Slow Road to Recovery
Ekaterine Vashakmadze2013, Institutions & Transition Economics: Microeconomic Issues eJournal
The South East Europe (SEE6) region exited from recession in the first half of 2013, supported by a nascent recovery in the Euro area. Industry-especially manufacturing exports and energy drove the recovery. The region experienced a welcome surge in exports in 2013, particularly car exports from Serbia. Unemployment in the region, at about 24 percent on average, began to decline in the first half of 2013 from its peak crisis levels. While employment grew in Albania, FYR Macedonia and Montenegro, it remained depressed in Serbia and Bosnia and Herzegovina. Unemployment in the region, at about 24 percent on average, began to decline in the first half of 2013 from its peak crisis levels. While employment grew in Albania, FYR Macedonia and Montenegro, it remained depressed in Serbia and Bosnia and Herzegovina. But even where employment has recovered meaningfully since 2010, the gains were not broad-based and mostly concentrated in services Near-term economic growth will be too weak to su...
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83136
Report No. 83136-ECA
South East Europe
Regular Economic Report No.5
Slow Road to Recovery
December 9, 2013
Acknowledgments
This Regular Economic Report (RER) covers economic developments, prospects, and policies in
six South Eastern European countries (SEE6): Albania, Bosnia and Herzegovina, Kosovo, FYR
Macedonia, Montenegro, and Serbia. The report is produced twice a year by staff of economists at
the World Bank Europe and Central Asia Region Poverty Reduction and Economic Management
Department (ECA PREM). The team of authors is led by Gallina Andronova Vincelette, Željko
Bogetić, and Abebe Adugna; the following team members have thematic and/or country assignments:
Simon Davies (fiscal and debt; and Bosnia and Herzegovina); Agim Demukaj (external sector; and
Kosovo); Doerte Doemeland, Nikola Kojucharov, and Ivan Kusen (labor market; monetary policy;
inflation developments); Raquel Letelier (financial sector); Anil Onal (database management; and
Albania); Lazar Sestović (real sector; and Serbia); Sanja Madzarević-Sujster (Montenegro); Bojan
Shimbov (financial sector, FYR Macedonia), Ekaterine Vashakmadze and Mizuho Kida (global
developments and outlook); Maria Andreina Clower, Christopher Pala, and Budy Wirasmo provided
invaluable assistance in editing and designing this report.
Dissemination of the report as well as external and media relations is managed by Lundrim Aliu,
Anita Bozinovska, Ana Gjokutaj, Jasmina Hadzić, Andrew Kircher, Vesna Kostić, Sanja Tanic; Boris
Balabanov, Mirjana Popovć, John Mackedon, Kristyn Schrader-King, and Dragana Varezić.
The team is grateful to Ellen Goldstein (Country Director, South Eastern Europe), Roumeen Islam
(Acting Sector Director, ECA PREM), Satu Kähkönen (Sector Manager, ECA PREM),and the
South East Europe Country Management Unit for their guidance in the preparation of this report.
The team is thankful for comments on earlier drafts of this report received from Central Banks and
Ministries of Finance in the SEE6 countries.
This and previous SEE RERs may be found at: www.worldbank.org/eca/seerer
Standard Disclaimer:
This volume is a product of the staff of the International Bank for Reconstruction and Development/
The World Bank. The findings, interpretations, and conclusions expressed in this paper do not
necessarily reflect the views of the Executive Directors of The World Bank 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.
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SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Contents
Summary
1
Chapter 1: Recent Macroeconomic Developments
Modest Growth after the Double-Dip Recession
Continued Improvements in Trade and External Debt
Nascent Employment Gains
Disinflation
Depressed Credit Growth
Persistent Fiscal Pressures
5
5
9
11
13
15
21
Chapter 2: Macroeconomic Outlook
Weak Growth Ahead
From Weak to Robust Growth: Improving Productivity and Competitiveness
Improved Business Climate, but Further Reforms Needed
27
27
28
29
Annex: Macroeconomic Indicators
32
List of Figures
Figure 1: Economic Growth Rates in SEE6
Figure 2: Growth of Industrial Output in 2013
Figure 3: Global Industrial Production and Trade: Recovering
Figure 4: Borrowing Costs in Select European Countries: Moderating
Figure 5: SEE Labor Productivity in SEE vs. EU11 and EU15
Figure 6: Labor Productivity in the SEE
Figure 7: Real Unit Labor Costs
Figure 8: Contributions to Change in Unit Labor Costs Since 2008
Figure 9: SEE6 Combined Current Account and Trade Balances
Figure 10: SEE6 Countries’ Half Year Current Account Balance
Iv |
CONTENTs
5
6
7
7
8
8
9
9
10
10
SLOW ROAD TO RECOVERY
Figure 11: SEE6 Export Growth
Figure 12: Worker Remittances 2010–H1 2013
Figure 13: Average SEE6 External Debt
Figure 14: Total Public and Private External Debt 2010–H1 2013
Figure 15: Employment in Regional Context
Figure 16: SEE: Paths of Employment Recovery
Figure 17: Sectoral Drivers of Employment Recoveries
Figure 18: Unemployment Rates 2013
Figure 19: Unemployment Rates in Regional Context
Figure 20: CPI inflation
Figure 21: Food Price Inflation
Figure 22: Energy Price Inflation in SEE6
Figure 23: Regional CPI Inflation Comparison
Figure 24: Output Gaps in SEE6*
Figure 25: Official Policy Rates
Figure 26: Real Broad Money Supply
Figure 27: Funding and Funding Costs for SEE6 Countries
Figure 28: CDS Spreads of SEE countries
Figure 29: Non-performing Loans
Figure 30: Asset Quality of Loan Portfolio, December 2012
Figure 31: Loan-to-Deposit Ratios
Figure 32: Capital Adequacy Ratio
Figure 33: Liquidity Ratio
Figure 34: Credit Growth Rates
Figure 35: Average Structural Fiscal Balance and Economic Growth
Figure 36: Structural Fiscal Balances
Figure 37: Fiscal Deficits
Figure 38: Contribution Toward Change in Deficits, 2012–13
Figure 39: Public Expenditure
Figure 40: Contribution Toward Change in Spending, 2009–12
Figure 41: Wage Bill and Social Benefit Spending, 2012
Figure 42: Benefits Coverage of Households
Figure 43: Benefits to Top and Bottom Quintiles Households
Figure 44: General Government Debt without Guarantees
Figure 45: State Guarantees
Figure 46: Distance to Frontier on the Ease of Doing Business, 2009–13
Figure 47: SEE6 Distance to the Frontier in the Areas of Doing Business, 2009 vs. 2013
CONTENTs
10
10
11
11
12
12
12
13
13
14
14
14
14
15
15
15
16
16
17
17
20
20
20
21
22
22
22
22
23
23
23
24
24
24
24
30
30
| v
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
List of Tables
Table 1: Growth of Goods Exports
Table 2: Asset Shares of Foreign Banks in SEE6, 2012
Table 3: Economic Growth Rates 2012–14
6
16
27
List of Boxes
Box 1: External Developments in 2013
Box 2: NPL Resolution Efforts in SEE6: The Experience to Date
Box 3: Implications of Croatia’s EU Accession for SEE6
vI |
CONTENTs
7
18
29
SLOW ROAD TO RECOVERY
summary
Recent Economic Developments
The South East Europe (SEE6) region exited
from recession in the first half of 2013,
supported by a nascent recovery in the Euro
area. Industry––especially manufacturing
exports and energy––drove the recovery. The
region experienced a welcome surge in exports
in 2013, particularly car exports from Serbia.
