4 2 2 0 -2 0 -4 -6 -8 -2 KOS ALB BIH MNE SRB MKD KOS MNE ALB BIH SRB MKD JJ Consumption JJ Investment JJ Net exports QQ Real GDP growth JJ Consumption JJ Investment JJ Net exports QQ Real GDP growth Source: Central banks and national statistical offices, World Bank staff estimates. resulted in net exports making a small but the public sector, the public wage bill rose in positive contribution to growth. In Albania, Montenegro; and social benefits increased in unfavorable weather led to higher demand FYR Macedonia and Montenegro, stimulating for imported energy, with a resulting negative consumption. contribution of net exports to growth. In Montenegro, the contribution of net exports was also negative, mainly because of the high import content of the construction of the Bar- Boljare highway. In Bosnia and Herzegovina, export growth has also been relatively broad- based, but net exports were negative in 2017 due to a lack of rainfall that reduced agricultural output, and significant imports of both consumer and intermediate products. Consumption continues to be a significant contributor to growth, supported by employment gains, higher real wages, and rising credit. Job creation was the main driver of buoyant consumption. In Bosnia and Herzegovina, for example, employment growth was the largest in services, and in Albania and Kosovo services and construction were the key drivers. Higher real wages, combined with still low inflation and rising credit to households helped push up consumption growth. As for 2. Growth dynamics expose vulnerabilities  |  5 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 3. Employment returns to pre-crisis levels and reduces poverty, helped by low inflation In 2017, employment in most countries country where employment is yet to recover to finally returned to the rates preceding the its pre-crisis level; there the employment rate global financial crisis. In the Western Balkans, is about 8 percent lower than in 2008 (Figure about 230,000 new jobs were created in the 3.1). 12 months through June, with employment growth averaging 3.8 percent.4 Jobs grew Private firms, especially in the services fastest in Kosovo, where employment went sector, generated more than half of all new up by 8.5 percent year-on-year,5 supported jobs in the region. In several countries, the by economic growth and a speeded-up public recovery in services has driven up private sector investment program; job creation was broad- employment, which became the main driver based, reaching construction, manufacturing, of general employment growth. Net services retail and wholesale trade, accommodation, job creation in Albania, driven by the tourism and agriculture. In Serbia, despite a poor industry, was 8.6 percent in the first half of agricultural season and slowing growth 2017, contributing to a fall in unemployment. generally, employment went up by 4.3 percent. In FYR Macedonia, where consumption In Montenegro, job creation of 3.5 percent has been the main driver of growth in 2017, was driven by a strong tourism season and most of the new jobs were in services, led by accelerated construction projects. In Albania, wholesale and retail trade. In Montenegro, the 3.4 percent increase in employment was dynamic tourism has offset employment losses led by services and industry, as well as by self- from the mother’s benefit introduced last year, employed entrepreneurs. Employment gains leading to a 3.6 percent year-on-year increase in FYR Macedonia (2.7 percent) came largely in the official employment numbers by August. from wholesale and retail trade, supported by private consumption, followed by transport Labor force participation increased in several and storage, and manufacturing. The gains countries, although it remains exceptionally in manufacturing were largely linked to the low, especially for women ( Figure 3.3). activities of companies supported by FDI, The regional participation rate increased by which benefit from government support, 1.1 percentage points year-on-year in June such as tax exemptions. In Bosnia and 2017, to 53.2 percent. All countries except Herzegovina, after losses in employment in Bosnia and Herzegovina saw higher labor 2016, recent labor-market reforms facilitated participation rates. In Bosnia and Herzegovina, a 1.8 percent rise in employment. Still, Bosnia however, the rate fell to 42.6 percent, the and Herzegovina is the only Western Balkans lowest in the region. In Montenegro, gains in labor force participation are expected now that the lifetime benefit to mothers with three or 4 Throughout this section, y-o-y June 2017 comparisons are used. more children has been abolished—this benefit 5 Since only six quarters of data were available for Kosovo, this result had been responsible for a significant decline might be subject to change as collection of quarterly data becomes more consistent. in female labor force participation since 2016. 6  |  3. Employment returns to pre-crisis levels and reduces poverty, helped by low inflation JOB CREATION PICKS UP Unemployment fell across the region in 2017, the labor force and finding jobs (Figure 3.4). except in Kosovo. Unemployment has become In Serbia, for example, unemployment fell to a chief concern for residents of the Western its lowest level in 20 years (11.8 percent), even Balkans (Box 3.1). Averaging 19 percent as labor force participation increased slightly, in June 2017, unemployment rates are highlighting important gains in employment. particularly high compared to the EU average Similarly, in Albania, job creation drove a of 7.7 percent. In June 2017, however, there reduction in unemployment by 1.6 percentage are encouraging signs of more people joining points, and this reduction took place while Figure 3.1. In all Western Balkan countries Figure 3.2. Although unemployment except Bosnia and Herzegovina, employment declined across the region, it remains high by reached pre-2008-crisis levels in 2017 international standards Employment index, Q2 2008=100 Unemployment rate, percent 130 35 120 30 25 110 20 100 15 90 10 80 5 70 0 -08 -09 -10 -11 -12 -13 -14 -15 -16 un-17 KOS MKD BIH MNE ALB SRB Jun Jun Jun Jun Jun Jun Jun Jun Jun J ▬▬ ALB ▬▬ BIH ▬▬ MKD ▬▬ MNE JJ Unemployment rate (2017f) QQ Unemployment rate (2016) ▬▬ SRB ▬▬ KOS ▬▬ WB6 ▬▬ Long-term unemployment (2015) Source: National statistics offices and World Bank staff estimates. Source: National statistics offices and World Bank staff estimates. Note: For presentation purposes Kosovo data are based on two series of Note: For Kosovo, in the absence of an estimate for the entire, the different frequencies; they may not be comparable. unemployment rate for June 2017 is used. Figure 3.3. Labor force participation rates Figure 3.4. More people seem to be joining the remain low, especially for women labor force and finding jobs Labor force participation rates, percent of population aged 15 Percent of population aged 15+ and older, 2016 90 100 80 90 80 70 70 60 60 50 50 40 40 30 30 20 20 10 Jun-16 Jun-17 Jun-17 Jun-16 Jun-17 Jun-17 Jun-16 Jun-17 Jun-16 Jun-17 Jun-16 Jun-16 Jun-17 Jun-16 10 0 SSA ECA EAP LAC SA MENA MNE SRB ALB BIH MKD KOS KOS BIH MKD MNE SRB ALB WB6 QQ Male QQ Female JJ Employed JJ Unemployed JJ Inactive Source: National statistics offices and World Bank staff estimates. Source: National statistics offices and World Bank staff estimates. Note: SSA: Sub-Saharan Africa, ECA: Europe and Central Asia, EAP: East Note: Data for Kosovo refers to population aged 15–64. Asia and Pacific, LAC: Latin America and the Caribbean, SA: South Asia, MENA: Middle East and North Africa. Data for Kosovo refers to population aged 15–64. 3. Employment returns to pre-crisis levels and reduces poverty, helped by low inflation  |  7 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Box 3.1. Unemployment: A Major Concern for Citizens throughout the Western Balkans.  ver 67 percent of respondents in the Western Balkans cited unemployment as their top concern— O double the share in the European Union, where it appears that a stronger labor-market response and more generous unemployment benefits have counteracted the effects of slowing growth. After three consecutive years of growth in the region, this is a slightly smaller percentage than found by the previous survey. A small but rising share of respondents consider emigration and a corresponding “brain drain” effect to be major concerns, along with crime and corruption. Figure B3.1. Unemployment is a major Figure B3.2. Concerns about emigration and concern in the Western Balkans “brain drain” add to those about the labor market Percent of respondents considering issue a major concern Percent of respondents considering issue a major concern, regional average 80 Brain drain/ 10 73 emigration 7 70 67 69 69 62 59 16 60 58 Crime 13 50 50 47 43 43 32 40 38 Corruption 27 36 34 34 30 27 27 25 27 Economic 46 23 20 18 situation 55 15 17 12 13 11 10 67 6 7 7 Unemployment 68 1 0 ALB BIH KOS MKD MNE SRB 0 10 20 30 40 50 60 70 80 JJ Unemployment JJ Economic situation JJ Corruption JJ 2016 JJ 2015 JJ Crime JJ Brain drain/emigration Source: Balkan Barometer 2017, a public opinion survey by the Regional Cooperation Council, www.rcc.int labor force participation increased. In FYR decreased throughout the Western Balkans Macedonia, unemployment fell to a record low but is still staggeringly high by international of 22.6 percent, and it dropped 15.1 percent in standards, ranging from 26.4 percent in Montenegro, driven by a robust tourism season. Albania to 50.9 percent in Kosovo (Figure 3.5). Bosnia and Herzegovina recorded the largest unemployment drop in the region, falling by Among the region’s unemployed workers, 4.9 percentage points to 20.5 percent, its lowest about 70 percent have been jobless for over level since 2007. But, unlike in neighboring 12 months. This figure reaches 80 percent in countries, the decline was driven by a FYR Macedonia and Montenegro. Long-term combination of higher employment and lower unemployment is especially a problem for labor force participation. Thus, for Bosnia and women: More than 80 percent of unemployed Herzegovina, emigration may have contributed women have been jobless for over 12 months. to the unemployment decline. Kosovo was Long-term unemployment may be leading the only country where unemployment went workers to exit the labor force or emigrate to up, to 30.6 percent, as employment took find jobs. time to catch up with a surge in labor force participation. Youth unemployment also 8  |  3. Employment returns to pre-crisis levels and reduces poverty, helped by low inflation JOB CREATION PICKS UP Figure 3.5. Youth unemployment has fallen Figure 3.6. Public wages are higher than private ones Unemployment of youth, aged 15-24 years, percent of youth Public/private net wage ratio, percent, and private-sector labor force employment growth, percent 60 130 50 120 110 40 100 30 90 20 80 10 70 0 60 BIH KOS MKD MNE SRB ALB WB6 BIH MKD MNE ALB SRB JJ Jun-17 ▬▬ Jun-16 JJ 2015 JJ 2016 JJ H1 2017 ▬▬ 100% Source: National statistics offices and World Bank staff estimates. Source: National statistics offices (Administrative employment and wage statistics) and World Bank staff estimates. Serbian data from Central Registry for Social Insurance, as reported by the Ministry of Finance. Note: For BIH, MKD, ALB, public sector includes: D (Electricity, gas, steam and air conditioning supply), E (Water supply; sewerage, waste management and remediation activities), O (Public administration and defense; compulsory social security), P (Education) and Q (Human health and social work activities). For Montenegro, D is classified as part of the private sector. No comparable data are available for Kosovo. Real wages trended up, with private wages and July 2017, continuing a gradual recovery catching up with public ones. Public-sector that began in 2016; private wages, rising by employment throughout the region averages 4.6 percent in nominal terms, grew faster than about 23 percent of total employment. A high public ones, which went up 3.4 percent. In public-private wage premium might crowd out Montenegro, however, the new government the private sector in labor markets.6 In particular, continued with the necessary consolidation; the ratio between public and private wages is by reducing bonuses and management salaries, above 100 percent across the Western Balkans, it helped curb the excessive growth of public meaning that public wages are higher than observed in 2016. private ones (Figure 3.6). In FYR Macedonia, average wages have been trending upward since Inflation headed up in 2017 but remains low, 2014, with information and communications benefitting household budgets. Low import technology (ICT), retail, transportation, prices, especially for commodities, mitigated manufacturing, and mining experiencing a modest increase in other price pressures. above-average wage growth. In Albania and Sustained growth, employment creation, Serbia, the end of the freeze on public wages and unfavorable weather drove up average has driven up average wages. In Serbia, real annual inflation throughout the region from wages increased by 1 percent between January 0.2 percent in 2016 to 2 percent in August 2017. In Albania, Bosnia and Herzegovina, FYR Macedonia, and Kosovo, inflation ranged 6 Higher public wages may also mean that private wages are from 1 to 1.9 percent, led by food and energy underestimated in the data (for example, due to underreporting of labor income). prices. Meanwhile, Serbia’s inflation rate rose 3. Employment returns to pre-crisis levels and reduces poverty, helped by low inflation  |  9 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 to 2.5 percent in August 2017 as food prices surged after the harsh winter, although core inflation was at 1.5 percent. Montenegro had the highest inflation rate in the region; in August it reached 2.8 percent, driven by rises in both excises for oil, tobacco and alcohol, and prices for tourism and catering services. Growth, jobs, and relatively low inflation lifted many people out of poverty. In 2017, the average poverty rate for Albania, FYR Macedonia, Montenegro, and Serbia dropped by an estimated 1 percentage point compared to a year earlier, to a projected poverty rate of 23.6 percent.7 This implies that in these countries about 124,000 people were no longer in poverty.8 To sustain recent welfare improvements, countries across the region will need to continue generating employment opportunities and boost labor earnings to reduce reliance on social transfers. 7 Regional average excludes Bosnia and Herzegovina and Kosovo due to issues in calculating PPP welfare aggregates. 8 These poverty figures reflect the regional standardized benchmark of living on less than US$5.5 per day in 2011 purchasing-power- parity terms. 10  |  3. Employment returns to pre-crisis levels and reduces poverty, helped by low inflation JOB CREATION PICKS UP 4. Exports grow, but external vulnerabilities remain External deficits are broadly unchanged. Exports continued to be strong and broad- Except for Albania and Serbia, the rest of the based in several countries, but fast-growing Western Balkan countries experienced relatively imports widened external deficits(Figure small changes (less than 0.5 percent of GDP) 4.2). In Albania, solid growth in services in their current account deficits (CADs). The exports, led by tourism receipts, helped to CAD narrowed in Albania by 1.3 percent of reduce the trade deficit by 1.5 percent of GDP. GDP in 2017, year-on-year, driven by a lower Serbia continued to experience robust and trade deficit and higher remittances (Figure broad-based growth in exports, projected at 4.1). On the other hand, a higher trade deficit 11 percent in 2017; however, export growth was is expected to drive the widening of the CAD offset by higher imports of energy (explained by in 2017 by 0.5 percent of GDP in Kosovo a particularly cold winter that caused problems and 1.5 percent in Serbia. In FYR Macedonia, in the operations of the electricity utility) and despite a slightly improved trade deficit, the intermediate goods (explained by growing external balance worsened in 2017 due to slow imports of crude oil and metals as the steel growth. Montenegro’s CAD of 18.6 percent of mill increased production). As a result, after GDP is a serious concern, having increased by three years of narrowing, Serbia’s trade deficit 0.5 percent of GDP in 2017 with the rise of is expected to widen by 0.7 percent of GDP construction-related imports. In Bosnia and Herzegovina, the CAD and its components are relatively unchanged. Figure 4.1. By yearend-2017, the current Figure 4.2. The widening of the CAD is mainly account deficit is expected to widen slightly in driven by goods imports all countries in the region Current account balance, percent of GDP Contribution to changes in the current account deficit, 2017, percent of GDP 0 5 4 -5 3 2 1 -10 0 -1 -15 -2 -3 -20 -4 2012 2013 2014 2015 2016 2017f ALB BIH MKD MNE KOS SRB ▬▬ ALB ▬▬ BIH ▬▬ KOS ▬▬ MKD ▬▬ MNE ▬▬ SRB JJ Goods exports JJ Goods imports JJ Net services exports ▬▬ WB6 JJ Remittances JJ Others QQ Change in CA deficit Source: Data from central banks and national statistical offices; World Bank Source: Data from central banks and national statistical offices; World Bank staff estimates. staff estimates. Note: “Others” category mainly refers to repatriation of profits. 