Country risk profile: the case of Western Balkan

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Country risk profilethe case of Western Balkan

• Mojmir Mrak
• University of Ljubljana
• 2009

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Contents of the presentation

• Country risk concept
• Political risk profile of the region
• Macroeconomic developments in the region
• Status of structural reforms in the region
• Key economic challenges for the region
• EU accession as the regions country risk anchor
• General comment Data on Kosovo a new sovereign
  state are not provided because of their poor or
  non availability

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A. Country risk concept

• Country risk is a risk of an environment in which
  a transaction is taking place
• Main objective of a country risk is to assess the
  countrys creditworthiness, i.e., to evaluate its
  future economic and political capacity to
  generate foreign exchange sufficient for regular
  debt servicing
• Country risk basically discusses two issues
• Ability of a country to service its obligations
  (economic and financial risk)
• Willingness of the country to service its
  obligations (political risk)

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A. Country risk concept (II)

• Four stumbling blocks of a country risk analysis
  
• External environment incorporates the influence
  of the world market on the country under analysis
• Economic and financial performance assesses the
  countrys financial and structural strengths /
  weaknesses and therefore its current and future
  debt-servicing capacities
• Economic policy instruments Their mix decisively
  influences the countrys creditworthiness
• Political risk addresses the willingness to pay

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A. Country risk concept (III)

• Main operational issues of a country analysis
• Time horizon of the assessment
• Short-term period up to one year
• Medium and / long term period up to five to
  seven years
• Methodology applied
• Fully quantitative
• Fully quantitative
• Combined (Delphi method, checklist method, etc.)
• Number of indicators used in a country risk
  assessment big differences with one general rule
• Smaller number for short-term assessment
• Larger number for longer-term assessment

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B. Political risk profile of theregion

• Lost decade or almost two in terms of economic
  development the development gap towards the EU
  has widened
• The legacy of wars (destruction, dislocation,
  disruption)
• Unresolved issues associated with the dissolution
  of the former SFRY
• Border issues
• Succession issues
• Other issues

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B. Political risk profile of the region (II)

• Weakness of states and unresolved status issues
  (status of Kosovo, institutional setting in BH,
  cooperation with the Hague tribunal, etc.)
• Organised crime, corruption and inadequate
  protection of legal rights
• Key objective of countries in the region is EU
  integration while intra-regional integration has
  a much lower priority
• Appetite of old EU member states for accession
  of the Western Balkan drastically reduced

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B. Macroeconomic developments in the region

• Economic growth high despite substantial
  political risks and uncertainties about the EU
  integration
• Over 5 in 2008 with Croatia a bit lower
• Main sources consumption and increasingly also
  investment / exports
• Still low per capita GDP

GDP growth ()
Country 2005 2006 2007e 2008p
Albania 5.7 5.5 6.0 6.1
BH 3.9 6.7 6.8 6.0
Croatia 4.3 4.8 5.6 3.8
Macedonia 4.1 3.7 5.1 5.3
Montenegro 4.2 8.6 10.3 7.0
Serbia 6.3 5.5 7.5 7.0
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B. Macroeconomic developments in the region (II)

• Unemployment Very high despite strong economic
  growth
• In some countries over 30
• Informal sector substantial

Unemployment ( of work force)
Country 2005 2006 2007e 2008p
Albania 14.1 13.8 13.2 na
BH 42.0 44.8 43.2 na
Croatia 12.3 10.5 9.7 na
Macedonia 37.3 36.0 34.9 na
Montenegro 25.2 20.6 16.8 na
Serbia 32.4 33.2 29.9 na
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B. Macroeconomic developments in the region (III)

• Inflation successfully reduced to a single
  digit level
• Reversal of disinflation trends in Serbia
• Inflationary pressures in some countries
  intensified in 2008 (energy, food, credit boom,
  monopolies)

Inflation rate ()
Country 2005 2006 2007e 2008p
Albania 2.4 2.4 2.9 4.0
BH 3.0 6.0 1.9 8.5
Croatia 3.3 3.2 2.9 6.5
Macedonia 0.5 3.2 2.3 8.4
Montenegro 2.3 3.0 4.2 8.0
Serbia 16.2 12.7 6.7 10.5
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B. Macroeconomic developments in the region (IV)