Favorable weather conditions supported a
strong contribution of agricultural output
to economic growth and helped weaken
inflationary pressures. However, domestic
demand remained depressed in most of the
region, reflecting high unemployment, sluggish
growth of household incomes and credit, and
a difficult investment climate. Only in Kosovo
and FYR Macedonia did public investment
contribute to some strengthening of domestic
demand. Beyond these short-term factors, a
slowdown in productivity growth and rising
unit labor costs adversely affected economic
growth, lowering competitiveness and demand
for labor.
Unemployment in the region, at about
24 percent on average1, began to decline in the
first half of 2013 from its peak crisis levels. While
employment grew in Albania, FYR Macedonia
and Montenegro, it remained depressed in
Serbia and Bosnia and Herzegovina. But even
where employment has recovered meaningfully
since 2010, the gains were not broad-based
and mostly concentrated in services Near-term
1
All SEE6 region-wide average aggregates are simple averages unless
specifically noted otherwise.
economic growth will be too weak to support
substantial gains in employment.
As export performance strengthened and
imports declined, current account balances
narrowed. The gradual recovery in the Euro
Area helped the combined (weighted average)
goods exports of SEE6 to grow by close to
13 percent (year-on-year), making a strong
positive contribution to overall economic
growth. Export growth picked up everywhere,
propelled by new foreign direct investment
(FDI)-based export capacity. However, the
sustainability of this high export growth is
uncertain in view of the region’s narrow export
base and competitiveness issues. Weak domestic
demand depressed imports in all countries but
Serbia, where their rise was led by raw materials
and parts used in export-oriented industries.
FDI remained sluggish in SEE6, rising only by
0.7 percent of gross domestic product (GDP),
but its share of financing of the current account
increased. Remittances continued to be resilient
overall, but the Greek crisis began to take its
toll, especially on Albania.
Foreign banks’ deleveraging from SEE6, rising
non-performing loans (NPLs) and weak credit
growth underpinned the need for vigorous
reforms to reduce vulnerabilities in the financial
sector. European banks continued to deleverage
and reduced their exposure to the SEE6 region.
With the aim of improving their resilience
and supervisory capacity, the SEE6 countries
made some progress in implementing banking
reforms over the past year. Banks remained
well-capitalized with actual capital-adequacy
sUMMARy
| 1
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
ratios above the regulators’ requirements
in all six countries. Liquidity was high at
25–35 percent of total assets. However, NPLs
reached worrisome levels at above 20 percent
of total loans in Albania and Serbia and about
18 percent in Montenegro. Their rise stemmed
from the sluggish state of the economy, weak
insolvency regimes and widespread payment
indiscipline in the private sector, exacerbated
by public sector arrears to businesses in some
of the SEE6 countries. In this environment,
despite ample liquidity and cuts in policy rates,
banks remained reluctant to extend new loans.
As a result, credit growth slowed in most SEE6
countries.
Fiscal deficits remained high and public debt
increased in 2013. The SEE6 average fiscal
deficit is expected to remain at elevated levels
at 4.2 percent of GDP in 2013 (compared
to 4.1 percent of GDP in 2012). Structural
rigidities in public expenditures, the weak tax
base, and depressed fiscal revenues contributed
to this outcome. Despite some fiscal
consolidation efforts, the SEE6 governments
did not address key rigidities such as the
high public sector wage bill (averaging over
Economic Growth Rates, 2012–2014
Albania
Bosnia and Herzegovina
Kosovo
2012
2013f
2014f
1.6
1.3
2.1
-1.1
0.8
2.0
2.7
3.0
4.0
FYR Macedonia
-0.4
2.5
3.0
Montenegro
-2.5
1.8
2.5
Serbia
-1.7
2.0
1.0
SEE6*
-0.7
1.8
1.8
Memo item:
Euro Area
-0.6
-0.4
1.1
Source: World Bank staff projections.
Note: Weighted average.
2 |
sUMMARy
9 percent of GDP) and the poorly targeted
social transfers (at 12.5 percent of GDP on
average). As a result, the pace of the fiscal
adjustment remained insufficient to reverse
the adverse debt dynamics in some countries.
Average public debt increased in SEE6 and is
expected to reach 45 percent of GDP by end2013, from 42 percent a year earlier. Public
debt remained at above 60 percent of GDP in
Albania, Montenegro, and Serbia.
Growth Outlook and Risks
With depressed domestic demand, uncertain
export prospects, and significant external risks,
the SEE6 short-term outlook remains frail.
After the bounce-back of the regional economy
in the first half of 2013 and taking into account
the latest high-frequency data, economic growth
for the year is expected be around 1.8 percent.
Net exports will continue to drive growth in
SEE6 in the short term. However, given the
limited export base of the SEE6 economies and
the uncertain new FDI-driven export capacity,
sustained export-led recovery is by no means
assured. Much depends on a lasting recovery
of external demand. In contrast, unfavorable
labor market conditions, a poor investment
climate, and difficult credit conditions that
depress consumption and investment will
keep a lid on the overall economic activity.
Therefore, weighted real GDP of the SEE6
region is now expected to grow 1.8 percent in
2014, about one percentage point less than the
earlier, mid-2013 estimate. The slowdown is
driven by the Serbian economy, which is now
expected to expand by only 1 percent in 2014
(compared to a 2 percent mid-2013 estimate)
because of the planned fiscal consolidation and
a declining private consumption. In contrast
SLOW ROAD TO RECOVERY
to Serbia, economic growth in the other five
SEE countries is expected to firm up in 2014
and exceed the pace of economic expansion of
2013.