4. Exports grow, but external vulnerabilities remain  |  11 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 in 2017.9 In FYR Macedonia, faster growth the rise reflects the resumption of tourism in goods exports than imports is expected and real estate investments. In Kosovo, FDI to slightly lower the trade deficit in 2017. inflows recovered in the first half of 2017, In Montenegro, despite a favorable tourism driven mostly by equity and reinvestment of season, exports remain low while strong retained earnings in financial intermediation, consumption growth and intermediate goods construction and real estate. In the first half of used for the construction of the Bar-Boljare 2017, net FDI in FYR Macedonia halved from highway continue to stimulate imports. The the same period in 2016, largely because of debt trade deficit also widened in Kosovo as dynamic repayments and profit repatriation outflows imports (much larger as a share of GDP) offset in June, though that was partly compensated the impact of the fast growth in exports, and for by other financial investments; in 2017 remittances were relatively stable as a percent FDI is expected to reach 2.6 percent of GDP. of GDP. In Bosnia and Herzegovina, trade In Albania, a fall in FDI reflected the project dynamics were generally unchanged in 2017, cycle of two large investments. Overall, in with faster export growth driving a slight 2017 FDI will finance most of the external narrowing of the trade deficit, by 0.3 percent deficits in Western Balkan countries in 2017, of GDP. except in Bosnia and Herzegovina, where it will cover only 25 percent of the CAD. Portfolio Steady FDI inflows into the Western Balkans inflows to the region, which mostly consist of are helping to finance external deficits. FDI government bonds, trended slightly up due to in Montenegro and Kosovo increased as a Serbia’s debt decomposition (Figure 4.4). percent of GDP (Figure 4.3). In Montenegro, Figure 4.3. FDI in the region has been Figure 4.4. Portfolio inflows trended up relatively stable indicating that sovereign debt was repaid Net FDI to GDP, percent Four-quarter rolling sum, € millions 12 4,000 10 3,000 8 2,000 6 1,000 4 0 2 0 -1,000 -2 -2,000 r-1 Sep-1 ar-1 Sep-1 ar-1 Sep-1 ar-1 Sep-1 ar-1 Jun-17 3 3 4 4 5 5 6 6 7 MNE KOS SRB BIH MKD ALB WB6 Ma M M M M JJ Net FDI to GDP 2017f (%) QQ 2016–17f change in net FDI to GDP (pps) ▬▬ FDI inflows ▬▬ Portfolio investment inflows ▬▬ Other investment inflows Source: Data from central banks and national statistical offices; World Bank staff estimates. 9 This change partly reflects the 2016 revision of Serbia’s balance of payments data, which lowered the current account deficit in 2016 compared to the previous estimate (from 4 percent of GDP to 3.1 percent). 12  |  4. Exports grow, but external vulnerabilities remain JOB CREATION PICKS UP 5. Fiscal deficits increase, and fiscal space to support growth is limited Except for Serbia, fiscal deficits are expected higher current spending. Similarly, in Kosovo, to rise in the region in 2017 because growth- higher public investment stimulated growth stimulating public investments were not and employment, but spending on benefits accompanied by cuts in recurrent spending. for war veterans and pensions expanded. As a Although revenues rose to support execution result, this year’s deficit is expected to reach the of public investment programs, the increases 2 percent limit established by the fiscal rule. were not always based on long-lasting reforms. In Albania, higher public investment and an Elevated and badly targeted social spending increase in energy subsidies due to a drought and subsidies to state-owned enterprises are expected to drive up the deficit slightly, (SOEs) continued to burden budgets, reducing to 2 percent of GDP. After two years of fiscal the fiscal space for growth-enhancing policies. surplus, Bosnia and Herzegovina is expected to As a result, five countries are expected to record record a deficit of 1.5 percent of GDP in 2017, higher deficits (Figure 5.1). In Montenegro, the mainly due to higher public investment. Unlike deficit is projected to top 4 percent of GDP, other countries in the region, Serbia is expected driven by higher public investment associated to achieve a surplus of 0.3 percent of GDP, with the construction of the highway and other based on strong revenues and lower spending; capital projects. However, the deficit would have despite recent improvements, however, high been a much higher 6 percent if the authorities subsidies, transfers, and on-lending to SOEs had not taken a series of fiscal consolidation continue to exert fiscal pressure. measures that boosted revenues and curtailed current spending. In FYR Macedonia the Several countries saw revenues increase deficit is likely to go up to 3 percent of GDP, (Figure 5.2). In Serbia, revenues grew because  driven by both higher public investment and of import VAT receipts, the corporate income Figure 5.1. Except in Serbia, deficits edged up Figure 5.2. Revenue gains helped finance in 2017 higher capital spending in most of the region Fiscal deficits by country, 2015–17, % of GDP Contribution to change in the fiscal deficit, 2017, % of GDP 8 3 é Reduced revenues, increased spending 6 2 4 1 2 0 0 -1 -2 -2 ê Increased revenues, reduced spending MNE MKD ALB KOS BIH SRB WB6 SRB ALB MKD MNE KOS BIH WB6 JJ 2015 JJ 2016 JJ 2017f JJ Expenditure JJ Revenue QQ Change in fiscal deficit Sources: National statistical offices and Ministries of Finance; and World Bank staff estimates. 5. Fiscal deficits increase, and fiscal space to support growth is limited  |  13 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Figure 5.3. Greater capital investment largely Figure 5.4. Spending on public wages and drove the regional increase in spending social programs is high Contribution to change in public spending, 2017f, % of GDP Estimated public spending, 2017, % of GDP 5 50 4 40 3 30 2 1 20 0 10 -1 -2 0 SRB MNE ALB MKD KOS BIH WB6 MNE BIH SRB MKD ALB KOS WB6 JJ Wage bill JJ Social benefits JJ Capital expenditures QQ Total expenditure JJ Wage bill JJ Social benefits JJ Capital expenditures QQ Total expenditure Sources: National statistical offices and Ministries of Finance; World Bank staff estimates. tax, and higher social security contributions. collection systems and reducing widespread tax Reforms resulted in higher revenues from concessions and exemptions. the personal income tax (PIT) and the solid performance of VAT and social security Enhanced revenues helped finance higher contributions for FYR Macedonia, and more spending, including public investment. efficient PIT administration helped to push Spending rose in all countries except Serbia up revenues in Kosovo. In Albania, VAT- (Figure 5.3). In Albania, savings associated refund arrears brought in more revenue. The with lower interest payments allowed for the Montenegrin government adopted a fiscal financing of local government investment strategy to stabilize public debt levels by 2019, grants; current spending also rose due to with ambitious reforms that increased excise higher subsidies to the state-owned energy taxes on tobacco, sugary drinks, alcohol, distribution company because a drought and coal; reduced VAT exemptions; and affected hydropower generation. In Bosnia and increased the standard VAT rate. Still, this year Herzegovina, rebounding capital spending on Montenegro’s revenues are expected to be lower, infrastructure drove the increase in total public reflecting a base effect caused by collection spending. In FYR Macedonia, the government in 2016 of a concession fee for 4G rights. reduced spending on country branding and In Bosnia and Herzegovina, the decline in promotion, wages, and goods and services, revenues is explained by a decrease in collection but increased spending on pensions, subsidies, of direct tax revenue.10 Overall in the region, and social assistance programs; the result although there have been improvements, there was a 0.9 percent of GDP increase in total is considerable scope to mobilize revenues. In expenditures in 2017. In Montenegro, although particular, countries in the region can bolster the government introduced reforms in 2017 revenues by improving the efficiency of tax to contain spending, abolish untargeted social 10 Bosnia and Herzegovina’s Fiscal Council, Global Fiscal Framework 2018–2020. 14  |  5. Fiscal deficits increase, and fiscal space to support growth is limited JOB CREATION PICKS UP Figure 5.5. Public debt-to-GDP ratios fell in Figure 5.6. External PPG debt declined in Serbia, Albania, and Bosnia and Herzegovina countries that pursued fiscal consolidations Public and publicly guaranteed debt, percent of GDP External PPG debt as a percent of GDP in 2017f, and percent change in total external PPG debt 80 65 8 55 70 6 45 60 35 4 25 50 15 2 5 40 0 -5 30 -15 -2 -25 20 -35 -4 -45 10 -6 -55 0 -65 -8 MNE ALB SRB MKD BIH KOS WB6 MNE KOS MKD BIH ALB SRB WB6 JJ 2017f QQ 2007 ▬▬ 2016 JJ External PPG debt QQ Change in total PPG external debt, rhs Sources: National statistical offices and Ministries of Finance; World Bank Sources: National statistical offices and Ministries of Finance; World Bank staff estimates. staff estimates. benefits11, and reduced spending on public- If growth is to accelerate, a better balance is sector wages, total expenditures are still needed between capital and current spending. expected to increase due to the construction At 23.2 percent of GDP on average, spending of the Bar-Boljare highway. In Kosovo, the in the region on public wages and social increase in total spending was driven mostly by benefits significantly exceeds average capital rising public investment, including the Route spending of 5.5 percent of GDP (Figure 5.4). 6 motorway, and higher spending on pensions This leaves little space for growth-enhancing and benefits to war veterans. Reassured by a public investment. Improved targeting of social sizable fiscal surplus of 1.8 percent of GDP benefits and tighter control over the wage bill over the first eight months of 2017 and a fall in would free up resources to invest in priority total spending by an estimated 0.9 percentage infrastructure, enhance the quality of public points of GDP, in October 2017 the Serbian services, build human capital, expand labor- government announced an increase in public- market opportunities for targeted groups, and sector wages (in the range of 5 to 10 percent) help protect poor and vulnerable households and pensions (5 percent). These measures will from the impacts of fiscal consolidation. partially offset the expenditure consolidation Although capital spending rose in much of the that took place in Serbia over the last three region this year, most countries continued to years and are likely to add to fiscal pressures under-execute their capital budgets, suggesting in future years as public investment spending inadequacies in the planning and management picks up and the lack of one-off revenues begins of public investment projects. to take effect. Countries that previously undertook fiscal consolidations continued to see a decline in 11 The Montenegrin parliament abolished the “lifetime” benefit for public debt. Accelerated growth and positive mothers of three or more children, which had led many women to primary balances in Serbia, Albania, and Bosnia withdraw from the labor market and also doubled the social benefit budget. and Herzegovina have helped reduce their PPG 5. Fiscal deficits increase, and fiscal space to support growth is limited  |  15 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 debt. A combination of growth, fiscal discipline, and active debt management is helping Serbia and Albania cope with historically high levels of debt, although in 2017 Serbia has also benefited from the weakening of the US dollar against the euro. This year Serbia’s PPG debt is expected to fall by 6 percentage points of GDP and Albania’s by 1.5 percent, reversing a rising trend that began in 2009 (Figure 5.5). Kosovo’s PPG debt, while the lowest in the region at an estimated 17.5 percent of GDP in 2017, is higher than the 14.6 percent it reached in 2016. More importantly, public debt in Kosovo is trending upward due to higher fiscal deficits, because of higher execution of public investment projects and high social spending. External debt pressures also declined in countries that pursued fiscal consolidation efforts and took advantage of favorable financial markets. In the past two years Serbia and Albania reduced external PPG debt as they consolidated their public finances (Figure 5.6). Serbia’s external PPG debt went down to 40 percent of GDP (as of August 2017); this is partly explained by the weakening of the US dollar against the euro, as about one- third of the PPG debt is denominated in US dollars. But in Montenegro, Kosovo, and FYR Macedonia large fiscal deficits and government guarantees associated with infrastructure projects drove an increase in external PPG debt. Montenegro’s external PPG debt has grown to 58.4 percent of GDP in 2017 driven mainly by the financing of the Bar-Boljare highway (and by the high share of US dollar-denominated loans for the highway). 16  |  5. Fiscal deficits increase, and fiscal space to support growth is limited JOB CREATION PICKS UP 6. Credit recovers, driven by lending to households12 Credit growth recovered, driven by lending 4 to 6 percent. While Albanian data show a to households. In Kosovo growth in credit to decline in credit, taking into account significant the private sector has been consistently high, loan write-offs, new credit was still positive and averaging 10 percent, as improved market growth-enhancing.13 Credit growth has mainly conditions and lower interest rates continued been driven by lending to households; lending to fuel private demand (Figure 6.1). In to businesses has been more uneven, partly Montenegro, credit growth recovered from a because of little growth in new credit and write- low base in 2016 to more than 6 percent in offs of NPLs (Figure 6.2). Figure 6.1. Expanding credit supported Figure 6.2. Credit to households grew faster economic growth than credit to firms in most of the region Private sector credit growth, percent year-on-year Credit growth, percent year-on-year in August 2017 12 14 10 12 8 10 8 6 6 4 4 2 2 0 0 -2 -2 -4 -4 6 6 16 -16 -16 -17 r-17 7 7 r-1 y-1 Jul- y-1 -1 Ma Ma Sep Nov Jan Ma Ma Jun KOS MKD SRB MNE BIH ALB ▬▬ ALB ▬▬ BIH ▬▬ KOS ▬▬ MKD ▬▬ MNE ▬▬ SRB JJ Firms JJ Households Source: IMF International Finance Statistics, National central banks. Source: IMF International Finance Statistics, National central banks. June 2017 as confidence improved and there Increased lending in domestic currency was encouragingly robust growth in deposits, helped manage currency risks in private a key source of funding for local banks. After a portfolios. Central banks in Albania, FYR period of political uncertainty, growth of credit Macedonia, and Serbia have introduced to the economy remained robust in Bosnia and measures to de-euroize balance sheets and for Herzegovina, Serbia, and FYR Macedonia at unhedged borrowers raised reserve requirements for foreign exchange-linked deposits and risk weights. Progress in de-euroization has 12 Note: For consistency purposes, data in this section are comparable and therefore might differ from the data used in the specific been gradual; the stock of outstanding loans country notes. Data for private sector credit growth in Bosnia and in foreign currencies still ranges from about Herzegovina, FYR Macedonia, and Serbia originate from the IMF International Finance Statistics’ Other Depository Corporations 42 percent of total loans in FYR Macedonia to survey, expressed in local currency. Data for Kosovo comes from the same indicator expressed in euros. Data for Albania and Montenegro are calculated based on Central Bank statistics using credit to the economy but not credit to governments; they include loan write-offs. 13 See the Albania Country Note and footnote 11 above. 