• Public finances consolidation continued due to
  high growth
• With limited role of monetary policy, fiscal
  stabilisation is a key for overall macro
  stability
• Differences with respect to budget deficit /
  surplus

Public finance ( BDP)
Country 2005 2006 2007e 2008p
Albania -3.5 -3.3 -3.4 -5.2
BH 2.1 2.6 1.3 -2.3
Croatia -4.0 -3.0 -2.3 -2.0
Macedonia 0.3 -0.3 0.6 -1.5
Montenegro 2.1 4.2 6.3 0.9
Serbia 0.9 -2.6 -2.7 -2.5
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B. Macroeconomic developments in the region (V)

• External balances they remain strongly negative
  
• Huge trade deficits
• Partly covered by services, ODA and remittances
• Still very large current account deficits
• Problems associated with credit boom

Current account ( BDP)
Country 2005 2006 2007e 2008p
Albania -8.7 -6.5 -10.6 -10.7
BH -17.5 -8.5 -12.8 -14.7
Croatia -6.3 -7.9 -8.6 -9.9
Macedonia -2.7 -0.9 -3.2 -9.7
Montenegro -9.1 -17.1 -15.0 -15.0
Serbia -8.4 -9.8 -12.9 -17.3
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C. Status of structural reforms in the region

• Relationship between macroeconomic stability and
  structural reforms growth sustainability
• Two sets of structural reforms
• Initial stage Liberalisation of prices and
  foreign trade
• Second stage reforms Privatisation,
  restructuring and institution building
  (judiciary, public administration, financial
  sector, etc.)
• Status of structural reforms in the region
• Initial stage more or less completed
• Second stage reforms at very different stages
  with institution building being a particularly
  long-term process

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C. Status of structural reforms in the region
Status of initial and second stage reform
(Transition Report)
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D. Key economic challenges for the region

• High and persistent unemployment
• Economic growth based on increased productivity
  has not been accompanied by comparable growth of
  employment
• Fiscal adjustment contributed to the decline of
  public employment
• Private employment generation still rather weak
• Informal sector continues to be very large
• Low international competitiveness
• High share of labour intensive industries
• Low share of high-tech industries

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D. Key economic challengesfor the region (II)

• Persistent de-industrialisation
• Services picked-up much quicker than industry
• Sustainability of development depends on
  re-industrialization
• Poorly developed infrastructure
• Obstacle for strengthening regional cooperation
• Obstacle for faster development of tourism sector
• Inadequate flexibility of public finances
• Large size of the government (over 40 of GDP)
• High proportion of current spending
• Lack of funds for pro growth spending, including
  investment

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D. Key economic challengesfor the region (III)

• Questionable current account sustainability
• Export growth more than matched by import growth
  for consumption and investment
• Remittances of crucial importance
• ODA on a downward trend in many countries
• Privatisation FDI inflow will start to be
  phased out
• Greenfield FDI inflow is expected to continue
  due to improved economic climate, opportunities
  and EU accession process

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E. EU accession as the regions country risk
anchor

• Current status of the EU accession process for
  the countries of the region very different
  status
• Croatia started EU accession negotiations in
  October 2005
• Macedonia became an EU candidate country in
  December 2005 negotiation not started yet
• Albania, BH, Montenegro and Serbia signed SAA
• Kosovo has not yet started the SAA negotiations

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E. EU accession as the regions country risk
anchor (II)

• Factors influencing the speed of EU accession
• On the side of the countries within the region
• Political developments (political criteria
  decisive)
• Credible commitment to speed up transition /
  meeting of Copenhagen economic criteria
• Administrative / institutional capacity of
  countries to adopt the acquis and to implement it
  
• Public support for EU accession may be vanishing
  
• On the side of the EU
• The region is surrounded by EU member states
• Importance of the damage control argument
• Enlargement fatigue / absorption capacity issue

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E. EU accession as the regions country risk
anchor (III)

• Optimistic scenario for the EU accession of the
  countries in the region
• Croatia may conclude accession negotiations by
  the end-2009 membership possible in 2011/2012
• Macedonia may start accession negotiations in
  2009 membership possible around 2015
• Montenegro applied for the EU membership in
  December 2008 membership still possible around
  2015
• Serbia may apply for membership in 2009
  membership still possible around 2015
• Albania, BH, and Kosovo will not be ready to
  start EU accession negotiations before 2010 this
  means that EU membership not realistic much
  before 2020