Risks to the SEE6 near-term outlook are on
the downside. Main external risks relate to
the pace of the increase in global interest rates
and sovereign borrowing costs arising from a
possible tapering of quantitative easing in the
U.S.; the Euro Area recovery; and deleveraging
and the potential exit of parent banks from the
SEE6 countries. Internal risks relate to “reform
fatigue” that may delay policy implementation,
and daunting fiscal and debt challenges in
several countries. Also, slow resolution of
NPLs, arrears accumulation in some countries,
and depressed credit growth could further
dampen prospects for growth.
now enjoy dynamic, open, and export-oriented
economies with large FDI and associated
transfer of technology and know-how. With
the recent progress of European Union (EU)
candidate countries Montenegro and Serbia,
and the agreement between Serbia and Kosovo
presaging greater stability and security, the
perception of the regional investor risk may
decline gradually over time. Croatia’s accession
to the EU, the opening of the accession
process of Serbia, and the progress made by
Montenegro, as well as recent political changes
in the region, may provide a renewed impetus
for reforms. The time to use that opportunity
is now.
Beyond this difficult short-term horizon,
how can SEE6 raise their longer-term growth
prospects? While maintaining macroeconomic
stability remains a top policy priority, structural
reforms will have to be pursued with vigor.
The nascent export-led growth of 2013 is a
positive development, but sustaining it will be
a challenge. In addition to the need to improve
their fiscal positions, reduce public debts,
and strengthen banking systems, SEE6 face
significant structural challenges in improving
productivity and competitiveness, including in
the areas of the investment climate, the labor
market, and the public sector.
Overcoming these challenges is possible. A
similar structural transformation challenge has
been successfully met by the Baltics, Poland,
the Czech Republic, and Slovakia, among other
countries. They began their transition two
decades ago under unfavorable conditions and
sUMMARy
| 3
SLOW ROAD TO RECOVERY
Chapter 1:
Recent Macroeconomic Developments
Modest Growth after the Double-Dip Recession
On the heels of a tepid recovery of the Euro
Area, the SEE6 region exited from recession
in the first half of 2013. The combined real
GDP of the SEE6 countries rebounded from
a 0.7 percent decline in 2012 to a 1.8 percent
growth (y-o-y) in the first half of 2013 (Figure
1). Economic growth was backed by a slowly
recovering external demand for SEE6 exports
(Box 1). While economic growth in Serbia and
Albania (at 1.4 percent) was led by industry,
agriculture, and exports, the Macedonian
growth (at 3.4 percent, the highest in the region)
reflected a strong recovery in construction and
services in the first half of 2013.
Industry––especially manufacturing exports
and energy––drove the recovery in 2013. In
contrast to 2012, industrial output grew across
the region in the first half of 2013 (Figure 2).
In Serbia, the start of production and exports
by FIAT exceeded expectations, with over
100,000 cars exported so far this year. In the
other SEE6 countries, industrial output growth
was weaker, but contributed positively to the
overall economic recovery.
Good weather conditions supported a strong
contribution of agriculture to economic
growth in SEE6. Because only a small share of
Figure 1: Economic Growth Rates in sEE6
percent, annual growth
percent, semi-annual y-o-y growth
4
4
3
3
2
2
1
1
0
0
-1
-1
-2
-2
-3
-3
ALB
BIH
KOS
MKD MNE
SRB
SEE6 EU15 EU11
J 2012
ALB
J H1 2012
BIH
KOS
MKD MNE
SRB
SEE6 EU15 EU11
J H1 2013
Source: National statistics offices, and World Bank staff estimates.
Note: no quarterly data available for Kosovo and Bosnia and Herzegovina; figures are projection for the year.
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 5
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure 2: Growth of Industrial Output in
2013
Table 1: Growth of Goods Exports
in Euro Terms
percent, q-o-q
H1
2012
20
18
Albania
16
720
840
1,250
1,382
10.6
135
149
10.4
1,507
1,523
1.1
194
209
7.7
Serbia
4,145
4,993
20.5
SEE6
7,951
9,096
12.6
Bosnia and Herzegovina
14
12
Kosovo
10
FYR Macedonia
8
Montenegro
6
H1 change
2013
in %
16.7
4
2
Source: National statistics offices and World Bank staff estimates.
0
ALB
J Q1
BIH
MKD
MNE
SRB
J Q2
Source: National statistical offices.
arable land is irrigated and/or protected from
floods, agricultural output critically depends on
weather conditions. In Serbia, after 20 percent
drop in the previous year, agriculture grew
21 percent in the first half of 2013 (y-o-y) with
better weather, contributing 1.6 percentage
points to the overall GDP growth. Elsewhere,
growth was less strong but positive. For
example, in FYR Macedonia, agriculture output
grew 0.7 percent and anecdotal evidence from
Kosovo also suggests a good agricultural year
because of weather and donor-funded projects
in the sector. Greater supply helped reverse the
food price inflation from a year ago.
On the demand side, exports drove the
economic recovery in SEE6. The gradual
recovery in the Euro Area helped the combined
goods exports of SEE6 to grow by close to
13 percent (y-o-y), making a strong positive
contribution to overall economic growth
(Table 1). Serbia led this export surge with
investments by large foreign companies
(including FIAT, Michelin, and Stada): its
exports grew by 20.5 percent in the first half
of 2013 compared to the same period of 2012,
6 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
with a 5.1 percentage point contribution to real
GDP growth. Preliminary data suggest that this
export surge continued in the third quarter of
2013 with an estimated growth of 38.5 percent
(y-o-y).
In addition to recovering external demand
from the EU, SEE6 countries’ export
growth was influenced by temporary
factors. For example, Montenegro and Bosnia
and Herzegovina benefited from a surge in
electricity exports from its hydropower plants
using record water accumulations. Also, an
increase in food exports from Bosnia and
Herzegovina to Croatia was related to that
country’s entrance to the EU.
Domestic demand remained mostly
depressed in SEE6 in 2013. Although statistics
on the expenditure side of the SEE6’s GDP are
only available for FYR Macedonia and Serbia,
several indicators—credit, wages, inflation,
unemployment, imports, and household debt—
all suggest depressed domestic demand. In
Serbia, domestic consumption and investment
had an especially negative contribution to GDP
SLOW ROAD TO RECOVERY
Box 1: External Developments in 2013
Following several years of weakness, growth in high-income countries is firming, including in
the Euro Area (Figure 3). High-income countries’ growth accelerated in Q2 2013, led by the United
States; the Euro Area recovered after 6 quarters of contraction, and robust growth came to Japan.
This acceleration softened in the Euro Area and Japan in the third quarter. In the US, growth led
by the private sector increased to 2.8 percent from the previous quarter, despite rising interest rates
and the effects of fiscal sequestration. The Euro Area recession has ended with annualized growth in
Q2 at 1.2 percent across a range of economies and PMI surveys suggested stronger consumer and
import demand. However, Germany and France lost the momentum in Q3, recording 1.2 percent
and negative 0.5 percent growth rates, respectively. Economic activity has strengthened in China in
recent months (Q3 up to 9.3% from 7.3% in Q2) and is recovering in other large middle-income
economies including South Africa, Turkey and Brazil, although Q2 outturns disappointed in India
and Mexico.