6. Credit recovers, driven by lending to households  |  17 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 about 70 percent in Serbia. In Albania, the share modify tax incentives, and revise disclosure of foreign currency lending had fallen slightly requirements. As of June 2017, the regional from 60 percent in mid-2016 to 57 percent in average for NPLs was 10.3 percent of total mid-2017; also Serbia saw a decrease from 70.2 loans. While NPLs have steadily declined from to 67.7 percent. over 20 percent in Albania (15.6 percent) and Serbia (12.2 percent), theirs are still the highest Gradually improving asset quality is helping in the region. At 3.9 percent, Kosovo has the drive credit growth, but NPLs are still high. lowest NPLs in the region. In Montenegro, NPLs weigh heavily on bank balance sheets, NPL levels had gradually fallen below 8 percent undermine profits, and erode capital, making by August. It is worth noting that, despite their it harder for banks to support economic downward trend, NPL levels remain high growth through the credit channel. Though and they are concentrated in a small number recent reforms have helped reduce the stock of banks. Further measures to strengthen of NPLs considerably, they are still well above financial sector supervision, monitor asset pre-crisis levels (Figure 6.3). FYR Macedonia, quality, diversifying bank funding sources, and Albania, Montenegro, and Serbia have either building up the nonbank financial sector would enacted laws to write off old NPLs or have a help reduce NPL levels. comprehensive NPL resolution strategy. Kosovo has a new system to enforce collateral recovery. Banks in the Western Balkans are still well- Albania and the Bosnia and Herzegovina capitalized and liquid, with possible further entity Republika Srpska have adopted new consolidation ahead. The capital adequacy of insolvency laws. Montenegro has amended the system reached an average of 17.4 percent the law on voluntary financial restructuring to in the second quarter of 2017 and liquid to facilitate NPL resolution, with amendments total assets were about 28 percent (Figure 6.4). that extend the timeline for its use, expand Profitability has slightly increased; return on coverage, describe alternative restructuring assets is averaging 1.8 percent for the region, up solutions, lower the administrative costs, from 1.1 percent at the end of 2016. However, Figure 6.3. Nonperforming loans are declining Figure 6.4. Banks are adequately capitalized NPLs as percent of total loans Capital adequacy ratio Percentage point change 30 25 3.0 2.5 25 20 2.0 20 1.5 15 1.0 15 0.5 10 10 0 5 -0.5 5 -1.0 0 0 -1.5 ALB SRB BIH MNE MKD KOS SRB KOS ALB MNE MKD BIH JJ Dec-15 JJ Jun-17 JJ Dec-14 JJ Q1/Q2 2017 QQ Peak since 2008 ‹‹ Pre-crisis level (end 2007) QQ Change since Dec-14, rhs ‹‹ Average (2006–08) Source: National central banks. Source: National central banks. 18  |  6. Credit recovers, driven by lending to households JOB CREATION PICKS UP vulnerabilities in domestic banks have renewed concerns about asset quality and the health of specific banks, in particular in Bosnia and Herzegovina and in Montenegro. Further structural changes are likely from the planned sale of some foreign-owned subsidiaries as parent banks realign their external exposures and smaller domestic institutions in Bosnia and Herzegovina merge. The deleveraging of foreign banks has driven up domestic deposits and reduced the average loan-to-deposit ratio from 119 percent in 2008 to about 88 percent in mid-2017. In the Western Balkans, financial intermediation is minimal and improvements have been slow. The depth of the financial sector measured by private sector credit to GDP averaged 45 percent in 2016, but was particularly low in Kosovo at 39 percent of GDP and Albania at 35 percent, compared to about 93 percent in the euro area. This compares poorly to other countries in Central and South East Europe. Since 2008 there has been a slight decline of 3 percent of GDP in financial sector deepening. As banks shift their funding models toward mobilizing more deposits, diversification of funding sources and evolution of the shallow nonbank financial sector will be central to providing term financing to foster investments and ultimately economic growth. In particular, building capital markets could help mitigate potential difficulties in diversifying the required funding. 6. Credit recovers, driven by lending to households  |  19 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 7. A positive outlook, with a broad reform agenda ahead The Western Balkans region is expected to high rates of unemployment and inactivity, and grow at 3.3 percent in 2018 and 3.6 percent exposure to natural disasters will continue to in 2019, driven by private consumption, heighten vulnerability. with support from investment and a stable or expanding role for exports as recovery takes Table 7.1. A positive medium-term growth hold in the EU and other developed countries. outlook Growth in Albania is expected to moderate 2016 2017f 2018f 2019f as large investment projects are completed, Real GDP growth, percent and should pick up slightly in Bosnia and Albania 3.4 3.8 3.6 3.5 Herzegovina, supported primarily by domestic Bosnia and Herzegovina 3.1 3.0 3.2 3.4 demand. Kosovo is expected to improve fastest Kosovo 3.4 4.4 4.8 4.8 as the new government expands the public Macedonia, FYR 2.4 1.5 3.2 3.9 investment program and adopts measures to Montenegro 2.9 4.2 2.8 2.5 stimulate private investment. FYR Macedonia’s Serbia 2.8 2.0 3.0 3.5 economy is also projected to recover gradually WB6 2.9 2.6 3.3 3.6 from the recent political turmoil and by 2019 Sources: Central banks and national statistical offices; World Bank staff estimates and projections. exceed the regional average. However, growth in Montenegro is likely to slow in 2018–19 as consumption takes a hit from the planned fiscal Risks to the growth outlook are mostly consolidation and with the completion of its domestic and can be mitigated by a sustained section of the Bar-Boljare highway. In Serbia, emphasis on fiscal stability. The current fiscal higher consumption and investment and a consolidations in Albania, Serbia, and Bosnia recovery in agricultural production should and Herzegovina and the recent adjustment drive the advance. in Montenegro are expected to reduce fiscal risks and improve confidence. But as the recent Poverty in the region is expected to continue example of FYR Macedonia shows, uncertainty falling, although the pace will vary by can dampen investment and growth. Delays in country. In Montenegro, fiscal consolidation the structural reform agenda would heighten efforts are expected to restore confidence and vulnerability in all countries in the region. support poverty reduction in the medium term; In addition, policy slippages or reversals that in the meantime, the government is working undermine macroeconomic stability could be to mitigate the impact of fiscal consolidation costly for medium-term growth, especially if on the poor and vulnerable. Poverty outcomes they happen before the more profound gains in each country will depend on its patterns of from earlier stabilization efforts materialize. economic growth, labor market improvements, To be prepared for shocks, countries in and the number of people close to the poverty the Western Balkans need fiscal space for line. For that reason, downside risks to growth, maneuver; the space is currently constrained by challenges generated by fiscal consolidation, untargeted recurrent spending. More emphasis 20  |  7. A positive outlook, with a broad reform agenda ahead JOB CREATION PICKS UP Box 7.1. How EU prospects may affect the economic outlook for the Western Balkans  e European Union is a “convergence machine”: between 1970 and 2009 living standards converged Th faster in Europe than in East Asia or Latin America. The catch-up was remarkable, especially for early accession countries Greece, Portugal, and Spain, followed by Hungary and Poland, with rapid increases in living standards and incomes. These countries managed to tap into regional value chains as simpler tasks were offshored outside of Europe as EU accessors moved to more sophisticated products with higher productivity.  hile together Western Balkan countries doubled their share of the EU market between 2004 and W 2015, faster growth in exports could be achieved by more intense trade integration, at a minimum catching up with countries of similar size. Exports of goods and services as a share of GDP average a low 30 percent or so in the Western Balkans, far below the 80 percent averaged by similar-sized transition economies now in the EU.  rowth in the EU is trending up, creating an opportunity for Western Balkan countries to reap the G growth and stability benefits of deeper trade integration. The higher a country’s trade share with the EU, the higher impact EU growth has on its exports (Figure B7.1). Figure B7.1. The higher its exports to the Figure B7.2. As EU growth firms up, the EU, the higher the impact of EU growth on a Western Balkans are projected to also grow country’s GDP Response of exports to a 1 percentage point shock to growth Response of GDP to a 1 percent shock to the corresponding in a corresponding region, percent increase in exports region’s GDP, percent increase in GDP Change in real exports, percent 0.7 MNE ALB 0.6 KOS BIH MKD 0.5 BIH KOS SRB SRB 0.4 MNE MKD 0.3 ALB 0.2 0 0.2 0.4 0.6 0.8 1.0 0 0.1 0.2 0.3 0.4 0.5 0.6 0.7 Exports to the corresponding region as a share of total exports QQ EU-28 1 percent growth shock JJ Serbia 1 percent growth shock JJ EU-28 1 percent growth shock Th  rough exports, growth in the EU affects growth in its trading partners, including the Western Balkans: a 1 percentage point increase in GDP growth in the EU-28 leads to additional growth of 0.6 percentage point of GDP in Albania and 0.27 percentage point in Montenegro, with the impact falling in between for FYR Macedonia, Serbia, Bosnia and Herzegovina, and Kosovo. Through regional ties, countries also affect each other: a 1 percentage point increase in GDP growth in Serbia pushes up growth in Montenegro by 0.26 percentage point. Regional integration is important for small countries because it facilitates entry into the production chains, the main vehicle for growth in productivity, exports, and output. Sources: World Bank (forthcoming 2017) “Western Balkans: Revving Up the Engines of Growth and Prosperity”. World Bank. Washington DC.; World Bank (2012) “Golden Growth: Restoring the Lustre of the European Economic Model”, World Bank. Washington DC.; World Bank (2016) “Rebalancing for Stronger Growth”, South East Europe RER No9, World Bank, Washington DC.; World Bank (2017) Western Balkans: Regional Economic Integration Issues Notes, World Bank, Washington DC.; WITS, CIA Factbook, and World Bank Staff estimates. 7. A positive outlook, with a broad reform agenda ahead  |  21 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 on rationalizing spending is needed, especially essential to correct both internal and external as several countries in the region prepare for imbalances. The growth outlook in Bosnia and election cycles. As shown by Serbia’s recent Herzegovina depends on resolution of structural volatile growth, weather-related vulnerability rigidities in spending that risk rendering is also high and continues to weight on the ineffective the earlier fiscal consolidation. growth outlook. New governments in Albania, Kosovo, FYR Macedonia, and Serbia have the opportunity Developments in the EU will have a to advance structural reforms. Albania needs significant effect on the region’s outlook, to diversify its sources of growth beyond the as will global liquidity and financial two large FDI projects that have supported conditions. Stronger-than-projected growth growth in recent years; it can do so by ensuring in the EU, with global liquidity conditions still macroeconomic sustainability, improving the loose, is a potential tail wind for the Western investment climate (e.g., with more effective Balkans (see Box 7.1). Nonetheless, the higher courts and public investment programs), and and more resilient EU growth is, the more reforming the energy and education sectors. likely and imminent will be the “downsizing” FYR Macedonia could reduce fiscal risks by of the European Central Bank’s quantitative building up tax collection, tightening spending easing program. A resulting stronger US dollar controls, making social spending more efficient, could be a risk for countries like Serbia and and generally acting to enhance management Montenegro where balance sheets have a of the public finances. Kosovo can strengthen relatively high share of US dollar exposure. its capacity to manage public investments and More important, any monetary tightening in remove current barriers to growth in its nascent the EU would imply less favorable borrowing private economy, especially for exporters. Serbia conditions, especially for countries with fiscal can use the fiscal space created by consolidation risks and unfinished reform agendas. The end to complete its transition to a market economy of favorable global liquidity conditions could by rightsizing state-owned enterprises and destabilize financial markets in some emerging drafting a new growth strategy to capitalize on economies that had been riding the tide of its manufacturing sector and highly educated elevated credit, with potential repercussions for workforce. In Bosnia and Herzegovina, the Western Balkans. although its deficits are relatively moderate, the high tax burden combined with inefficient While external conditions remain favorable, patterns of spending creates unnecessary fiscal it is important to seize the moment to pressure; if structural rigidities on spending are advance reforms. As demand for Western not addressed (such as the large public wage bill Balkan exports improves and borrowing costs and sizable and poorly targeted social assistance) remain favorable, countries would benefit it will be difficult to generate robust growth in from rebuilding their fiscal buffers to increase the medium term. In all countries, addressing resilience to shocks. At the same time, it will be high structural unemployment and low labor important to accelerate the pace of structural force participation would bring significant reforms to boost medium-term growth. In growth benefits (see Box 7.2). Finally, deeper Montenegro, a credible fiscal adjustment regional integration among Western Balkan with measures to mitigate social impacts is countries has the potential to create economies 22  |  7. A positive outlook, with a broad reform agenda ahead JOB CREATION PICKS UP of scale, increase competitiveness, create positive Maintaining momentum for progress on spillovers, and lead to faster convergence to the EU accession agendas would help shift EU, the main trading partner for all of them. risks to the upside. Serbia and Montenegro are negotiating chapters of EU acquis, with a view to membership in 2025. After adoption Box 7.2. Addressing structural issues in Kosovo’s labor market  osovo is confronted by four major employment challenges: low rates of job creation, very high rates K of inactivity and structural unemployment, high informality, and lack of growth in productivity. Economic growth in Kosovo has not translated into robust job creation. Despite annualized GDP growth of 3.4 percent for 2008–15, only about 63,000 formal jobs were created from 2005 to 2014; in fact, job destruction tended to outpace job creation. One reason is the difficulty of starting firms, and because those that do enter the market often have fewer than 10 employees, they tend to be less dynamic and less innovative, with minimal growth prospects and low survival rates. I  nactivity and persistent unemployment are pervasive, particularly among women and youth. In 2016, female participation in the labor market was 18.6 percent, the lowest rate in the Western Balkans and among the lowest in the world. Moreover, in 2016, 30.1 percent of eligible youth was neither employed nor in education or training (NEET), and at about 62.4 percent, youth unemployment was almost twice as high as adult rates. Not surprisingly, the employment-to-population ratio is also low: less than 30 percent of working-age adults are employed, compared to 50 percent for the region. An estimated 30 percent of workers have informal jobs, and rates are higher in areas like construction and agriculture that rely heavily on unskilled labor.  timulating job creation and firm growth depends not only on Kosovo improving its investment S climate, but also on removing barriers to employment. For instance, more education will lead to higher employment only if it provides the skills that employers demand. Three policy priorities are therefore vital:  n improved investment climate, less informal competition, and adequate access to finance for small • A and medium enterprises. The regulatory burdens on firms in Kosovo are high, mainly because the inspection system is inefficient and expensive. Also, about 60 percent of firms report being severely affected by informal competitors. Smaller firms have the additional disadvantage of finding it harder to access credit. ffordable child- and elder-care, flexible work arrangements, and adequate maternity leave • A regulations. In Kosovo the supply of formal child care is extremely low relative to countries at a similar development stage, and there is a severe shortage of flexible work arrangements. Finally, family leave laws, with maternity leave largely charged to employees, are a disincentive to formally hiring women.  atching skills with market needs, with special attention to disadvantaged groups. Youth find it • M hard to acquire skills, even though firms consider skills shortages to be a serious problem, and larger firms distrust Kosovo’s education and training systems. Sources: World Bank (2017) “Kosovo Jobs Diagnostic”. World Bank. Washington DC.; PISA 2015. 7. A positive outlook, with a broad reform agenda ahead  |  23 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 of the Reform Agenda Document and stable achieving stable and meaningful growth, but direction of anticipated reforms, Bosnia and it will not be easy. Montenegro has opened 28 Herzegovina has been asked to complete a of the 33 negotiated acquis chapters and Serbia detailed questionnaire to assess its readiness has opened 10. For Serbia to enter in 2025, for EU candidacy and expects confirmation in the next five years it will have to open 23 of candidate status in 2018. Albania and and close 33 chapters—thus hitting a major FYR Macedonia expect to start accession milestone almost monthly. Opening chapters is negotiations in 2018. Kosovo’s priorities are visa an exceptionally demanding process. Box 7.3 liberalization and advancing on implementing summarizes what has been done and what is the Stabilization and Association Agreement still to be done to support EU membership for (SAA). EU accession is a formidable tool for Western Balkan countries. Box 7.3. Western Balkan progress on the EU accession agenda: Collaboration rather than competition is essential  n May 23, 2017, the European Union, the Western Balkans, and Turkey jointly adopted conclusions O that include country-specific policy guidance based on each country’s Economic Reform Programme (ERP). This followed the annual economic policy dialogue meeting of Representatives of the Western Balkans and Turkey with EU Member States, the European Commission (EC), and the European Central Bank (ECB).  conomic governance has become a pillar of EU enlargement policy, mirroring developments within E the EU to strengthen economic policy coordination as part of the European Semester. Pre-accession economic surveillance by the EC and the EU has been gradually strengthened in recent years to help potential enlargement partners achieve and sustain macroeconomic stability, boost growth, and meet the economic accession criteria. As of 2015, all candidate and potential candidate countries must submit their medium-term policy plans in the form of annual ERPs. The ERP process and the ensuing dialogue on economic governance is also meant to enhance the Western Balkan institutional and analytical capacity to adopt coherent medium-term policy frameworks and to prepare these countries for participation in the EU economic policy coordination.  e ERPs spell out medium-term macroeconomic and fiscal frameworks for the next three years and Th priorities for structural reforms. The agenda includes reforms to boost competitiveness and improve conditions for growth and job creation. In 2017, all enlargement countries submitted their third annual ERPs, covering 2017-19, and Joint Conclusions with country-specific policy guidance were adopted by all enlargement partners and the EU at the ministerial level.  e Joint Conclusions between the Western Balkans and EU documented the macroeconomic and Th fiscal challenges and structural obstacles to growth and competitiveness for countries in the region and the progress made. Among the structural obstacles were social benefits that were not well-targeted (Montenegro); skills mismatches (Montenegro, Albania, Bosnia and Herzegovina, FYR Macedonia); low enrollment in pre-school education (Montenegro, Serbia, Bosnia and Herzegovina); sizable or persistent nonperforming loans (Montenegro, FYR Macedonia, Bosnia and Herzegovina, Serbia, Albania); broadband coverage below the EU average (Serbia); a low labor market participation or 24  |  7. A positive outlook, with a broad reform agenda ahead JOB CREATION PICKS UP Box 7.3 continued employment rate (Montenegro, FYR Macedonia, Kosovo); high informality (Montenegro, Serbia, Albania, Kosovo); declining public investment due to limited fiscal space (Bosnia and Herzegovina, FYR Macedonia); difficult or limited access to finance (Serbia, Montenegro, Albania); weak public finance management (FYR Macedonia, Bosnia and Herzegovina); unclear land ownership (Albania); energy sector bottlenecks (Albania, Serbia, Kosovo); weak rule of law (Kosovo); and an excessive regulatory burden and unpredictable judicial system (Albania). Western Balkans Progress Toward EU Accession Montenegro Serbia Macedonia, FYR Albania Bosnia and Herzegovina Kosovo Jun-03 Dec-03 Jun-04 Dec-04 Jun-05 Dec-05 Jun-06 Dec-06 Jun-07 Dec-07 Jun-08 Dec-08 Jun-09 Dec-09 Jun-10 Dec-10 Jun-11 Dec-11 Jun-12 Dec-12 Jun-13 Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 JJ Potential candidate JJ Candidate status JJ Negotiations Th  e meeting also listed recommendations for the medium term to address the structural issues, a selective summary of which is presented below:  e meeting recommended that Montenegro fully implement the 2017 consolidation package • Th to achieve savings of about 3 percent of GDP, gradually reduce public spending on wages and pension as a percentage of GDP, strengthen tax revenues and review tax exemptions, adopt measures to facilitate debt servicing, continue efforts to reduce NPLs, enhance prudential and banking resolution frameworks to improve financial stability, and reform the law on social protection to ensure cost-effectiveness.  imilarly, the recommendations for FYR Macedonia included developing a fiscal consolidation • S strategy, improving the efficiency and effectiveness of public spending, building up budget planning capacity, enhancing fiscal transparency by documenting the composition of deficit financing, adopting fiscal rules, strengthening the use of local currency and further fostering NPL resolution, adopting a credible PFM reform program, and prioritizing public investment in terms of clear policy objectives.  e recommendations for Albania were to continue pursuing fiscal adjustment to reduce public • Th debt as a share of GDP, strengthen tax administration further, broaden the tax base, introduce valuation-based property tax, implement the remaining measures of the NPL resolution strategy, strengthen supervision of the nonbank financial sector, continue to clarify the ownership of agricultural land and register property, and adopt the legal provisions necessary to promote and monitor energy efficiency.  ecommendations for Bosnia and Herzegovina were to create fiscal space for public investment • R by containing government consumption and better targeting social spending; clear public sector arrears; develop a comprehensive strategy for resolution of NPLs; adopt a country-wide 7. A positive outlook, with a broad reform agenda ahead  |  25 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Box 7.3 continued energy sector reform strategy and a legal framework; simplify, harmonize, and ensure mutual recognition of business registration procedures between entities; introduce e-payment tax services; strengthen employment services to better assist job seekers; and reduce the tax wedge.  e recommendations for Kosovo were to improve the capacities of the Ministry of Finance • Th and local governments to improve macro-fiscal planning, forecasting, and fiscal assessments; strengthen central and local government capacities to manage public procurement and public investment; take steps to introduce targeting and means testing of war veteran programs; remove legal and institutional barriers to the access of businesses to finance; develop a liquidation and bank resolution framework to strengthen the resilience of the banking sector; adopt a mechanism to support energy efficiency measures; and complete the regulation of energy prices.  e recommendations for Serbia were to reduce the budget deficit in 2017 and over the medium • Th term, increase capital spending through additional fiscal savings, reduce public spending on wages and pensions as a share of GDP, revive reforms of SOEs and tax administration, implement the rest of the NPL resolution strategy, finalize the reform and privatization of two large state- owned banks, adjust electricity tariffs to reflect actual costs, improve payment collection and avoid future accumulation of arrears in the energy sector, develop the framework for regulating new financial instruments to improve access to finance, put in place a risk management system to improve the functioning of the tax administration, increase labor market participation, and reduce the high non-wage labor cost of jobs at the lower end of the wage distribution in a fiscally neutral way. Source: Council of the European Union (2017) A Summary of Joint Conclusions of the Economic and Financial Dialogue Between the EU and the Western Balkans and Turkey, Brussels, 23 May 2017. (OR. en) 9655/17 ECOFIN 460 UEM 177 COWEB 64 ELARG 42; National authorities and World Bank staff. Note: While the conclusions described were adopted jointly by the EU, the Western Balkans, and Turkey, this box focuses only on conclusions related to the Western Balkans. 26  |  7. A positive outlook, with a broad reform agenda ahead Country Notes JOB CREATION PICKS UP Albania yy Economic growth in Albania is projected to rise to 3.8 percent in 2017, supported by private investment, including FDI-financed energy projects, and recovering household consumption. yy Growth is expected to moderate to an average of 3.6 percent for 2018–19 as private consumption accelerates. yy The economic expansion has created jobs. yy Prudent fiscal policy, continuing during the electoral year, has reduced public debt. yy To foster confidence and accelerate growth, it will be critical for Albania to speed up reforms to consolidate public finances, improve the efficiency of spending, reduce risks from the energy and financial sectors, and build up the legal system. Recent Economic Developments Growth stimulated job creation in 2016 and the first half of 2017. Employment grew by Albania’s economic growth is expected to 2.5 percentage points (pp) in 2016 and 1.7 pp accelerate to 3.8 percent in 2017, supported in the first half of 2017. Net job creation was by robust domestic demand. Having reached higher in services (8.6 percent year-on- 3.4 percent in 2016, growth continued upward year) and industry (2.7 percent). Labor force in 2017, supported by private investment and participation reached 57.7 percent, 0.5 pp consumption, which together are expected to higher than in the same period in 2016. The account for 3.7 pp growth for 2017. Investment official unemployment rate declined by 2 pp to dynamics are linked to progress on two large an average of 14 percent, but more than half is FDI-financed energy projects (the Trans still long-term. Average nominal wages, which Adriatic Pipeline and the Devoll hydropower had been declining since 2013, began to grow plant), and private consumption is supported by again in 2017 when the freeze in public wages job creation and the easing of credit conditions. ended. Public consumption has plateaued due to fiscal consolidation efforts. Net exports contributed Prudent fiscal policy has been supporting a positively in the first half of 2017, helped by reduction in public debt, though the pace tourism and a recovering commodity market. of consolidation slowed in 2017. Despite However, in the second half net exports are parliamentary elections, the 2017 fiscal being weakened by the higher energy imports, deficit is projected at 2 percent of GDP, only as domestic production was affected by a slightly above the 1.8 percent deficit in 2016. drought. As a result, in 2017 net exports are Through June revenues and expenditures expected to add only 0.1 percentage points to remained within budget, consistent with the growth. Meanwhile, the main drivers of growth revised fiscal rules in the Organic Budget Law are construction and services; declines in energy adopted in July 2016. The primary balance is production are weighing on industry. expected to remain positive at 0.4 percent of Albania  |  29 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 GDP, supporting a decline in the public debt- sector is profitable, and the capital adequacy to-GDP ratio from 72.4 percent in 2016 to ratio of 16.3 percent in mid-2017 was well 70.9 percent in 2017. Fiscal consolidation above the regulatory minimum of 12 percent. was slowed by an increase in subsidies to the Lower interest rates stimulated an expansion state-owned energy distribution company; of 9.3 percent (y-o-y) in domestic currency its financial performance was undermined loans. Restructuring the NPLs of large by the dry season. This situation illuminates borrowers and mandatory write-offs led the the vulnerabilities associated with unfinished NPL ratio to drop from above 18 percent in reforms in the energy sector. Savings from lower January to 15.3 percent of total loans in July interest payments helped finance an increase in 2017. However, slow recovery continues to investment grants to local governments for local suppress credit growth, particularly in business infrastructure projects and the rehabilitation of lending, as banks remain risk-averse: lending city centers. to corporations increased by only 4 percent, though that is up from 2.1 percent in the same This year inflation is expected to gradually period in 2016.1 Resolving NPLS will require converge to the Bank of Albania’s target accelerated application of the Bankruptcy Law band of 3 ± 1 percent. Higher food prices are adopted early in 2017 and such complementary likely to push up average annual inflation from measures as write-offs of old loans. 0.9 percent in 2016 to 2.2 percent. The rise in inflation follows steady economic growth The current account deficit (CAD) is and recovery in the utilization of production projected to narrow from 9.6 percent in capacity. 2016 to 8.3 percent in 2017 as tourism- related exports surge. Remittances are The Bank of Albania’s policy stance continues expected to remain robust even though growth to be accommodative. The policy rate is still is weak in such source countries as Greece and the minimum of 1.25 percent set in April Italy. Strong services exports, led by tourism, 2016. The policy change was transmitted to the have helped reduce the trade deficit despite credit market with the average rate on domestic stagnant goods exports and higher energy- currency loans falling to 6.8 percent in the first related imports. On the financing side, FDI fell half of 2017 from 7.3 percent a year earlier. by 7 percent as activities related to two large The exchange rate appreciated due to stronger energy projects, which reached a peak in 2016, inflows of foreign currency. In the second start to decline. (Imports associated with these quarter of 2017 the real effective exchange rate projects followed a similar dynamic.) By July appreciated by 4.4 percent, driven by a nominal 2017 the stock of foreign exchange reserves appreciation of the Albanian lek of 4.6 percent was €2.8 billion, which covered 6.6 months of and a wider inflation differential with trading imports of goods and services. partners. Credit to households recovered in the first half of 2017, but slow resolution of nonperforming loans (NPLs) continues to 1 Without taking into account the effect of the write-offs, which deter lending to corporations. The banking leads to a decline in the credit stock. 