Figure 3: Global Industrial Production and
Trade: Recovering
Figure 4: Borrowing Costs in select
European Countries: Moderating
percent, 3m/3m saar
credit default swap rates, basis points
30
1,800
25
1,600
20
1,400
15
1,200
10
1,000
5
800
0
600
-5
400
-10
▬ Developing industrial production
▬ High income industrial production
▬ High income imports
▬ Developing country exports
Source: World Bank and the Datastream.
▬ Spain
▬ Ireland
▬ Italy
1-Oct-13
1-May-13
1-Dec-12
1-Jul-12
1-Feb-12
1-Sep-11
1-Apr-11
1-Nov-10
1-Jun-10
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
Dec-11
Sep-11
Jun-11
0
Mar-11
-20
1-Jan-10
200
-15
▬ Portugal
Source: World Bank and the Datastream.
Capital flows to developing countries began to rebound and pressures on asset prices and
currencies eased. However, there remain risks and uncertainty related to the eventual timing of
tapering and its impacts on developing countries. Global capital flows remain volatile: gross capital
flows to developing countries dropped in October, fully reversing the earlier rebound in September.
Markets seem to be discriminating on the basis of domestic policy frameworks and risks. The transition
to higher interest rates poses risks of a disorderly adjustment if rates rise too rapidly or a sudden stop
in capital flows exposes country-level vulnerabilities. Although some adjustment has taken place (the
average long- term cost of bond financing for developing countries tightened by 50 basis points since
May), U.S. yields likely have a further 200–220 basis points to rise, with developing country yields
likely to rise by an average 300–350 basis points in the medium-term. Economies with substantial
vulnerabilities could see their cost of borrowing rise much more. The temporary decision by the Fed
to maintain quantitative easing at current pace has delayed the impact on developing countries facing
external financing vulnerabilities.
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 7
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
growth of about 2 percentage points each in
the first half of 2013. Only in FYR Macedonia
and Kosovo did domestic demand strengthen,
mainly because of increased investments. In
FYR Macedonia, for example, investment
increased by 8.2 percent in the first half of 2013
(y-o-y), driven by investment in large public
sector projects.
productivity growth dipped to a level below
the one in 2008 in several countries, as sluggish
output growth failed to keep pace with the
upturn in employment (Figure 6).
Figure 5: sEE Labor Productivity in sEE vs.
EU11 and EU15
Figure 6: Labor Productivity in the sEE
index (2008=100)
index (2008=100)
110
Sluggish productivity growth and rising
unit labor costs in several countries affected
negatively economic growth. Only in Albania
120
105
110
100
95
100
90
90
85
80
80
75
70
70
60
65
60
50
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
▬ SEE5 (ex Kosovo)
▬ EU-11
▬ EU-15
2004
2005
2006
2007
2008
2009
▬ Albania
▬ Bosnia and Herzegovina
▬ Montenegro
▬ Serbia
2010
2011
2012
▬ FYR Macedonia
Source: National statistics offices, World Bank staff estimates.
Source: National statistics offices, World Bank staff estimates.
Against these short-term developments,
productivity growth—a key driver of longrun growth—slowed substantially in the
past two years. In the years prior to the global
financial crisis, labor productivity grew faster
in the SEE6 countries than EU11 and EU15,
a pattern that was sustained in the immediate
aftermath of the crisis (Figure 5).2 Since
the beginning of 2012, however, SEE labor
and Serbia did real unit labor costs decline
after 2008 (Figure 7), aided in part by the
stronger productivity growth in these two
economies compared to the rest of the SEE.
But real wages in Bosnia and Herzegovina and
FYR Macedonia, for example, continued to
grow, while productivity growth fell (Figure
8). This led to further increases in unit labor
costs in these countries despite the persistent
slack in their labor markets. The labor demand
and trade competitiveness channels adversely
affected economic growth.
2
EU11 comprises Bulgaria, Croatia, the Czech Republic, Estonia,
Hungary, Latvia, Lithuania, Poland, Romania, the Slovak
Republic, and Slovenia. The group of EU15 countries comprises:
Austria, Belgium, Denmark, Finland, France, Germany, Greece,
Ireland, Italy, Luxembourg, the Netherlands, Portugal, Spain,
Sweden, and the United Kingdom.
8 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
SLOW ROAD TO RECOVERY
Figure 7: Real Unit Labor Costs
Figure 8: Contributions to Change in Unit
Labor Costs since 2008
index (2008=100)
percentage points
120
15
110
10
100
5
90
0
80
-5
70
-10
60
-15
50
-20
2004
2005
2006
2007
2008
2009
2010
2011
▬ Albania
▬ Bosnia & Herzegovina ▬ FYR Macedonia
▬ Montenegro
▬ Serbia
2012
ALB
BIH
MKD
MNE
SRB
J Real wage growth J Productivity growth Q Total change in unit labor costs
Source: National statistics offices, World Bank staff estimates.
Source: National statistics offices, World Bank staff estimates.
Note: 2009 reflects a structural break in the data for FYR Macedonia due
to methodological revisions in the definition of gross wages, which excluded
food and transport allowances in the period 2004–2009.
Note: 2009 reflects a structural break in the data for FYR Macedonia due
to methodological revisions in the definition of gross wages, which excluded
food and transport allowances in the period 2004-2009
Continued Improvements in Trade and External Debt
Current account balances narrowed in all
SEE6 countries on the back of recovering
European Union (EU) demand for exports.
Both increases in exports and declines in
imports contributed to a major rebalancing
in trade and improvements in current account
balances (Figure 9, Figure 10 and Figure 11).
While intraregional SEE6 trade grew in 2012,
exports began to shift towards the EU in
2013. That was true especially for Bosnia and
Herzegovina, FYR Macedonia, and Serbia;
while Montenegro’s and Kosovo’s share of
exports to the SEE region increased.
Current account deficits (CAD) were
primarily financed by portfolio investments
and FDI. Portfolio investments were the
largest source of financing in the first half of
2013, accounting for almost half of CAD’s
financing. The FDI share of CAD financing
grew strongly from 18.4 percent in 2012 to
about 45.3 percent in the first half 2013. FDI
financed one third of the CAD in Serbia and
Montenegro, about a half of FYR Macedonia’s,
two-thirds of Bosnia and Herzegovina’s, and
over 90 percent of Kosovo’s and Albania’s.
Average FDI flows to the SEE6 countries
increased in 2013, albeit from low levels.
FDI in Serbia and FYR Macedonia—mostly
in manufacturing—doubled, although from a
very low base. In Kosovo and Albania, the FDI
were directed mostly towards infrastructure—
the Prishtina Airport and hydro-power plants,
respectively.