30  | Albania JOB CREATION PICKS UP Outlook and Risks The near-term economic outlook for Albania is positive, although growth is projected to moderate to an average of 3.6 percent for 2018–19 with completion of the two large energy projects and no other large projects planned. In the medium term, growth will rely on private consumption, supported by labor market improvements and export growth in response to greater demand in the EU. The CAD is expected to be narrowed by growing services exports and slower FDI- related imports, with the CAD fully financed by FDI. Sustained fiscal consolidation efforts and structural reforms should gradually reduce the fiscal deficit to 1.5 percent of GDP by 2019 and the debt-to-GDP ratio to 60 percent of GDP by 2022. Poverty (US$5.5/day, 2011 PPP) is projected to decline from 32.8 percent in 2017 to 30.9 percent by 2019. These economic prospects are not without risks, however. Lower than expected growth in trading partners could reduce Albania’s exports and FDI inflows, which would translate into lower tax revenues and public investment and thus slower output growth. Higher global interest rates would pressure the budget by tightening financing conditions for the government. Enhancing growth depends on macroeconomic stability and on improvements in the business climate to enhance the efficiency of the courts, public investment management, labor skills, and energy reform. The post- election period will offer an opportunity to advance these agendas, which should be informed by efforts to ensure that poverty reduction continues Albania  |  31 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Employment up, unemployment down FDI narrows the current account percent in billions of euro 60 350 50 250 40 150 50 30 -50 20 -150 10 -250 0 -350 12 12 13 13 14 14 15 15 16 16 17 13 3-13 1-14 3-14 15 15 16 16 17 Q1- Q3- Q1- Q3- Q1- Q3- Q1- Q3- Q1- Q3- Q1- Q1- Q Q Q Q1- Q3- Q1- Q3- Q1- ▬▬ Employment ▬▬ Unemployment JJ Other investments JJ Foreign direct investments JJ Current account Source: INSTAT data. Source: Bank of Albania. Services and construction stimulate growth Medium-term reduction of the fiscal deficit will depend on careful budget management contributions to growth, percent percent of GDP percent of GDP 7 80 0 5 70 -1 60 -2 3 50 -3 1 40 30 -4 -1 -5 20 -3 10 -6 -5 0 -7 10 11 12 13 14 15 16 17 Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 JJ Agriculture JJ Extractives JJ Manufacturing JJ Construction JJ Public debt ▬▬ Fiscal balance JJ Trade, autorepair, transport JJ Information, communication JJ Other services JJ Net taxes ▬▬ GDP Source: INSTAT data. Source: MoF data. High NPLs weigh on credit growth CPI inflation tracks domestic consumption percent percent CPI inflation, percent 20 30 5 15 25 4 20 10 3 15 5 2 10 0 5 1 -5 0 0 -10 -11 -12 -13 -14 -15 -16 -17 -10 -11 -12 -13 -14 -15 -16 ep-17 Dec Dec Dec Dec Dec Dec Dec Jun Dec Dec Dec Dec Dec Dec Dec S ▬▬ Private credit growth ▬▬ Deposit growth ▬▬ Non-performing loans Source: BoA data. Source: MoF, INSTAT data. 32  | Albania JOB CREATION PICKS UP ALBANIA 2013 2014 2015 2016 2017f 2018f 2019f Real GDP growth (percent) 1.0 1.8 2.2 3.4 3.8 3.6 3.5 Composition (percentage points): Consumption 0.9 4.5 -0.9 0.2 1.4 1.4 1.6 Investment -0.8 -0.9 0.7 1.3 2.3 2.4 1.4 Net exports 0.9 -1.8 2.4 1.9 0.1 -0.2 0.5 Exports 0.5 0.9 0.5 6.5 3.5 3.2 3.3 Imports (-) -0.4 2.7 -1.9 4.6 3.4 3.4 2.8 Consumer price inflation (percent, period average) 1.9 1.6 1.9 1.3 2.1 2.9 3.0 Public revenues (percent of GDP) 24.2 26.3 26.6 27.6 28.2 28.1 28.1 Public expenditures (percent of GDP) 29.2 32.2 31.5 29.4 30.2 30.1 29.6 Of which: Wage bill (percent of GDP) 5.2 5.1 5.1 4.6 4.8 4.8 4.7 Social benefits (percent of GDP) 9.5 9.9 9.9 10.4 10.4 10.4 10.4 Capital expenditures (percent of GDP) 4.8 4.3 4.4 4.0 4.8 5.2 5.0 Fiscal balance (percent of GDP) -5.2 -6.0 -4.9 -1.8 -2.0 -2.0 -1.5 Primary fiscal balance (percent of GDP) -1.7 -3.1 -2.2 0.7 0.4 0.6 1.0 Public debt (percent of GDP) 66.6 67.9 69.0 67.5 65.7 65.5 62.7 Public and publicly guaranteed debt 70.4 72.0 73.1 72.4 70.9 68.5 65.7 (percent of GDP) Of which: External (percent of GDP) 26.9 29.6 34.2 32.7 31.6 29.4 27.0 Goods exports (percent of GDP) 10.9 9.3 7.5 6.7 6.6 6.5 6.3 Goods imports (percent of GDP) 31.5 31.6 30.0 30.9 31.9 32.0 31.4 Net services exports (percent of GDP) 2.3 3.2 5.1 7.4 10.0 11.3 12.3 Trade balance (percent of GDP) -18.2 -19.0 -17.4 -16.8 -15.3 -14.2 -12.8 Remittance inflows (percent of GDP) 6.9 7.2 7.5 7.2 7.5 7.4 7.1 Current account balance (percent of GDP) -10.9 -12.9 -10.8 -9.6 -8.3 -7.7 -7.7 Foreign direct investment inflows (percent of GDP) 9.6 8.1 8.0 8.9 8.3 7.0 7.0 External debt (percent of GDP) 64.4 72.4 74.7 74.7 77.9 79.8 80.8 Real private credit growth (percent, period average) -2.7 -1.4 -1.8 -2.1 n.a. n.a. n.a. Nonperforming loans 24.1 22.4 18.2 18.3 n.a. n.a. n.a. (percent of gross loans, end of period) Unemployment rate (percent, period average) 17.1 18.0 17.3 15.2 14.0 n.a. n.a. Youth unemployment rate (percent, period average) 29.7 35.6 32.3 32.0 n.a. n.a. n.a. Labor force participation rate 52.5 53.7 55.7 56.0 n.a. n.a. n.a. (percent, period average) GDP per capita, PPP (current international $) 10,255 10,645 10,926 11,276 11,670 12,079 12,538 Poverty rate at US$5/day, PPP 47.2 46.7 46.2 45.5 n.a. n.a. n.a (percent of population) Sources: Country authorities, World Bank estimates and projections. Notes: Labor market indicators and credit growth reflect year-to-date annual rolling averages. Non-performing loans show year-to-date actuals. Youth unemployment rate is for labor force aged 15–29. Albania  |  33 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Bosnia and Herzegovina yy Economic growth for 2017 in Bosnia and Herzegovina (BiH) is estimated at 3 percent, continuing the momentum of the past two years. yy Unemployment fell by 5 percentage points but there was also a fall in labor market activity rate. However, at 20.5 percent unemployment is still high and is at 45.8 percent for youth. yy Supported primarily by rising domestic demand, economic growth is projected to move above 3 percent in 2018–19. While the work on EU accession will push reforms forward, slow progress caused by political uncertainty is a recognizable risk. Recent Economic Developments Unemployment remains high: 43.1 percent for men and 51.4 percent for women in 2017. It is Growth in 2017 is expected to sustain the highest among youth, but that rate did decrease pace of the last two years. Economic activity from 54.3 percent in 2016 to 45.8 percent. It is expected to increase by 3 percent in 2017, is encouraging, however, that those aged 25 similar to the pace of expansion in 2014–16. to 49 are among the most active in the labor Consumption continues to drive growth and market, with an activity rate of 73.5 percent is expected to contribute 2.8 percentage points and employment of 58.1 percent. (pp) in 2017, supported by investment (0.5 pp). Exports growth has been relatively broad-based, Deflation ended in 2017. In July the consumer but dry season reduced somewhat agricultural price index was up 0.9 percent year-on-year output, and imports growth was strong both (y-o-y), mainly because more luxury goods, in consumer and intermediate products, such as alcohol and tobacco (up 6.5 percent), resulting in a negative contribution from net were imported. Other categories that registered exports (0.6 pp) to growth. As for production, increases were food (up 0.6 percent), utilities (up the main contributors to the growth of real 0.9 percent), hospital services (up 4.6 percent) value-added in 2016 were services (1.2 pp), and transport services (up 3.2 percent). By manufacturing (1 pp), and agriculture (0.5 pp). contrast, prices decreased notably on clothing The composition of growth is expected to be and footwear, followed by out-patient services, similar in 2017, except that because of the dry furniture, and accommodations. With limited season agriculture is likely to contribute less. growth in nominal salaries in 2017, higher consumer prices reduced real incomes: the net Unemployment has fallen significantly, monthly salary in July 2017 averaged €425, up from 25.4 percent in 2016 to 20.5 percent by 2 percent y-o-y in nominal terms but down in 2017, but labor market participation by 0.5 percent compared to yearend 2016. is also falling. The significant reduction in unemployment rate resulted from the fall in A fiscal deficit of 1.5 percent of GDP is activity rate and a slight rise in employment. projected for 2017. Gross revenue from 34  |  Bosnia and Herzegovina JOB CREATION PICKS UP indirect taxes rose in July by 13.1 percent a comfortable level of more than 6 months of y-o-y , mainly the result of collecting more imports. in VAT (7.4 pp contribution) and excise tax (4.3 pp). Nevertheless, for the entire year the fiscal balance is expected to register a deficit of Outlook and Risks about 1.5 percent of GDP, since the revenue performance was counterbalanced by an Supported primarily by rising domestic increase in social spending and somewhat more demand, in 2018–19 economic growth is capital spending. The public debt-to-GDP projected to grow by more than 3 percent. ratio remains slightly above 40 percent. Preparations for submitting official documents for the next step in EU accession are expected Credit growth was buoyant, although it is to put some positive pressure on investment still not as dynamic as it was before the global sentiment. Moderate growth is projected in crisis. By July 2017 total loans were up by the medium term, taking into account slow 6.4 percent (y-o-y). While still lower than the improvement in the business environment, pre- crisis rate of 20 percent, this is the highest resumption of the construction of corridor growth registered since November 2011. In Vc and energy and tourism projects, as well as September Standard & Poor’s affirmed BiH’s uncertainty about the conduct of tax reform. B/B long- and short-term foreign and local These developments will weigh heavily on currency sovereign credit rating with a stable consumption-based growth. outlook. Still, risks associated with the quality of bank assets continue to be a major barrier The positive growth expected is conditional to healthy growth in credit. Persistent risks in on the country completing structural regulation and oversight of domestic banks reforms. Efficient and effective fiscal may jeopardize fiscal and financial stability. In policy, safeguarding the banking sector, the second quarter the share of nonperforming and addressing persistent unemployment loans in commercial bank portfolios remained and underemployment are central to BiH high at 11.1 percent of total loans. growth. Although its deficits remain relatively moderate, the tax burden is high and spending After narrowing slightly in 2016, the current is inefficient. Fiscal consolidation will not account deficit (CAD) is expected to rise be effective until structural rigidities on slightly to 5.8 percent of GDP. Trade in goods expenditure side are addressed, especially the helped narrow the CAD to 5.5 percent in 2016 high public wage bill and sizeable and poorly as growth in the euro value of goods exports targeted social assistance. (6.2 percent y-o-y) overtook that of imports (2 percent). In 2017, in contrast, with imports Notable risks persist, both domestic and picking up, net exports are subtracting from external. The highest risk for the medium term growth. The result will be a slightly higher relates to political uncertainties, among them CAD for the year. FDI inflows finance only the upcoming elections, which could slow the about 25 percent of the CAD, but in the first reform agenda. Although progress on reform half of 2017, international reserves still covered agenda in areas such as employment and social policy, debt management and financial sector Bosnia and Herzegovina  |  35 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 regulation put it more firmly on the path of EU accession, continued progress on reforms is needed as the country completes the detailed Questionnaire from the European Commission that assesses its readiness for EU candidacy. Externally, the main risk for the BiH economy continues to be slow growth in the EU. 36  |  Bosnia and Herzegovina JOB CREATION PICKS UP Services continued to support moderate GDP Deflation ended in 2017 growth contributions to growth, percentage points of GDP percent y-o-y euro 3.5 90 3.0 10 2.5 70 2.0 6 50 1.5 1.0 2 30 0.5 10 0 -2 -0.5 -10 -1.0 -6 -30 -1.5 -2.0 -10 -50 -14 -14 -14 -15 -15 -15 -16 -16 -16 -17 -17 2012 2013 2014 2015 2016 Feb Jun Oct Feb Jun Oct Feb Jun Oct Feb Jun JJ Agriculture JJ Industry JJ BiH overall CPI inflation, lhs ▬▬ BiH transport CPI inflation, lhs JJ Services QQ Overall GDP growth ▬▬ Change in Brent oil price, rhs Source: BiH Agency for Statistics, World Bank. Source: BiH Agency for Statistics, World Bank. Indirect gross tax collection is strong Higher spending will drive the fiscal balance into deficit real 3 months moving average, percent y-o-y general government fiscal balance, percent of GDP 13 1 11 9 0 7 -1 5 3 -2 1 -1 -3 -3 -4 -5 -7 -5 -13 Jul-13 an-14 Jul-14 an-15 Jul-15 an-16 Jul-16 an-17 Jul-17 Jan J J J J 2009 2010 2011 2012 2013 2014 2015 2016 2017 ▬▬ Growth in total indirect revenues in 2010 prices ▬▬ Growth in net indirect revenues in 2010 prices Source: BiH Indirect Tax Office, World Bank Source: Fiscal authorities, World Bank estimates. The deficit in the goods trade continued to With commercial bank nonperforming loans narrow still high. deleveraging is still a risk KM billions, 12m sum 3 mo. moving ave., % y-o-y percent 20 8 20 15 10 4 10 0 0 5 0 -10 -4 -5 -20 -8 -10 -14 Jul- 14 -15 Jul- 15 -16 Jul- 16 -17 Jul- 17 09 10 11 12 13 14 15 16 17 Jan Jan Jan Jan Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- Q1- JJ Trade balance, lhs ▬▬ Exports, rhs ▬▬ Imports, rhs JJ Capital adequacy, tier 1 capital to risk weighted assets ▬▬ Asset quality, NPLs to total loans ▬▬ Profitability, return on equity Source: BH Agency for Statistics, World Bank. Source: Central Bank of BiH, World Bank calculations. Bosnia and Herzegovina  |  37 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 BOSNIA AND HERZEGOVINA 2013 2014 2015 2016 2017f 2018f 2019f Real GDP growth (percent) 2.4 1.1 3.0 3.1 3.0 3.2 3.4 Composition (percentage points): Consumption n.a. n.a. n.a. 1.7 2.8 3.1 3.1 Investment n.a. n.a. n.a. 0.7 0.5 0.7 0.8 Net exports n.a. n.a. n.a. 0.8 -0.3 -0.6 -0.5 Exports n.a. n.a. n.a. 1.4 0.8 1.0 1.1 Imports (-) n.a. n.a. n.a. 0.6 1.1 1.6 1.6 Consumer price inflation -0.1 -0.9 -1.0 -1.1 1.1 1.1 0.1 (percent, period average) Public revenues (percent of GDP) 42.7 43.8 43.2 43.1 42.7 41.1 40.5 Public expenditures (percent of GDP) 44.8 45.8 42.6 42.1 44.2 41.3 39.6 Of which: Wage bill (percent of GDP) 12.3 12.0 11.5 11.4 11.3 10.8 10.5 Social benefits (percent of GDP) 16.5 17.1 16.6 19.1 19.3 18.7 17.9 Capital expenditures (percent of GDP) 3.9 4.3 2.0 2.9 4.7 3.1 2.9 Fiscal balance (percent of GDP) -2.1 -2.0 0.7 1.0 -1.5 -0.2 0.9 Primary fiscal balance (percent of GDP) -1.4 -1.2 1.6 1.9 -0.4 0.8 1.9 Public debt (percent of GDP) 34.5 40.4 40.5 38.7 37.4 34.6 30.6 Public and publicly guaranteed debt 37.7 41.7 41.9 40.4 39.1 36.4 32.4 (percent of GDP) Of which: External (percent of GDP) 28.3 30.9 30.4 28.6 28.7 27.0 23.9 Goods exports (percent of GDP) 24.8 25.1 25.2 25.7 25.6 25.6 25.6 Goods imports (percent of GDP) 51.4 53.9 50.3 49.3 49.0 48.9 49.6 Net services exports (percent of GDP) 6.1 6.1 6.4 6.4 6.7 6.5 6.3 Trade balance (percent of GDP) -20.5 -22.7 -18.8 -17.1 -16.8 -16.8 -17.7 Remittance inflows (percent of GDP) 8.1 8.5 8.3 8.2 8.0 7.9 7.9 Current account balance (percent of GDP) -5.3 -7.4 -5.7 -5.1 -5.3 -5.8 -6.7 Foreign direct investment inflows -1.3 -2.9 -1.7 -1.6 -1.5 -1.5 -1.5 (percent of GDP) External debt (percent of GDP) 73.8 76.9 76.6 76.2 74.3 72.1 70.0 Real private credit growth 1.7 4.1 2.3 4.2 n.a. n.a. n.a. (percent, period average) Non-performing loans 15.1 14.0 13.7 11.8 n.a. n.a. n.a. (percent of gross loans, end of period) Unemployment rate (percent, period average) 27.5 27.5 27.7 25.4 20.5 n.a. n.a. Youth unemployment rate 58.8 62.9 62.3 54.3 n.a. n.a. n.a. (percent, period average) Labor force participation rate 43.6 43.7 44.1 43.1 n.a. n.a. n.a. (percent, period average) GDP per capita, PPP (current international $) 9,798 10,084 10,527 10,958 11,053 11,506 12,244 Poverty rate at US$5/day, PPP n.a. n.a. n.a. n.a. n.a. n.a. n.a. (percent of population) Sources: Country authorities, World Bank estimates and projections. Notes: Labor market data are preliminary. Credit growth reflects year-to-date annual rolling averages. Non-performing loans show year-to-date actuals. 38  |  Bosnia and Herzegovina JOB CREATION PICKS UP Kosovo yy Economic growth is expected to reach 4.4 percent in 2017, up from 3.4 percent in 2016, driven primarily by investment, and supported by consumption and a recovery in exports. yy The fiscal deficit is projected to widen to 2 percent of GDP in 2017 because of a faster execution of capital projects, including Route 6 project, and an increase in social benefits. yy Stronger Euro Area growth, an increase in production of base metals, high prices for nickel and lead globally, and a broad-based growth in the production of tradable goods and services are stimulating exports. yy The outlook is positive, with growth projected to reach 4.8 percent in 2018 and 2019, but projected upturn is subject to downside risks, including perceptions about political stability, and a possible shortage of capacity to move forward ambitious public investment plans. Recent Developments tourism), which should contribute 2.5 pp to overall growth. The industry contribution is Growth is projected to reach 4.4 percent expected to be 1.1 pp, followed by agriculture in 2017, underpinned by investment, at 0.5 pp. consumption, and recovery in exports. Public and private investments are projected The labor market performance continues to contribute 2.6 percentage points (pp) to to improve. Following a rapid employment growth. Private investments are fueled by credit increase in 2016, job creation continued to and foreign direct investment (FDI) flows; strengthen in 2017 lead by construction, faster than planned execution of the Route manufacturing and accommodation grew at 6 project has accelerated public investment. 8.5 percent year-on-year (y-o-y) in June 2017, Also, exports contributed 2.0 pp to growth and the fastest in the region.2 Because employment consumption another 1.7 pp. Higher social growth was lower than growth in the labor spending and bank credit to households are force participation, unemployment increased promoting household consumption. Exports to 30.6 percent in the second quarter of 2017; have benefitted from more robust growth in the youth unemployment was 50.9 percent, and EU and from a broad-based acceleration in the long-term unemployment 72.1 percent. In production of tradable goods and services, as fact, employment as a share of total population well as higher base metal prices and production. was a mere 29.9 percent. However, the contribution of net exports to growth will be marginal, largely because of higher imports for public investments. Production is supported by a significant 2 Data for only 6 quarters are available in the new short-term monitoring data by the National Statistics Office. This number expansion of services (mainly construction and might be revised should the data change. Kosovo  |  39 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 The rise in capital and social spending is items went up, but for the year inflation is expected to surpass the higher revenue expected to remain at 1.7 percent. collection, leading to a projected deficit of 2 percent of GDP in 2017. Revenues are The CAD is expected to widen to 9.7 percent expected to grow by 5.1 percent, with tax of GDP in 2017 as imports of capital goods revenues up 4.8 percent, driven by a higher grow to meet demand. Exports of goods are collection of personal income taxes (by recovering (though from a low base) and are 13 percent) as employment grows and of VAT expected to grow by 15.8 percent (having fallen (by 9.1 percent) due to higher consumption by 4.5 percent in 2016) due to higher growth in general. Customs tariffs are expected to in trade partners, and higher prices for and decrease slightly due to activation of the production of base metals. Domestic demand Stabilization Association Agreement (SAA) is fueling imports of goods, projected to grow with EU. Improved local collection is driving by 10 percent in 2017 (from 6.9 percent in growth in nontax revenues, up by 7.7 percent 2016). Exports of services are expected to go up y-o-y. Spending is expected to grow by about 8 percent due to higher growth in Europe, but 9.5 percent y-o-y because of an increase in public based on data through August, service imports investments by 17 percent, and an increase in are expected to decrease by 9 percent y-o-y. subsidies and transfers by 9.3 percent (primarily due to a higher allocation for war veterans FDI inflows are expected to rebound in benefits and adjustments to the pension system). 2017 due to stronger growth in the euro Government consumption is expanding also, zone. Remittances and FDI inflows continue due to higher wages (5.2 percent) and use of to finance the domestic savings shortfall goods and services (4.5 percent). Public debt and supports domestic consumption and is projected to remain low at 16.8 percent of private investment in construction, financial GDP but is growing fast and likely to reach intermediation, and real estate sectors. Equity 25 percent by 2022. investments make up the largest share, followed by reinvestment of retained earnings. Germany, Improvements in the quality of banking assets Switzerland and Austria continue to be the still supports credit growth. Nonperforming main origin of FDI inflows, partly because of loans (NPLs) went down from 4.9 percent of the Kosovar diaspora. Implementation of the total loans in December 2016 to 3.9 percent SAA, recent improvements in the business in July 2017. Improved market conditions and environment, and stronger growth in the Euro lower interest rates spurred growth in private Area continue to support FDI inflows and credit by 9.9 percent y-o-y by July—a trend remittances. likely to continue till yearend. Inflation is projected to rise from 0.3 percent Outlook in 2016 to 1.7 percent in 2017. Average inflation for January to July 2017 reached Economic growth in Kosovo is projected to 1.7 percent (y-o-y), as prices for fuel, food accelerate, reaching 4.8 percent in 2018–19, products, tobacco. alcohol, and household driven by growing investments, both public and private, and consumption. These are 40  | Kosovo JOB CREATION PICKS UP supported by faster execution of capital projects and the improving business environment. Consumption is expected to contribute 2.5 pp to growth and investments 2.2 pp. In the near term the CAD is projected to hover around 10 percent of GDP. The increased demand for investment goods will outperform the positive trend in exports of both goods and travel services, leading to increased trade and higher CADs. Net FDI and remittances are expected to finance larger shares of the CAD as growth in the Euro Area continues to firm up. Kosovo’s outlook is positive, but the projected upturn is vulnerable to weaker growth in Europe and perceptions about political stability. Unwinding political risks could heighten fiscal pressures and delay reforms. The expansion of public investment as a driver of growth in 2018–20 may suffer from capacity constraints in the implementation of the investment program. To counterbalance the risks,  reforms should focus on shifting the sources of growth toward tradable sectors, increasing productivity, engaging and employing youth, addressing corruption, improving environmental sustain- ability, and addressing constraints in the energy sector. Kosovo  |  41 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Investment, net exports, and consumption are Services are expected to be the main source of expected to drive growth in 2017 growth in 2017, followed by industry growth contributions, percent growth contributions, percent 7 5 6 5 4 4 3 3 2 2 1 0 1 -1 -2 0 -3 -4 -1 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017 JJ Consumption JJ Investments JJ Exports JJ Imports JJ Agriculture JJ Industry JJ Services ▬▬ Growth JJ Taxes less subsidies ▬▬ Real GDP growth Source: Statistics Agency of Kosovo and World Bank. Source: Statistics Agency of Kosovo and World Bank. Despite fiscal pressures, the overall budget Higher capital and social spending are the balance (RHS) is expected to stay within limits main sources of the deteriorating budget in 2017 balance in 2017 percent of GDP percent of GDP 30 0 10 29 -0.5 9 28 -1.0 27 8 -1.5 26 7 25 -2.0 -2.5 6 24 23 -3.0 5 22 -3.5 4 2013 2014 2015 2016 2017f 2014 2015 2016 2017f 2018f 2019f ▬▬ Public revenues, lhs ▬▬ Public expenditure, lhs ▬▬ Budget balance, rhs ▬▬ Wage bill ▬▬ Social benefits ▬▬ Capital expenditure Source: Ministry of Finance and World Bank. Source: Central Bank and World Bank. FDI is rising and continues to finance the CAD Credit growth continues to spur private investment percent of GDP percent y-o-y growth 6 18 4 16 2 14 0 12 -2 10 8 -4 6 -6 4 -8 2 -10 0 -13 -13 -13 -14 -14 -14 -15 -15 -15 -16 -16 -16 -17 -17 -17 2013 2014 2015 2016 2017 Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep JJ CAD ▬▬ FDI net ▬▬ Total loans ▬▬ Loans to corporations ▬▬ Loans to households Source: Central Bank and World Bank. Source: Central Bank. 42  | Kosovo JOB CREATION PICKS UP KOSOVO 2013 2014 2015 2016 2017f 2018f 2019f Real GDP growth (percent) 3.4 1.2 4.1 3.4 4.4 4.8 4.8 Composition (percentage points): Consumption 2.3 5.5 2.7 3.7 1.7 2.5 2.2 Investment -0.1 -1.4 2.9 2.9 2.6 3.5 2.7 Net exports 1.2 -2.9 -1.6 -3.1 0.1 -1.2 -0.1 Exports -0.4 1.4 0.4 0.5 2.0 1.7 1.8 Imports (-) -1.6 4.3 1.9 3.6 -1.9 -2.9 -1.9 Consumer price inflation (percent, period) average) 1.8 0.4 -0.5 0.3 1.7 1.7 1.7 Public revenues (percent of GDP) 25.2 24.4 25.4 26.7 27.0 26.8 27.0 Public expenditures (percent of GDP) 28.1 27.0 26.6 27.5 29.0 29.3 29.7 Of which: Wage bill (percent of GDP) 7.9 8.8 9.1 9.1 9.2 9.3 9.3 Social benefits (percent of GDP) 4.1 5.0 5.3 6.0 6.3 6.1 5.9 Capital expenditures (percent of GDP) 10.0 7.4 7.0 7.4 8.4 8.9 9.4 Fiscal balance (percent of GDP) -2.9 -2.6 -1.2 -0.9 -2.0 -2.5 -2.7 Primary fiscal balance (percent of GDP) -2.7 -2.4 -1.0 -0.6 -1.5 -2.0 -2.2 Public debt (percent of GDP) 8.9 10.4 12.7 14.3 16.8 19.2 20.6 Public and publicly guaranteed debt 8.9 10.6 12.9 14.6 17.5 20.0 21.3 (percent of GDP) Of which: External (percent of GDP) 6.1 5.8 6.2 6.3 7.4 8.6 8.9 Goods exports (percent of GDP) 5.5 5.9 5.6 5.1 5.7 6.0 6.4 Goods imports (percent of GDP) 43.2 43.1 42.0 43.4 46.0 46.4 46.1 Net services exports (percent of GDP) 9.8 8.3 7.9 9.4 10.8 11.2 11.9 Trade balance (percent of GDP) -27.9 -28.9 -28.5 -28.8 -29.5 -29.1 -27.8 Remittance inflows (percent of GDP) 9.4 10.0 10.5 10.6 10.8 11.0 11.4 Current account balance (percent of GDP) -3.4 -7.0 -8.6 -9.2 -9.7 -10.0 -9.8 Foreign direct investment inflows (percent of GDP) 4.7 2.2 4.7 32.9 4.9 5.2 6.5 External debt (percent of GDP) 30.4 31.4 33.3 33.6 34.9 35.9 35.9 Real private credit growth (percent, period) average) 1.9 3.2 7.9 8.7 9.9 n.a. n.a. Nonperforming loans 8.5 8.5 6.5 4.9 3.9 n.a. n.a. (percent of gross loans, end of period) Unemployment rate (percent, period average) 30.0 35.3 32.9 27.5 n.a. n.a. n.a. Youth unemployment rate (percent, period) 55.9 61.0 57.7 57.7 n.a. n.a. n.a. average) Labor force participation rate 40.5 41.6 37.6 41.6 n.a. n.a. n.a. (percent, period average) GDP per capita (current US$) 3,877 4,030 3,745 3,647 3,769 3,925 4,087 Sources: Country authorities, World Bank estimates and projections. Notes: Credit growth reflects year-to-date annual rolling averages. Non-performing loans show year-to-date actuals. Real GDP growth and composition of growth are annual projections. Kosovo  |  43 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 FYR Macedonia yy After a prolonged political crisis, economic growth in FYR Macedonia is projected to slow to 1.5 percent in 2017, then pick up to average 3.5 percent for 2018-19 as investment and consumption recover. yy Employment programs have helped bring unemployment to a low of 22.8 percent. yy The new government’s supplementary budget for 2017 retains the previous fiscal deficit target but factors in lower growth expectations by lowering both revenues and expenditures. yy Fostering confidence and inclusive growth will require fiscal consolidation and structural reforms to enhance the investment climate, human capital, and public sector efficiency. Recent Economic Developments Construction, the main driver of growth in previous years, stalled in 2017. In the Political turmoil has affected growth. The first half of the year its contribution was political crisis that began in 2015 culminated negative as technical difficulties interrupted in the inauguration of a new government in the construction of two highways between June 2017. Throughout, it disrupted economic the Adriatic Sea (Albania) and the Black Sea activity. GDP growth slowed from 3.8 percent (Bulgaria). Political uncertainty suppressed in 2015 to 2.4 percent in 2016 and is expected growth in most services and manufacturing to fall to 1.5 percent for 20173. Investment fell segments in the first half of the year, but by 4.7 percent y-o-y in 2016 and by 9.6 percent a recovery is expected in the second half in the first half of 2017, though it is expected as consumers and investors become more to begin recovering by year-end as confidence confident and the highway project problems is restored. For the past two years, private are resolved. consumption has been a major contributor to growth, supported by higher employment Despite slower economic activity, and wages, but in 2017 the turmoil reduced employment continued to grow and its contribution. Net exports are expected to unemployment to decline. Employment have a positive, though small, contribution grew by 2.5 percent y-o-y in 2016 and by to growth, supported by buoyant exports and 2.7 percent in the first half of 2017, helped fewer investment-related imports. in part by fiscal stimulus through which more than 14,000 jobs were created. Most of the jobs created were in wholesale and retail trade as private consumption grew; others were created in transport services and manufacturing— 3 The State Statistic Office recently published revised GDP figures for 2015 and 2016, standing at 3.9 and 2.9 percent, respectively. sectors closely linked to FDI-supported Nevertheless, given that the published data set did not allow for a companies, which benefit from tax exemptions complete growth accounting analysis, the older figures were used for this publication. and other government support. Construction 44  |  FYR Macedonia JOB CREATION PICKS UP jobs declined in line with developments in Monetary policy remains accommodative. the sector. The unemployment rate fell to a Since February 2017 the Central Bank has held historic low of 22.8 percent in the first half the basic interest rate to a historic minimum of 2017, in part because fewer Macedonians of 3.25 percent. After a brief interruption in participated in the labor force. The decline in the second quarter of 2016 due to speculative participation may be the result of unemployed transactions on the foreign exchange market, workers who were discouraged leaving the labor monetary policy normalized in the second half market, some to emigrate to other countries. of 2016 and early 2017. Despite targeted government programs, youth unemployment is still high at 46 percent, as is Annual inflation is projected at 0.9 percent; long-term unemployment at 81 percent. The low international prices, combined with average wage continued the upward trend that lower utility prices, had led to a deflation of began in 2014, driven by wage increases in 0.2 percent in 2016. A recovery in oil prices labor-intensive industries. and higher prices for beverages, tobacco, and communications are expected to lead to The fiscal deficit is projected to rise to inflation in 2017. 3 percent of GDP in 2017. This year’s fiscal performance so far has followed the budget Credit conditions improved in 2017. Strong originally approved. In July the new government credit growth of 6.5 percent in 2016 masked adopted a supplementary budget that adjusted a slowdown in corporate lending, from revenues and expenditures based on more 7.1 percent in 2015 to 3.2 percent at yearend. conservative growth projections but retained The slowdown continued in the first half of 2017, the deficit target in nominal terms. The new but banks expect lower credit requirements and budget rebalanced expenditures: it reduced higher demand for credit to businesses in the country branding and promotion, goods and final quarter of 2017. Household lending has services, wages and capital spending (to match been the main driver of credit growth in 2017. expected execution), and increased spending Though nonperforming loans have gone up on pensions, subsidies, social assistance, and slightly, reaching 6.6 percent in August, they health. Revenues from excise taxes are expected are still lower than the regional average of about to be higher in 2017 and those from VAT 10 percent. The loan-to-deposit ratio stood at slightly lower. 89 percent in August 2017, which should allow banks to expand lending activities. Public and publicly guaranteed (PPG) debt is projected to reach 48.7 percent in 2017. The current account deficit (CAD) is Over the past five years the PPG-to-GDP ratio projected to hold steady at 3.1 percent of has gone up by about 10 percentage points. GDP in 2017. The solid increase in exports was In the first half of 2017 PPG debt remained partially counterbalanced by higher dividends stable in nominal terms but GDP declined. In and profit repatriation, resulting in the CAD the second half it is expected to again rise as falling slightly to 2.1 percent of GDP in the guarantees associated with the highway projects first half of the year. It is expected to widen increase. in the second half as imports associated with FDI and highway projects pick up. In the first FYR Macedonia  |  45 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 half, net FDI inflows were half the level of a reforms are efforts to enhance public financial year earlier, but they are expected to recover management, improve the investment climate, to 2.6 percent of GDP by yearend; that would build human capital and skills, and expand finance 84 percent of the CAD. In August economic opportunities for all. foreign reserves stood at 4.5 months of imports. Outlook and Risks The economic outlook is positive, with growth expected to reach 3.2 percent in 2018 and 3.9 percent in 2019. The main driver of growth is likely to be private consumption, fueled by rising employment, and recovering investment, as for the construction of the two highways. The fiscal deficit is expected to gradually decline to 2.2 percent by 2019 as the government launches reforms to build up tax collection, tighten spending controls, and make social spending more efficient. In the baseline scenario of gradual consolidation the PPG- to-GDP ratio is expected to rise to 55 percent by 2019, which underscores the need for strong and frontloaded structural reforms to stabilize debt in the medium term. The CAD is expected to hover around 3 percent of GDP through 2019. With the political crisis resolved, the main risk now is the fiscal situation, which could threaten macroeconomic stability and undermine growth prospects. Pressures come from the high deficit, driven by low revenues, a growing deficit in the pension system, higher interest payments, and accumulation of arrears. A credible fiscal consolidation program will help to stabilize public debt and rebuild fiscal buffers against shocks. The new government has the opportunity to advance reforms to ensure macroeconomic stability, improve the country’s competitiveness, and promote inclusive economic growth. Among such 46  |  FYR Macedonia JOB CREATION PICKS UP Political turmoil suppressed growth to the point Unemployment fell as fewer entered the labor of recession force and fiscal stimulus created jobs GDP growth by sector, contributions to growth in percent labor market developments 13 70 65 11 9 60 57 7 52 50 46 5 3 40 37 44 1 -1 30 33 -3 23 -5 20 14 14 14 14 15 15 15 15 16 16 16 16 17 17 4 5 