While remittances to SEE6 decreased in
2013, they remained broadly resilient to the
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 9
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure 9: sEE6 Combined Current Account
and Trade Balances
Figure 10: sEE6 Countries’ half year Current
Account Balance
percent of GDP
percent of GDP
0
0
-5
-5
-7.0
-10
-9.9
-10
-15
-11.9
-20
-14.9
-15
-25
-30
-20
-22.0
-22.8
-35
-25
-40
2011
J CAD
2012
H1 2013
MNE
J Trade balance
J H1 2011
Source: Central banks, IMF WEO, and World Bank staff calculations.
KOS
SEE6
J H1 2012
ALB
SRB
MKD
BIH
J H1 2013
Source: SEE6 Central Banks.
Note: Montenegro’s current account deficit narrows usually in Q3 due to
the main tourist season, producing a lower annual external deficit.
Figure 11: sEE6 Export Growth
Figure 12: Worker Remittances 2010–h1
2013
percent
percent of GDP
30
16
25
14
20
12
15
10
10
8
5
6
0
4
-5
2
-10
0
ALB
J 2011
BIH
J 2012
KOS
MKD
MNE
SRB
KOS
SEE6
J H1 2013
Source: Central banks, IMF WEO, and World Bank staff calculations.
J 2011
BIH
SEE6
J 2012
ALB
MNE
SRB
MKD
J H1 2013
Source: SEE6 central banks.
Note: Albania, Kosovo, and Bosnia and Herzegovina define remittances
as including compensation of employees; Serbia and Montenegro use
narrower definitions. Data for FYR Macedonia include only workers
remittances coming through official bank channels and reported as such,
but not all private transfers.
Eurozone crisis. Remittances to the region
declined by 0.5 percentage point as a share of
GDP in the first half 2013 (Figure 12) mainly
because of the economic conditions migrants
faced in Italy and Greece. The largest drop was
in Albania, where the size of the contraction
10 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
was more than 2 percentage points of GDP, as a
result of many migrants returning from Greece.
External debt remained high, albeit receding,
mainly due to private sector deleveraging
(see fiscal section). Total external debt in
SLOW ROAD TO RECOVERY
Figure 13: Average sEE6 External Debt
Figure 14: Total Public and Private External
Debt 2010–h1 2013
percent of GDP
percent of GDP
80
120
70
60
69.5
65.8
67.1
80
50
60
40
30
20
100
63.3
30.5
24.4
30.6
26.4
40
20
10
0
0
2010
J External debt
2011
2012
MNE
H1 2013
J o/w Gov. debt
Source: SEE6 central banks and ministries of finance (MoF).
J 2010
SRB
J 2011
SEE6
MKD
J 2012
BIH
ALB
KOS
J H1 2013
Source: SEE6 central banks and ministries of finance; IMF; World Bank.
Note: Montenegro’s and Kosovo’s external debt are estimates. Kosovo
external debt also excludes potential debt to the London Club and the Paris
Club.
SEE6 declined by 2.4 percentage points to
67.1 percent of GDP in the first half 2013,
mainly because of the large 5.2 percentage
point decline of Serbia’s external debt (Figure
13, Figure 14). In addition to Serbia, external
debt declined in FYR Macedonia by 0.9 percent
of GDP, and in Kosovo3 and Albania by about
0.3 percent of GDP, respectively (Figure 14).
3
External private debt for Kosovo is an estimate and might be
slightly underestimated.
Nascent Employment Gains
While employment rates in SEE6 improved
in 2013, their increase made only a small
dent in the high unemployment rates.
Compared to the EU11 and EU15, where
employment levels remained noticeably below
their pre-crisis peaks, the SEE6 employment
was nearly back to its 2008 pre-crisis peak level
in the first half of 2013 (Figure 19). However,
gains in employment are slow to translate into
substantial decline in unemployment rates.
Albania, FYR Macedonia and Montenegro
experienced the strongest job growth since
2010, while employment in Serbia and Bosnia
and Herzegovina remains depressed (Figure
16). Even where employment has recovered
meaningfully since 2010, the gains have not
been broad-based, but concentrated mostly on
service sectors. In contrast, industry continued
to lose jobs (Figure 17).
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 11
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure 15: Employment in Regional Context
Figure 16: sEE: Paths of Employment
Recovery
index (2008=100)
index (2008=100)
105
110
105
100
100
95
95
90
90
85
85
2007
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
▬ SEE5 (ex Kosovo)
▬ EU-11
▬ EU-15
2008
2009
2010
▬ Albania
▬ Bosnia and Herzegovina
▬ Montenegro
▬ Serbia
2011
2012
▬ FYR Macedonia
Source: Eurostat, National statistics offices.
Source: National statistics offices.
Unemployment in the SEE6 has remained
stubbornly high, despite slight recent declines
in some countries. The average unemployment
rate for the SEE6 was 23.6 percent as of mid2013, well above the EU-11 average, and
showing little improvement from peak crisis
levels (Figure 18). Only in FYR Macedonia
did unemployment decline substantially, albeit
from very high levels. Albania’s unemployment
rate (12.8 percent) remained the lowest among
the SEE6, while Kosovo’s, at 30.9 percent,
remained the highest.4 By contrast, in EU11 and
EU15, unemployment rates have continued to
rise (Figure 19).
Figure 17: sectoral Drivers of Employment
Recoveries
percentage points
10
8
6
4
2
0
-2
-4
Albania
J Agriculture
J Industry
FYR Macedonia
J Services
Source: Eurostat, National statistics offices.
4
Kosovo recently released the 2012 unemployment figure from its
Labor Force Survey after a 3-year gap in the data.
12 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
Montenegro
Q Total
SLOW ROAD TO RECOVERY
Figure 18: Unemployment Rates 2013
Figure 19: Unemployment Rates in Regional
Context
percent of labor force
percent of labor force
40
30
33.5
35
25
30
27.6
25.5
27.5
25
20.5
20
15
10
13.8
30.9
28.8
20
23.5
15
19.2
10
12.8
5
5
0
0
ALB
Q Crisis time
MNE
SRB
▬ SEE6 average
BIH
MKD
KOS
▬ EU11 average
Source: National Labor Force Surveys.
2007
▬ SEE5
2008
▬ EU-11
2009
2010
2011
2012
H1 2013
▬ EU-15
Source: Eurostat, National LFS data, World Bank staff estimates.
Note: Q2 2013 data for all except Kosovo (2012). Kosovo changed its LFS
methodology in 2012, making previous year’s figures incomparable.