6 7 8 9 0 1 2 3 4 5 6 7 Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q1- Q2- 200 200 200 200 200 200 201 201 201 201 201 201 201 H1-1 JJ Agriculture JJ Mining, electricity, gas supply JJ Manufacturing ▬▬ Unemployment rate ▬▬ Employment rate JJ Construction JJ Wholesale & retail, transp., accom. JJ Other services ▬▬ Activity rate ▬▬ Youth unemployment ▬▬ Real GDP growth Source: State Statistics Office. Source: State Statistics Office and World Bank estimates. The fiscal deficit widened Government borrowing and guarantees have driven up public debt slightly percent of GDP percent of GDP percent of GDP 36 1 60 34 0 50 32 -1 40 30 -2 30 28 -3 20 26 -4 10 24 -5 0 6 7 8 9 0 1 2 3 4 5 6 7f 8f 9f 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e 200 200 200 200 201 201 201 201 201 201 201 201 201 201 JJ Budget balance, rhs JJ Upward budget balance revisions JJ Central government JJ Funds ▬▬ Revenues, lhs ▬▬ Expenditures, lhs JJ Municipalities JJ Guaranteed debt of SOEs Source: Ministry of Finance and World Bank estimates. Source: National Bank data. Despite continuing credit expansion, political The CAD held steady and was almost fully uncertainty led lending to businesses to fall financed by FDI inflows percent y-o-y percent change percent of GDP 100 12 30 90 25 80 10 20 70 8 15 60 10 50 6 40 5 30 4 0 20 -5 2 10 -10 0 0 -15 14 14 15 15 16 16 17 17 Q1- Q3- Q1- Q3- Q1- Q3- Q1- Q3- 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017e JJ Contribution of household loans, lhs JJ Contribution of corporate loans, lhs JJ Trade deficit JJ Private transfers ▬▬ Current account balance ▬▬ Credit growth, rhs Source: National Bank data. Source: National Bank data. FYR Macedonia  |  47 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 FYR MACEDONIA 2013 2014 2015 2016 2017f 2018f 2019f Real GDP growth (percent) 2.9 3.6 3.8 2.4 1.5 3.2 3.9 Composition (percentage points) Consumption 1.5 1.9 2.9 3.1 1.9 2.3 2.5 Investment 0.1 3.1 1.1 -1.3 -0.6 0.6 1.0 Net exports 1.3 -1.3 -0.2 0.7 0.2 0.3 0.4 Exports 2.6 7.3 3.4 5.9 4.7 4.1 3.9 Imports 1.3 8.7 3.5 5.2 4.5 3.8 3.5 Consumer price inflation (percent, period average) 2.8 -0.3 -0.3 -0.2 0.9 1.6 2.0 Public revenues (percent of GDP) 30.1 29.7 31.0 29.9 30.4 30.4 30.4 Public expenditures (percent of GDP) 34.1 33.9 34.4 32.5 33.4 33.1 32.7 Of which: Wage bill (percent of GDP) 7.2 7.0 7.0 6.9 6.9 6.8 6.8 Social transfers (percent of GDP) 14.8 14.9 14.8 14.7 14.8 14.8 14.8 Capital expenditures (percent of GDP) 4.3 4.2 4.2 3.7 3.6 4.1 4.4 Fiscal balance (percent of GDP) -4.0 -4.2 -3.4 -2.6 -3.0 -2.7 -2.2 Primary fiscal balance (percent of GDP) -3.1 -3.2 -2.3 -1.5 -1.7 -1.3 -0.7 Public debt (percent of GDP) 34.0 38.1 38.1 39.1 39.7 41.6 42.0 Public and publicly guaranteed debt 40.3 45.8 46.7 47.8 48.7 51.1 53.7 (percent of GDP) Of which: External (percent of GDP) 25.5 31.9 31.3 33.3 33.9 36.1 38.2 Goods exports (percent of GDP) 29.2 32.5 33.6 35.2 37.7 40.5 42.3 Goods imports (percent of GDP) 52.0 54.2 53.6 53.6 56.2 57.3 57.0 Net services exports (percent of GDP) 4.6 4.4 3.8 3.5 3.7 3.8 3.8 Trade balance (percent of GDP) -18.3 -17.3 -16.2 -14.8 -14.8 -13.0 -10.8 Remittances inflows (percent of GDP) 2.2 2.2 2.1 1.8 2.1 2.0 2.0 Current account balance (percent of GDP) -1.6 -0.6 -1.9 -2.7 -3.1 -2.9 -2.9 Foreign direct investment inflows (percent of GDP) 2.8 2.3 2.3 3.2 2.6 3.0 3.2 External debt (percent of GDP) 64.0 70.3 69.9 74.1 76.3 77.5 77.1 Real private credit growth (percent, period average) 1.0 8.5 9.4 7.8 n.a. n.a. n.a. Nonperforming loans 10.9 10.8 10.6 6.4 n.a. n.a. n.a. (percent of gross loans, end of period) Unemployment rate (percent, period average) 29.0 28.0 26.1 23.7 22.0 20.4 19.4 Youth unemployment rate (percent, period average) 51.9 53.1 47.3 50.0 n.a. n.a. n.a. Labor force participation rate 57.2 57.3 57.0 56.6 n.a. n.a. n.a. (percent, period average) GDP per capita, PPP (current international $) 12,468 12,938 13,330 13,583 13,936 14,355 14,814 Poverty rate at US$5/day, PPP 34.3 33.6 32.3 31.7 30.5 29.3 n.a. (percent of population) Sources: Country authorities, World Bank estimates and projections. Notes: Labor market indicators and credit growth reflect year-to-date annual rolling averages. Non-performing loans show year-to-date actuals. Poverty rates are based on FYR Macedonia survey on income and living conditions (SILC). 48  |  FYR Macedonia JOB CREATION PICKS UP Montenegro yy The Montenegrin economy is expected to grow by 4.2 percent in 2017, supported by robust household consumption, a surge in investment led by construction of the Bar-Boljare highway, and a favorable tourism season. yy Growth created jobs but the labor market improvements were partially offset by a withdrawal of women from the labor force. yy The government adopted an ambitious fiscal consolidation strategy designed to stabilize public debt by 2019. yy Credible fiscal consolidation, mitigation of adverse social impacts, and structural reforms to make the economy more competitive are critical for fostering confidence and growth. Recent Economic Developments enough to offset steep declines in energy and manufacturing. Driven by domestic demand, Montenegro’s economy is projected to grow by 4.2 percent Although growth created jobs, disincentives in 2017, up from 2.9 percent in 2016. to labor force participation affected labor Growth picked up in the first half of 2017 market. Participation stagnated in 2016, partly to 4.2 percent; household consumption, because introduction of lifetime benefits for supported by social benefits and wage growth, mothers with three or more children caused contributed 5.1 percentage points (pp) of a significant number of women to withdraw GDP. Investment also grew, contributing from employment. However, as tourism another 1.4 pp as residential construction and improved, the trend reversed, and by August work on the Bar-Boljare highway brought a 2017 employment growth had picked up by 23 percent increase in investment. Government 3.6 percent (from 1.3 percent in 2016). As of consumption also contributed 0.6 pp to growth, June 2017, the survey-based unemployment led by a rise in public sector wages. However, rate had declined by 1 pp to 16.7 percent (on changes in inventories subtracted 1.8 pp from a four-quarter basis), and employment rate GDP growth and net exports subtracted 1.2 pp had grown slightly, to 45.5 percent. Large due to an investment-related rise in imports of employment programs helped to bring down equipment and materials for the highway and youth unemployment, although it remains high for windmill projects. Meanwhile, a favorable at 33.5 percent, and long-term unemployment tourism season built up disposable incomes, grew to 77 percent (on a four-quarter basis). driving growth in residential construction and These trends are likely to improve, since the retail. Tourist overnight stays had increased mothers’ benefit was abolished in June 2017 by 9 percent by August 2017, while retail trade a Constitutional Court finding that the benefit grew by 5 percent in the first half of the was unconstitutional. year. But, industrial production continued to contract: growth in the mining sector was not Montenegro  |  49 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Although public finances improved wages and capital expenditures related to the temporarily in 2016, some expansionary highway construction. Public debt (including measures heightened fiscal pressures in guarantees) is expected to rise to 76.1 percent 2017. The general government deficit fell from of GDP by yearend, driven by the highway- 7.3 percent of GDP in 2015 to 3.1 percent in related loan. 2016, mostly because capital spending for the highway was under-executed. Improved tax Inflationary pressures have risen. Spillovers collection brought in more revenue, but not from international oil and food prices and enough to compensate for the 10 percent rise higher excises on oil and tobacco turned the in public wages, the mothers’ lifetime benefit, 2016 deflation into 2.4 percent y-o-y inflation a 3 percent rise in pensions, and a 20-percent by September 2017. With excises and VAT rates rise in minimum pensions ahead of general rising starting in 2018, inflationary pressures elections in October. are likely to be sustained. The government elected in November 2016, Heightened lending activity supported a has adopted an ambitious fiscal consolidation decline in nonperforming loans (NPLs). strategy to rein in fiscal risks. Together with Overall credit had grown by 7.7 percent y-o-y in the budget for 2017, in December 2016 the August 2017 as household lending rose nearly new government adopted fiscal consolidation 10 percent for the eighth month in a row. The measures amounting to 3.2 percent of GDP, Central Bank reduced the reserve requirement among them a rise in excise taxes and a reduction from 9.5 to 7.5 percent in March 2017; this in VAT exemptions, collection of tax arrears, a gave banks additional liquidity for lending 25 percent reduction of the mothers’ benefit, to the government, which had grown close an 8 percent reduction in the wages of officials, to 58 percent by August. Deposits, the main a freeze of seniority bonuses payment until bank funding strategy, also grew (10.9 percent 2019, and selective cuts in capital expenditures. y-o-y). Supported by credit growth and In June 2017, Parliament adopted a new resolution efforts, NPLs fell from 10.3 percent Fiscal Strategy and related legislative changes, at end-2016 to below 8 percent in September which saved another 3 pp of GDP, in part by 2017. However, that is still above the pre-crisis raising the VAT rate from 19 to 21 percent; level and the authorities have again extended increasing excises on tobacco, sugary drinks, the voluntary restructuring act and enabled its alcohol, and coal; and reducing the wages of effective implementation. public officials, along with the abolition of the mother’s benefit. The measures adopted External imbalances remain high. After so far are designed to reduce the deficit from widening in 2016 to 18.1 percent of GDP, the 6 percent of GDP (which was expected in the current account deficit (CAD) improved slightly absence of the Fiscal Strategy) to 4 percent by in the first half of 2017 to 16.1 percent even as yearend. By July 2017, revenues had increased imports of goods increased by 8 percent, led by by 9 percent, led by improved collection of the high import-dependence of infrastructure VAT and excises. Spending measures are yet projects and tourism. Meanwhile exports, led to bring savings; by July overall spending was by steel and aluminum, surged by 7 percent. up 7 percent, mostly due to earlier increases in The largest contribution to CAD moderation 50  | Montenegro JOB CREATION PICKS UP came from exports of services, mostly tourism, obligations. Recent measures have already which went up over 20 percent in the first half brought an upgrade in the S&P and Moody’s of the 2017, and from surpluses in the income outlook rating, from negative to stable, at the accounts. Net FDI increased to 10.3 percent of current non-investment credit rating. Structural GDP by June, financing two-thirds of the CAD. reforms to accelerate private sector growth and The 2017 CAD is projected at 18.6 percent of reduce unemployment, especially for women GDP; FDI is expected to slightly improve to and youth, and mitigate the short-term poverty 11.4 percent of GDP and hold at similar levels and social impacts of fiscal consolidation are in 2018–19. needed to support inclusive growth. Outlook and Risks The positive economic outlook is vulnerable to risks. The economy is expected to grow by an average of 2.7 percent in 2018–19, thanks to higher public investments and household consumption. While investment growth will slow as the highway is completed, its contribution to growth will stay strong throughout the projection period. External imbalances are projected to remain high because the current growth pattern is import- dependent. A goal of the medium-term fiscal framework is to put debt and the public deficit on a sustainable trajectory. The fiscal position is projected to be in balance by 2019. Recent fiscal decisions are expected to stabilize public debt by 2019 and reduce the country’s vulnerability to external shocks. Compliance with the fiscal rule is expected by 2022. Decisive fiscal consolidation and mitigation of its social impacts are essential to confidence and growth. With public debt growing, space must be created for 2019-20 for orderly servicing of the large refinancing needs (more than 12 percent of GDP). Reducing the deficit, though difficult, is urgent in order to reassure markets and successfully roll over current Montenegro  |  51 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Growth is picking up… …but external imbalances are still high high-frequency data, trend-cycle, 2012–17, index, 2011=100 US$ billion, 2012–17 percent of GDP 150 last observation: Aug-17 1.5 0 140 1.0 -4 130 0.5 120 0 -8 110 -0.5 -12 100 -1.0 -16 90 -1.5 80 -2.0 -20 -12 -12 -13 -13 -14 -14 -15 -15 -16 -16 -17 -17 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul 2012 2013 2014 2015 2016 2017 ▬▬ Total industry_tc ▬▬ Retail trade_tc ▬▬ Tourism_tc JJ Goods, lhs JJ Services, lhs JJ Income, lhs JJ Current transfers, lhs ▬▬ CAD, rhs Source: MONSTAT data. Source: CBCG and MONSTAT data. Note: tc = trend cycle Note: Data for 2017 are on four quarter basis by June Labor market outcomes are gradually …but inflationary pressures are intensifying improving… adm. data, in thousands, 2012–17 in thousands 2012–17, annual growth rates 200 55 6 195 50 5 190 4 185 45 3 180 40 2 175 1 170 35 165 30 0 160 -1 155 25 -2 last observation: Aug-17 -3 last observation: Sep-17 150 20 -12 -12 -13 -13 -14 -14 -15 -15 -16 -16 -17 -17 -12 -12 -12 -13 -13 -13 -14 -14 -14 -15 -15 -15 -16 -16 -16 -17 -17 -17 Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan Jul Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep Jan May Sep ▬▬ Employment, lhs ▬▬ Employment_tc, lhs ▬▬ CPI ▬▬ PPI ▬▬ Unemployment, rhs ▬▬ Unemployment_tc, rhs Source: MONSTAT data. Source: MONSTAT data. The fiscal deficit is still high… …and the fiscal consolidation strategy aims to stabilize public debt percent of GDP, 2012–16 percent of GDP, 2012–16 2012–19, € billions percent of GDP 50 1 3.5 75 0 3.0 40 -1 70 -2 2.5 30 -3 2.0 65 20 -4 1.5 60 -5 1.0 10 -6 55 -7 0.5 0 -8 0 50 2012 2013 2014 2015 2016 Jul-17 2012 2013 2014 2015 2016 2017f 2018f 2019f JJ Total revenues and grants JJ Total expenditure and net lending JJ Foreign public debt, lhs JJ Domestic public debt, lhs ▬▬ Cash deficit, rhs ▬▬ Accrual deficit, rhs ▬▬ Public debt, rhs Source: MOF and MONSTAT data. Source: MOF and MONSTAT data. Note: July 2017 data show central government only. 52  | Montenegro JOB CREATION PICKS UP MONTENEGRO 2013 2014 2015 2016 2017f 2018f 2019f Real GDP growth (percent) 3.5 1.8 3.4 2.9 4.2 2.8 2.5 Of which (percentage points): Consumption 1.6 2.6 2.2 4.5 3.0 1.3 2.1 Investment 0.3 0.5 1.9 6.1 2.4 2.3 0.2 Net exports 1.7 -1.3 -0.7 -7.6 -1.2 -0.8 0.2 Exports -0.5 -0.3 2.2 2.4 1.0 1.7 1.8 Imports (-) -2.2 1.0 2.9 10.0 -2.2 -2.5 -1.7 Consumer price inflation (percent, period average) 2.2 -0.7 1.5 -0.2 2.3 3.1 2.1 Public revenues (percent of GDP) 42.3 44.6 41.5 42.5 42.0 43.1 42.4 Public expenditures (percent of GDP) 46.9 47.7 48.8 45.6 45.9 44.7 42.3 Of which: Wage bill (percent of GDP) 13.0 13.3 13.1 12.9 11.7 11.0 10.6 Social benefits (percent of GDP) 14.4 14.3 13.3 14.1 13.6 12.6 11.9 Capital expenditures (percent of GDP) 4.1 5.8 9.0 4.3 8.6 9.3 8.2 Fiscal balance (percent of GDP) -4.6 -3.1 -7.3 -3.1 -3.9 -1.6 0.2 Primary fiscal balance (percent of GDP) -2.4 -0.9 -4.9 -1.0 -1.5 0.4 2.2 Public debt (percent of GDP) 57.5 59.9 66.2 64.4 68.4 70.0 69.3 Public and publicly guaranteed debt 66.0 67.1 73.7 71.4 76.1 77.3 76.3 (percent of GDP) Of which: External (percent of GDP) 42.6 47.9 55.7 52.8 58.4 61.4 61.7 Goods exports (percent of GDP) 11.8 10.3 8.9 8.7 8.4 8.4 8.4 Goods imports (percent of GDP) 51.3 50.1 48.9 50.6 50.1 49.7 49.0 Net services exports (percent of GDP) 19.4 20.0 21.6 19.4 19.0 19.3 19.9 Trade and services balance (percent of GDP) -20.1 -19.8 -18.5 -22.5 -22.7 -21.9 -20.6 Remittance inflows (percent of GDP) 4.6 4.3 4.1 3.8 3.7 3.7 3.5 Current account balance (percent of GDP) -14.5 -15.2 -13.2 -18.1 -18.6 -18.0 -17.0 Foreign direct investment inflows (percent of GDP) 9.6 10.2 16.9 9.4 11.4 11.6 11.1 External debt (percent of GDP) 155.9 163.4 161.9 160.9 163.4 166.7 166.3 Real private credit growth (percent, period average) 2.6 -2.5 1.2 0.0 n.a. n.a. n.a. Nonperforming loans 17.5 15.9 12.5 10.3 n.a. n.a. n.a. (percent of gross loans, end of period) Unemployment rate (percent, period average) 19.5 18.0 17.6 17.7 17.0 16.6 16.1 Youth unemployment rate (percent, period average) 41.7 36.3 38.5 39.1 n.a. n.a. n.a. Labor force participation rate 50.1 52.7 53.7 54.3 n.a. n.a. n.a. (percent, period average) GDP per capita, PPP (current international $) 14,884 15,410 16,050 16,195 16,389 16,586 16,785 Poverty rate at US$5/day, PPP 9.9 4.8 4.6 4.3 4.6 4.9 4.8 (percent of population) Sources: Country authorities, World Bank estimates and projections. Notes: Labor market indicators and credit