Disinflation
Inflation in SEE6 decelerated in the first
three quarters of 2013 on the back of
stabilizing energy and food prices. The
drop in CPI inflation—relative to peak rates
in December 2012/January 2013—was
substantial: it ranged from 7.9 percentage
points in Serbia to 3.5 percentage points
in Kosovo, and 3 percentage points in FYR
Macedonia (Figure 20). Most of the slowdown
reflects the dissipation of one-off factors that
pushed up inflation in 2012––administered
prices, some tax hikes, and the impact of bad
weather on agricultural output and the food
supply. Food inflation dropped by 9 percentage
points (Figure 21), while energy inflation fell
5 percentage points. Serbia was an exception
where inflation temporarily spiked in August
owing to a one-time increase in retail electricity
prices (Figure 22). With these developments,
as of September, CPI inflation in SEE6
(2.5 percent) converged substantially, only one
percentage higher than that of its regional peers
(Figure 23).
With subsiding inflation and still-high
spare capacity, some SEE6 central banks
eased monetary policy. Specifically, still-large
output gaps in SEE6 (Figure 24) supported
some loosening in the countries with flexible
exchange rates (Albania and Serbia) and
managed pegs (FYR Macedonia). Policy rates
were cut by an average of 50 basis points in
the first half of 2013 (Figure 25). To support
liquidity, “euroized” countries (Bosnia and
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 13
percent (y-o-y)
6
4
2
▬ Albania
▬ Bosnia and Herzegovina
▬ FYR Macedonia ▬ Montenegro
▬ Serbia
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
▬ Kosovo
▬ Albania
▬ SEE6
▬ FYR Macedonia ▬ Montenegro
▬ Bosnia and Herzegovina
▬ Kosovo
▬ Serbia
▬ SEE6
Source: National statistical offices and World Bank staff calculations.
Source: National statistical offices and World Bank staff calculations.
Figure 22: Energy Price Inflation in SEE6
Figure 23: Regional CPI Inflation
Comparison
percent (y-o-y)
percent (y-o-y)
8
7
6
5
4
3
2
▬ Albania
▬ Bosnia and Herzegovina
▬ FYR Macedonia ▬ Montenegro
▬ Serbia
▬ Kosovo
J SEE6
J EU15
Aug-13
Jul-13
Jun-13
May-13
Apr-13
Mar-13
Feb-13
Jan-13
0
Dec-12
Sep-13
Jun-13
Mar-13
Dec-12
Sep-12
Jun-12
Mar-12
1
Dec-11
18
16
14
12
10
8
6
4
2
0
-2
-4
-6
Sep-13
-2
Dec-11
0
Jun-13
8
Dec-12
10
Jun-12
12
20
18
16
14
12
10
8
6
4
2
0
-2
-4
Mar-12
14
Mar-13
percent (y-o-y)
Sep-12
Figure 21: Food Price Inflation
Dec-11
Figure 20: CPI inflation
Sep-13
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
J EU11
▬ SEE6
Source: National statistical offices and World Bank staff calculations.
Source: National statistical offices and World Bank staff calculations.
Herzegovina, Kosovo, and Montenegro)5
maintained relatively low rates of required
reserves: 9.5 percent in Montenegro, 10 percent
in Bosnia, and 10 percent in Kosovo.
Despite these efforts, SEE6 experienced
limited recovery of monetary aggregates,
mirroring sluggish real activity. The real
broad money supply (M2) in Albania, FYR
Macedonia, Montenegro, and Serbia has not
increased appreciably since mid-2010. Only
in Bosnia and Herzegovina and Kosovo has
there been a measurable rise in real M2 since
the crisis, but the scope for further expansion
5
Kosovo and Montenegro have unilaterally adopted the euro as
their sole legal tender, while Bosnia and Herzegovina runs a eurobased currency board.
14 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
SLOW ROAD TO RECOVERY
Figure 24: Output Gaps in sEE6*
Figure 25: Official Policy Rates
percent of potential GDP
percent
10
20
8
18
16
6
14
4
12
2
10
0
8
6
-2
4
-4
2
0
2008
-6
2007
2008
▬ Montenegro
2009
▬ Serbia
2010
2011
2012
2013
▬ FYR Macedonia ▬ Albania
▬ Albania
2009
2010
2011
2012
2013
▬ FYR Macedonia ▬ Serbia
▬ Bosnia and Herzegovina
▬ Euro area (ECB refi rate)
Source: IMF WEO and Staff country reports.
Source: ECB, National statistical offices.
Note: *Estimates for Kosovo are not available.
Figure 26: Real Broad Money supply
index (2009:Q1=100)
Depressed Credit Growth
125
120
115
110
105
100
▬ SEE6
▬ EU15
Sep-13
Mar-13
Sep-12
Mar-12
Sep-11
Mar-11
Sep-10
Mar-10
Sep-09
90
Mar-09
95
▬ EU11
Source: IMF IFS, National central banks.
Note: 2013:H1 data is expressed as an annualized rate.
is constrained by the limited external inflows
within these countries’ exchange arrangements.
On balance, however, the post-crisis monetary
recovery in SEE6 has been broadly on par with
regional peers, albeit considerably more volatile
(Figure 26).
Funding conditions for SEE6 countries
improved somewhat in 2013. After supportive
measures taken by major world central banks,
market sentiment improved and risk aversion
declined.6 Credit Default Swaps (CDS)
spreads reached their lowest levels in most
SEE6 countries since early 2011 and equity
markets rose (Figure 27, Figure 28). Gross
capital inflows to SEE6 region rose in 2013,
amounting to 0.5 percent of GDP. FDI saw a
boost of 0.7 percent of GDP in the first half
of 2013 and portfolio investments remained
robust as capital markets remained supportive
of SEE6 sovereign bond issuances.
6
A Bank for International Settlements (BIS) study “The euro area
crisis and cross-border bank lending to emerging market” (http://
www.bis.org/publ/qtrpdf/r_qt1212f.htm) confirms that between
mid-2011 and mid-2012 it was primarily parent bank stress that
drove deleveraging.
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 15
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure 27: Funding and Funding Costs for
sEE6 Countries
Figure 28: CDs spreads of sEE countries
in million of US$
basis points
basis points
3,000
1,000
1,400
1,200
2,000
800
1,000
1,000
600
800
400
600
0
-1,000
400
200
-2,000
J Change in BIS reporting banks external position vis-à-vis SEE6, lhs*
▬ Albania
▬ FYR Macedonia ▬ Montenegro
Oct-13
Q3-13
Q1-13
Q2-13
Q3-12
Q4-12
Q2-12
Q1-12
Q4-11
Q3-11
0
Q2-11
0
Q1-11
Q2-13
Q1-13
Q3-12
Q4-12
Q2-12
Q1-12
Q4-11
Q3-11
Q1-11
Q2-11
-3,000
200
▬ Serbia
▬ Parent banks CDS spread average, rhs**
▬ SEE6 sovereign CDS spread, bps, rhs***
Source: Bloomberg, Bank for International Settlements (BIS) and World
Bank staff calculations.
Note: *Countries included: Albania, Bosnia and Herzegovina, FYR
Macedonia, Montenegro and Serbia.
** Banks included: Raiffeisen Bank, Erste Bank, Banca Intesa, UniCredit
Bank, Societe Generale, National Bank of Greece (NBG) and Alpha Bank.
*** Countries included: Albania, FYR Macedonia, Montenegro and Serbia.
Source: Bloomberg.
Table 2: Asset shares of Foreign Banks in
sEE6, 2012
percent of country’s total assets
Austria Greece Slovenia
However, European foreign banks continued
to deleverage from the SEE6 region.
European foreign banks, which dominate the
SEE6 financial landscape (Table 2) remained
under market and regulatory pressures that
prevented them from expanding their balance
sheets and encouraged their subsidiaries to
keep diversifying their sources of funding. In
fact, compared to the end of the third quarter
of 2012, the international exposure by foreign
banks dropped in SEE6 financial sector as
parent banks continued to reduce their presence
in the region. Austria’s Hypo Alpe Adria Bank,
for example, put its subsidiaries in the region
(Bosnia and Herzegovina, Montenegro and
Serbia) for sale. Slovenia’s Nova Ljubljanska
Banka (NLB) recently reached a restructuring
plan with the European Commission to
downsize portfolio, raising the risk of divestment
from the region. While negotiations between
16 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
Albania
28.8
Bosnia and Herzegovina
37.2
8.5
Kosovo
24.1
16.1
Macedonia
4.7
Montenegro
21.2
Serbia
16.4
18.8
23.0
16.9
17.0
14.0
3.5
Source: Bankscope, Central Banks.
the European Commission’s Directorate
General for Competition and the National
Bank of Greece (NBG) for restructuring of the
bank are not yet concluded, one of the reported
options would be for the NBG to withdraw
from Southeastern.
Against this backdrop, SEE6 countries made
some progress in implementing banking
reforms over the past year with the aim to
improve their resilience and supervisory
capacity, but challenges remained. Macro-
SLOW ROAD TO RECOVERY
Figure 29: Non-performing Loans
Figure 30: Asset Quality of Loan Portfolio,
December 2012
percent of total loans
percent of total loans
30
60
25
50
20
40
15
30
10
20
5
10
0
0
ALB
J Dec-12
BIH
J Jun-13
KOS
MKD
MNE
SRB
Q Peak since 2008
ALB
BIH
J Impaired (Category 2)
KOS
MKD
J Substandard
S Pre crisis level (end 2007)
J Loss
Source: National authorities and World Bank staff calculations.
Source: Central Banks of the SEE6 countries.
MNE
SRB
J Doubtful
Note: Data for pre-crisis NPL level (2006–2008) for Serbia refers to end of
2008 level only.
prudential frameworks were strengthened
to varying degrees, home-host relations
improved, and several countries made efforts
to reduce their elevated NPLs levels (including
with foreign technical assistance (see Box 2).
However, there remain four challenges:
(i) taming the still rising NPLs problem,
(ii) bringing the high loan-to-deposit ratios
down, in some countries
(iii) increasing bank profitability, and
(iv) resuming credit growth.
NPLs continued to rise in the first half of
2013, reaching peak levels in most of the
region. NPLs started rising in mid-2012 and
continued to increase in each of the SEE6
countries in the first half of 2013 (Figure 29).
Their rise in SEE6 reflected a mix of weak
economic fundamentals, worsening loan quality
(Figure 30) and weak insolvency regimes. In
addition, weak fiscal discipline resulted in
public sector arrears, which constrained private
sector liquidity and decreased the ability of
companies to service their loans. NPLs reached
worryingly high levels of above 20 percent of
total loans in Albania and Serbia, and about
18 percent in Montenegro. In addition,
impaired loans (Category 2 loans), which
accounted for the bulk of the newly-created
NPLs, remained still high in some countries
and need close monitoring (Box 2).
Loan-to-deposit ratios continued to be
high in three of the six countries in the
region (Figure 31). Serbia has reduced its
loan-to-deposit ratio and its banks increased
their liquidity considerably, but it still has the
highest ratio in the region, at 140 percent in
mid-2013. Montenegro has the second highest
level at 122 percent in mid-2013 (down from
167 percent in mid-2009), similar to Bosnia
and Herzegovina.
Bank profitability remained under pressure.
Banks’ profitability, measured through the
average return on assets (ROA) fell in the
first half of 2013 in Albania, Bosnia and
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 17
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Box 2: NPL Resolution Efforts in sEE6: The Experience to Date
All six South East Europe countries have now received or begun discussions on external assistance to
support the resolution of NPLs. Carrying out NPL resolution processes requires significant efforts in
a number of key dimensions, inter alia, including: (i) developing a clear, objective grasp of financial
and regulatory incentives at play, both locally and internationally, legal and regulatory impediments,
and shortfalls in organizational and technical abilities in the banks; (ii) introduction of voluntary
debt restructuring frameworks, and a judiciary prepared to execute resolution of those uncooperative
borrowers; (iii) a willingness to set achievable interim and longer-term NPL reduction goals and
supervisory resolve to have them enforced; and (iv) introduction of voluntary debt restructuring
frameworks, and a judiciary prepared to execute resolution of those uncooperative borrowers; and (v)
engagement of a number of key local stakeholders to adopt the needed measures. All these dimensions
have to be carefully sequenced in accord with an agreed, time-bound strategy. With the above set preconditions in place, the NPL reduction process is likely to require at least 18 months to demonstrate
durable results.
Albania:
The Bank of Albania (BoA) with the Government has initiated a wide range of reforms in recent
years to support the resolution of NPLs, covering legislative, procedural and taxation issues. In a
bid to draw from international best practice to support the mitigation of NPLs, the BoA entered
into an MOU with the World Bank Vienna Financial Sector Advisory Center (FinSAC) in October
2012. Recent 2013 amendments to the Civil Procedure Code adopted with FinSAC support aim to
shorten and simplify collateral enforcement procedures and significantly reduce the court’s right to
intervene in enforcement or foreclosure on real property. However, banks continue to face important
tax ambiguities in their efforts to write off unrecoverable NPLs. To bring clarity to these matters, the
Ministry of Finance on behalf of the Tax Authority launched in November 2013 a Working Group
with the BoA, supported by legal and accounting experts from the respective institutions. As banks
are continuing to keep a significant portion of unrecoverable problem loans in their balance sheets,
if these tax ambiguities were resolved, banks’ could lower NPL levels by 5–6 percentage points.