growth reflect year-to-date annual rolling averages. Non-performing loans show year-to-date actuals. Montenegro  |  53 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 Serbia yy Severe weather conditions and lower investment have slowed economic growth in 2017; the growth projection for the year has therefore dropped from 3 to 2 percent. yy In the first eight months fiscal consolidation continued and government overshot its deficit target, producing a surplus of 1.8 percent of annual GDP. yy Reform priorities include continuation of SOE reforms, particularly privatization of large chemical and pharmaceutical companies, and restructuring state energy and transport utilities. yy The main concerns now are the sustainability of fiscal consolidation and widening external imbalance. Recent Economic Developments 11.8 percent in the second quarter, the lowest level since 1997. Equally important, youth The estimate for 2017 growth has now been unemployment dropped from 36.1 percent a dropped from 3 to 2 percent. Although year ago to 28.9 percent. The gradual recovery growth of 2.8 percent in 2016 was broad-based, in wages that began in 2016 has continued: economic growth has since slowed substantially. average wages increased by 1 percent in real Severe and protracted winter weather weighed terms (y-o-y) in the first half of 2017. Private heavily on energy4 and construction, and a sector wages recovered faster, at 4.9 percent recent drought caused agricultural output y-o-y, but at 3.4 percent growth, wages in the to plunge to an estimated 10 percent less public sector are catching up. than in 2016. Private and even more public investment fell, contributing only one-third as The budget will be balanced or in a small much to growth in 2017 as in 2016. Moreover, surplus. Continued higher revenues, spending as rigid demand for intermediate goods and controls, and under-execution of the public energy resulted in growth of imports, they investment program led to a 1.8 percent overwhelmed output growth. annualized GDP surplus through August. Revenues were up 7.1 percent (y-o-y in Nevertheless, employment rose5 by 4.3 percent nominal terms) and expenditures increased by in the second quarter of 2017, compared to only 1.2 percent. Revenues were up primarily the same quarter of 2016, pushing up the because of higher proceeds from the VAT employment rate to a record high of 48.1 on imports; corporate income tax and social percent. However, nearly a quarter of all jobs contributions also grew along with formal are informal and thus not registered with social employment. Spending was similar to last insurance institutions. Unemployment fell to year’s in all categories, except for purchases of goods and services (which includes hiring of new employees on short-term contracts) and 4 Production of electricity in particular. 5 Labor Force Survey (LFS), second quarter of 2017. on-lending to SOEs. However, the 13 percent 54  | Serbia JOB CREATION PICKS UP drop in spending on public infrastructure By yearend the current account deficit (CAD) (y-o-y, in nominal terms) may deter growth is expected to reach 4.6 percent of GDP. The of the economy. The current fiscal surplus has CAD reached 3.2 percent of annualized GDP helped to reduce public debt as a share of GDP in the first eight months as the trade deficit from 73 percent in 2016, to 65.5 percent at the widened by nearly 20 percent; this implied a end of August.6 While revenues are expected widening in euro terms of 67 percent. Exports to continue their 2017 trajectory, spending on have grown by 11 percent7 so far in 2017, with subsidies, transfers, and on-lending to SOEs agriculture exports up 18 percent, car tires is likely to lower the current surplus to 0.1– up 26 percent, and metals industries exports 0.3 percent of GDP by yearend. up 46 percent8 as the steel mill in Smederevo resumed operations under new management. Slower growth and appreciation of the dinar But growth in imports by 12.7 percent lowered inflation, but credit to the private cancelled out the export growth. Through sector also fell. Inflation reached its 2017 peak August imports of intermediate goods were up of 4 percent in April, falling to 3.2 percent 16.4 percent and of energy 34.8 percent, due (y-o-y) in September. After keeping its policy to the harsh winter and operational problems rate constant at 4 percent for 13 consecutive in state electricity company - EPS. The net FDI months, the central bank lowered it to increase of 12.9 percent in euro terms was more 3.75 percent in September and to 3.5 percent than enough to cover the CAD. in October. However, M1 year-on-year growth dropped to 8.3 percent in September 2017 after hitting 20.5 percent in December Outlook and Risks 2016. Through September the dinar had appreciated by 3.3 percent against the euro. Growth is projected to gradually recover in Growth of private sector credit of 0.7 percent 2018 and beyond, but not without risk. After by September was sluggish; it depended this year’s disappointing growth, the Serbian mainly on higher lending to households (up by economy is expected to recover over the 8.4 percent) because loans to private enterprises medium term. Based on announced increases went down by 1.1 percent (y-o-y). Loans to in public wages and expected increases in government were up 1.8 percent (y-o-y, in employment generally, consumption is likely nominal terms). Having hit 18.9 percent at to grow faster than previously projected, but it the end of 2016, nonperforming loans (NPLs) is not clear how much of this will spill over to fell back to 14.7 percent in August as banks imports. Public investment should rise in 2018 more aggressively wrote off bad loans or sold with better project execution. them to specialized investors. NPLs remain concentrated in state banks, where they The medium-term growth projections represent close to 25 percent of total loans. crucially depend on the pace of structural reforms. Serbia needs to deal with its large and 6 Calculated as a percent of the moving average of GDP, all values 7 Based on balance of payment data published by the NBS, in dinars. Total public debt includes nonguaranteed debt of local calculated in euro terms. governments. 8 Data based on Statistics Office report through August 2017. Serbia  |  55 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 unsustainable state-owned enterprises (SOEs). medium-term fiscal framework is not yet clear. Besides utilities, the government has a stake in Recent increases in wages, substantial subsidies more than 600 companies, some of which have to SOEs, and delays in reforming the public required massive financial support (of about wage system are exerting more pressure on 1 percent of GDP each year). Finalizing this fiscal stability, and near-term external financing section of the transition from a planned to a needs will put upward pressure on external market economy would lower fiscal pressures, debt. reduce crowding-out, and increase competition. Given the potential fiscal impact and sector- specific rationale for government ownership, priority for attention should be several large chemical SOEs. Speeding up the restructuring of the state-owned utility companies, most of which are in the energy sector, would not only bring significant financial savings but would also ensure a more reliable electricity supply, which is one of the key components of growth (as demonstrated in 2017). Gradual widening of the CAD is possible over the medium term. While exports are likely to increase (based on recent foreign investment in the real sector and with the services sectors gaining importance) to reach about 55 percent of GDP, consumption growth is likely to stimulate imports. Because the primary balance is likely to deteriorate as foreign companies transfer net income back home, more external financing will be required, which will push up external debt. Inflation is set to pick up gradually as domestic demand recovers, though it is expected to stay within the NBS target band. Monetary policy will continue to operate within an inflation targeting framework, supported by a flexible exchange rate. The main risks to the baseline scenario stem from a possible fiscal loosening and a widening of external imbalances. The current IMF program expires early in 2018 and the 56  | Serbia JOB CREATION PICKS UP Agriculture has been slowing the economy… …but the labor market is still improving contribution to GVA growth in percentage points percent 4 50 3 40 2 1 30 0 20 -1 10 -2 -3 0 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 15 15 15 15 16 16 16 16 1-17 2-17 Q1- Q2- Q3- Q4- Q1- Q2- Q3- Q4- Q Q 2008 2009 2010 2011 2012 2013 2014 2015 2016 -17 JJ Industry JJ Services JJ Agriculture JJ Employment rate JJ Unemployment rate Source: Statistics Office of Serbia. Source: Statistics Office of Serbia. The first-half fiscal surplus… …helped to reduce public debt percent of annual GDP net change, € millions 1.0 3,000 0.5 0 2,000 -0.5 -1.0 1,000 -1.5 -2.0 0 -2.5 -3.0 -1,000 Jan-Aug Q1 Q2 Q3 Q4 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 JJ 2014 JJ 2015 JJ 2016 JJ 2017 Source: Ministry of Finance. Source: Ministry of Finance. Since April inflation has been slowing… …despite more lending to households percent € million 6 11,000 10,000 5 9,000 8,000 4 7,000 3 6,000 5,000 2 4,000 3,000 1 2,000 1,000 0 0 -14 ay-14 ep-14 an-15 ay-15 ep-15 an-16 ay-16 ep-16 an-17 ay-17 ep-17 -06 -07 -08 -09 -10 -11 -13 -14 -15 -16 -17 Jan M S J M S J M S J M S Jan Mar May Jul Sep Nov Jan Mar May Jul Sep ▬▬ CPI total ▬▬ Target, upper band ▬▬ Target, lower band ▬▬ Private enterprises ▬▬ Government ▬▬ Households ▬▬ SOEs Source: Statistics Office of Serbia. Source: National Bank of Serbia. Serbia  |  57 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 SERBIA 2013 2014 2015 2016 2017f 2018f 2019f Real GDP growth (percent) 2.6 -1.8 0.8 2.8 2.0 3.0 3.5 Composition (percentage points): Consumption -0.7 -1.0 0.4 0.6 1.8 2.4 2.6 Investment -1.9 -0.2 1.3 0.6 0.5 1.1 1.1 Net exports 5.2 -0.6 -0.8 1.5 -0.4 -0.5 -0.2 Exports 7.9 2.3 4.5 5.7 4.3 3.6 4.3 Imports (-) 2.7 3.0 5.4 4.2 4.6 4.1 4.6 Consumer price inflation (percent, period average) 7.9 2.1 1.4 1.1 3.1 3.0 3.0 Public revenues (percent of GDP) 37.9 39.7 40.4 41.7 42.4 41.1 40.9 Public expenditures (percent of GDP) 43.5 46.3 44.0 43.0 42.1 41.3 41.2 Of which: Wage bill (percent of GDP) 10.1 9.9 8.8 8.3 8.3 8.3 8.2 Social benefits (percent of GDP) 17.7 17.8 17.6 16.8 16.2 15.7 15.6 Capital expenditures (percent of GDP) 2.1 2.5 2.8 3.3 3.1 3.4 3.7 Fiscal balance (percent of GDP) -5.6 -6.6 -3.7 -1.3 0.3 -0.2 -0.2 Primary fiscal balance (percent of GDP) -3.2 -3.7 -0.5 1.8 3.2 2.5 2.3 Public debt (percent of GDP) 52.6 64.2 68.8 67.8 62.3 59.8 56.0 Public and publicly guaranteed debt 60.9 71.8 75.9 73.0 67.0 64.0 60.0 (percent of GDP) Of which: External (percent of GDP) 35.7 41.5 45.2 45.9 40.0 40.0 40.0 Goods exports (percent of GDP) 30.7 31.9 33.9 37.0 39.3 41.3 43.4 Goods imports (percent of GDP) 42.8 44.3 45.8 46.0 49.1 50.9 52.9 Net services exports (percent of GDP) 0.9 1.4 2.2 2.6 2.7 3.1 3.5 Trade balance (percent of GDP) -11.2 -10.9 -9.8 -6.4 -7.1 -6.5 -6.1 Remittance inflows (percent of GDP) 6.3 5.6 6.2 5.4 5.7 5.7 5.5 Current account balance (percent of GDP) -6.1 -6.0 -4.7 -3.1 -4.6 -4.3 -4.2 Foreign direct investment inflows (percent of GDP) 3.8 3.7 5.4 5.4 5.8 5.2 5.0 External debt (percent of GDP) 74.8 77.1 78.3 76.7 74.6 68.9 65.3 Real private credit growth (percent, period average) -9.2 -3.8 -1.3 5.0 n.a. n.a. n.a. Non-performing loans 21.4 21.5 21.6 17.0 n.a. n.a. n.a. (percent of gross loans, end of period) Unemployment rate (percent, period average) 22.1 19.2 17.7 15.3 13.5 13.0 12.5 Youth unemployment rate (percent, period average) 49.4 47.6 43.2 42.4 n.a. n.a. n.a. Labor force participation rate 48.4 51.9 51.6 52.0 n.a. n.a. n.a. (percent, period average) GDP per capita, PPP (current international $) 13,772 13,806 14,112 14,412 15,164 16,063 17,049 Poverty rate at US$5/day, PPP n.a. n.a. n.a. n.a. n.a. n.a. n.a. (percent of population) Sources: Country authorities, World Bank estimates and projections. Notes: Labor market indicators and credit growth reflect year-to-date annual rolling averages. Non-performing loans show year-to-date actuals. 58  | Serbia Key Economic Indicators JOB CREATION PICKS UP 2013 2014 2015 2016 2017f 2018f 2019f Real GDP growth (percent) Albania 1.0 1.8 2.2 3.4 3.8 3.6 3.5 Bosnia and Herzegovina 2.4 1.1 3.0 3.1 3.0 3.2 3.4 Kosovo 3.4 1.2 4.1 3.4 4.4 4.8 4.8 Macedonia, FYR 2.9 3.6 3.8 2.4 1.5 3.2 3.9 Montenegro 3.5 1.8 3.4 2.9 4.2 2.8 2.5 Serbia 2.6 -1.8 0.8 2.8 2.0 3.0 3.5 WB6 2.5 0.3 2.2 2.9 2.6 3.3 3.6 Consumer price inflation (percent, period average) Albania 1.9 1.6 1.9 1.3 2.1 2.9 3.0 Bosnia and Herzegovina -0.1 -0.9 -1.0 -1.1 1.1 1.1 0.1 Kosovo 1.8 0.4 -0.5 0.3 1.7 1.7 1.7 Macedonia, FYR 2.8 -0.3 -0.3 -0.2 0.9 1.6 2.0 Montenegro 2.2 -0.7 1.5 -0.2 2.3 3.1 2.1 Serbia 7.9 2.1 1.4 1.1 3.1 3.0 3.0 WB6 0.8 0.2 0.5 0.9 1.8 2.1 2.0 Public expenditures (percent of GDP) Albania 29.2 32.3 31.5 29.4 30.2 30.1 29.6 Bosnia and Herzegovina 44.8 45.8 42.6 42.1 44.2 41.3 39.6 Kosovo 28.1 27.0 26.6 27.5 29.0 29.3 29.7 Macedonia, FYR 34.1 33.9 34.4 32.5 33.4 33.1 32.7 Montenegro 46.9 47.7 48.8 45.6 45.9 44.7 42.3 Serbia 43.5 46.3 44.0 43.0 42.1 41.3 41.2 WB6 37.8 38.8 38.0 36.7 37.5 36.6 35.8 Public revenues (percent of GDP) Albania 24.2 26.3 26.6 27.6 28.2 28.1 28.1 Bosnia and Herzegovina 42.7 43.8 43.2 43.1 42.7 41.1 40.5 Kosovo 25.2 24.4 25.4 26.7 27.0 26.8 27.0 Macedonia, FYR 30.1 29.7 31.0 29.9 30.4 30.4 30.4 Montenegro 42.3 44.6 41.5 42.5 42.0 43.1 42.4 Serbia 37.9 39.7 40.4 41.7 42.4 41.1 40.9 WB6 33.7 34.7 34.7 35.2 35.5 35.1 34.9 Source: World Bank calculations and projections using data from national authorities and World Economic Outlook (2017). Key Economic Indicators  |  61 WESTERN BALKANS REGULAR ECONOMIC REPORT NO.12 2013 2014 2015 2016 2017f 2018f 2019f Fiscal balance (percent of GDP) Albania -5.1 -6.0 -4.9 -1.8 -2.0 -2.0 -1.5 Bosnia and Herzegovina -2.1 -2.0 0.7 1.0 -1.5 -0.2 0.9 Kosovo -2.9 -2.6 -1.2 -0.9 -2.0 -2.5 -2.7 Macedonia, FYR -4.0 -4.2 -3.4 -2.6 -3.0 -2.7 -2.2 Montenegro -4.6 -3.1 -7.3 -3.1 -3.9 -1.6 0.2 Serbia -5.6 -6.6 -3.7 -1.3 0.3 -0.2 -0.2 WB6 -4.0 -4.1 -3.3 -1.4 -2.0 -1.5 -0.9 Public debt (percent of GDP) Albania 66.6 67.9 69.0 67.5 65.7 65.5 62.7 Bosnia and Herzegovina 34.5 40.4 40.5 38.7 37.4 34.6 30.6 Kosovo 8.9 10.4 12.7 14.3 16.8 19.2 20.6 Macedonia, FYR 34.0 38.1 38.1 39.1 39.7 41.6 42.0 Montenegro 57.5 59.9 66.2 64.4 68.4 70.0 69.3 Serbia 52.6 64.2 68.8 67.8 62.3 59.8 56.0 WB6 42.4 46.8 49.2 48.6 48.4 48.4 46.9 Public and publicly guaranteed debt (percent of GDP) Albania 70.4 72.0 73.1 72.4 70.9 68.5 65.7 Bosnia and Herzegovina 37.7 41.7 41.9 40.4 39.1 36.4 32.4 Kosovo 8.9 10.6 12.9 14.6 17.5 20.0 21.3 Macedonia, FYR 40.3 45.8 46.7 47.8 48.7 51.1 54.7 Montenegro 66.0 67.1 73.7 71.4 76.1 77.3 76.3 Serbia 60.9 71.8 75.9 73.0 67.0 64.0 60.0 WB6 47.4 51.5 54.0 53.3 53.2 52.9 51.7 Goods exports (percent of GDP) Albania 10.9 9.3 7.5 6.7 6.6 6.5 6.3 Bosnia and Herzegovina 24.8 25.1 25.2 25.7 25.6 25.6 25.6 Kosovo 5.5 5.9 5.6 5.1 5.7 6.0 6.4 Macedonia, FYR 29.2 32.5 33.6 35.2 37.7 40.5 42.3 Montenegro 11.8 10.3 8.9 8.7 8.4 8.4 8.4 Serbia 30.7 31.9 33.9 37.0 39.3 41.3 43.4 WB6 24.0 24.7 25.2 26.7 28.0 29.2 30.3 Source: World Bank calculations and projections using data from national authorities and World Economic Outlook (2017). 62  |  Key Economic Indicators JOB CREATION PICKS UP 2013 2014 2015 2016 2017f 2018f 2019f Trade balance (percent of GDP) Albania -18.2 -19.0 -17.4 -16.8 -15.3 -14.2 -12.8 Bosnia and Herzegovina -20.5 -22.7 -18.8 -17.1 -16.8 -16.8 -17.7 Kosovo -27.9 -28.9 -28.5 -28.8 -29.5 -29.1 -27.8 Macedonia, FYR -18.3 -17.3 -16.2 -14.8 -14.2 -13.0 -11.5 Montenegro -20.1 -19.8 -18.5 -22.5 -22.7 -21.9 -20.6 Serbia -11.2 -10.9 -9.8 -6.4 -7.1 -6.5 -6.1 WB6 -16.3 -16.7 -15.1 -13.3 -13.3 -12.7 -12.1 Current account balance (percent of GDP) Albania -10.9 -12.9 -10.8 -9.6 -8.3 -7.7 -7.7 Bosnia and Herzegovina -5.3 -7.4 -5.7 -5.1 -5.3 -5.8 -6.7 Kosovo -3.4 -7.0 -8.6 -9.2 -9.7 -10.0 -9.8 Macedonia, FYR -1.6 -0.6 -1.9 -2.7 -3.1 -2.9 -2.9 Montenegro -14.5 -15.2 -13.2 -18.1 -18.6 -18.0 -17.0 Serbia -6.1 -6.0 -4.7 -3.1 -4.6 -4.3 -4.2 WB6 -6.3 -7.0 -6.1 -5.5 -6.1 -5.9 -6.0 External debt (percent of GDP) Albania 64.4 72.4 74.7 74.7 77.9 79.8 80.8 Bosnia and Herzegovina 73.8 76.9 76.6 76.2 74.3 72.1 70.0 Kosovo 30.4 31.4 33.3 33.6 34.9 35.9 35.9 Macedonia, FYR 64.0 70.3 69.9 74.1 76.3 77.5 77.1 Montenegro 155.9 163.4 161.9 160.9 163.4 166.7 166.3 Serbia 74.8 77.1 78.3 76.7 74.6 68.9 65.3 WB6 77.2 81.9 82.4 82.7 83.6 83.5 82.6 Unemployment rate (period average, percent) Albania 17.1 18.0 17.3 15.2 14.0 n.a. n.a. Bosnia and Herzegovina 27.5 27.5 27.7 25.4 20.5 n.a. n.a. Kosovo 30.0 35.3 32.9 27.5 n.a. n.a. n.a. Macedonia, FYR 29.0 28.0 26.1 23.7 22.0 20.4 19.4 Montenegro 19.5 18.0 17.6 17.7 17.0 16.6 16.1 Serbia 22.1 19.2 17.7 15.3 13.5 13.0 12.5 WB6 24.2 24.3 23.2 20.8 n.a. n.a. n.a. Source: World Bank calculations and projections using data from national authorities and World Economic Outlook (2017). Key Economic Indicators  |  63 View this report online: www.worldbank.org/eca/wbrer