In October 2013, Bank of Albania has launched an NPL Resolution Platform involving enhanced
supervisory intrusiveness with regard to NPL recovery and resolution strategies by banks, supported
by FinSAC. The outcome of this initiative will be to strengthen the ability of the Central Bank to
direct banks to step up their efforts to reduce the NPL stock in a compressed time-frame.
Bosnia and Herzegovina:
In response to the authorities request for technical assistance for an NPL resolution framework, in
April 2013 the IMF conducted a diagnostic study to define various short- and long-term measures to
help clean up the NPLs. The report is slated to identify steps to strengthen the framework for NPL
resolution by removing tax and institutional obstacles. The IMF is considering providing follow-up
technical assistance in two key areas: i) launching an “Istanbul Approach” to bad debt resolution,
whereby debt of distressed companies with multiple creditors would be restructured collectively by
a committee of creditors, and ii) developing a law on factoring and/or proposing new legislation
on asset management companies to facilitate banks’ sale of problem assets. Additionally, the IMF
diagnostic team findings point to a critical need to improve tax laws related to loan restructuring
and loan sales, out–of- court corporate debt restructuring, the corporate insolvency law, and to the
introduction of a comprehensive consumer bankruptcy regime. Taking advantage of the forthcoming
asset quality review of selected banks requested by the IMF, FinSAC has proposed to add an NPL
recovery mapping module that would create more transparency and stronger accountability for the
banks’ efforts to de-risk their balance sheet.
18 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
SLOW ROAD TO RECOVERY
Kosovo:
Institutionally, there is no functional system for the collective resolution of NPLs and enterprise
distress. The modern liquidation and re-organization statute, while broadly consistent with good
practice, lies entirely dormant due to the lack of a framework for the training, licensing, supervision,
or accountability of insolvency professionals. There is only one specialized commercial court,
which is understaffed and under-resourced. Only recently did Kosovo introduce notary services
and mediation services as alternative dispute resolution mechanisms, working under the Kosovo
Chamber of Commerce and American Chamber of Commerce.
Montenegro:
The Central Bank of Montenegro (CBCG) has taken the lead in introducing the “Podgorica
Approach,” a new integrated program to enhance NPL reduction. With technical assistance provided
by the World Bank’s Vienna-based Financial Sector Advisory Center (FinSAC), the CBCG is in
the process of implementing a more formal framework to enhance NPL reduction activities. Based
loosely on the London Rules, the approach is designed to create an incentive-based, voluntary
framework to support real restructuring (operational as well as financial) and to provide solutions for
debt restructuring on a systematic scale. The approach is grounded in the proposed Lex specialis Law
on Voluntary Financial Restructuring of Debts, which is expected to be enacted in late 2013. As part
of the analytical underpinnings to establish the costs and benefits of financial restructuring, FinSAC
has recently completed an extensive assessment of the recoverability of the four largest NPL bank
portfolios, involving bottom-up analysis of 120 large non performing borrowers. The outcome was
a demonstration of the critical importance of a successful financial restructuring initiative, as only a
small portion of the NPL portfolio is expected to cure without strong remedial action.
FYR Macedonia:
Following a World Bank Technical Assistance project on contingency planning in mid-2012, the
National Bank of Republic of Macedonia has developed an action plan aimed at enhancing crisis
preparedness. The project focused on the tools, resources, powers and interagency coordination
mechanisms available to the authorities in the event of a systemic crisis. The main goal of the proposed
crisis contingency plan is to prevent and reduce the impact of a crisis by taking actions to: (i) better
understand the risks (including NPL-related risks) and inter-connections in the financial system,
(ii) use supervision to strengthen resilience of banks, (iii) establish relevant legislation and policies
(including for NPLs), and (iv) have a strategy to manage a crisis using carefully selected scenarios..
FinSAC is contributing to building capacity at the NBRM, focusing on system-wide NPL reduction.
Serbia:
Although fully provisioned (based on local prudential and accounting standards), the high level
of NPLs is a source of serious concern in Serbia. Through amendments to the decision on the
Classification of Bank Balance Sheet Assets and Off-balance Sheet Items that were passed in December
2012, a more lenient regulatory treatment of overdue loans fully guaranteed with mortgages was
introduced. Regulatory impediments have been eased for the sale of distressed assets to their corporate
clients. Out-of-court restructuring of NPLs has been introduced, but banks’ response has been quite
tepid, with only few recorded voluntary restructurings to date. There are issues with capacity of the
designated mediator (Chamber of Commerce) and lack of awareness about the system by companies.
The National Bank of Serbia drafted a set of amendments on the Decision on the Classification of
Bank Balance Sheet Assets and Off-balance Sheet Items in order to remove some of the obstacles for
dealing with NPLs. The amendments were put for public debate on November 27, 2013.
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 19
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure 31: Loan-to-Deposit Ratios
180
160
140
120
100
80
60
40
20
0
ALB
J Dec-12
BIH
KOS
J Jun-13
MKD
MNE
SRB
Q Peak level since 2006
Source: National authorities and World Bank staff calculations.
Note: Due to the accounting harmonization with the IFRS, data for
Montenegro is not comparable to the last Report.
Herzegovina and FYR Macedonia, and only
increased slightly in Serbia and Kosovo. In
Montenegro, as positive credit growth resumed,
bank profitability, too, turned positive for the
first time since mid-2008. However, increased
provisioning for the rising NPLs, additional
regulatory compliance, and lower revenues
continued to put pressure on profitability and
the banks’ willingness to lend.
Figure 32: Capital Adequacy Ratio
Despite ample liquidity and notable cuts
in policy rates throughout 2013, real credit
growth remained elusive in the SEE6 region,
failing to support economic recovery. Banks
in SEE6 countries were well-capitalized (Figure
32). Liquidity in the banking system was also
high at 25–35 percent of total assets (Figure
33). High liquidity and capital adequacy served
as buffers against volatile financial flows and
uncertainty about the funding and potential
exit of parent banks. However, rapidly
increasing NPLs, the introduction of tighter
credit underwriting standards, and banks’
efforts to clean their balance sheets and contain
costs added pressure on lending in 2013. This
discouraged banks from resuming credit,
especially to SMEs. As a result, overall credit
growth in 2013 further weakened in the SEE6
region, except in Montenegro (Figure 34).
Against this backdrop, what is the remaining
priority reform agenda in the financial
sector? First, the successful and sustainable
reduction of NPLs is the most important task
ahead. As noted above, since the last edition
Figure 33: Liquidity Ratio
45
25
40
20
35
30
15
25
20
10
15
10
5
▬ Albania
▬ Bosnia and Herzegovina
▬ Montenegro
▬ Serbia
Q1-13
Q3-12
SRB
Q1-12
MNE
Q3-11
MKD
Q Average (2006–08), quarterly
Q1-11
KOS
Q3-10
BIH
J Jun-13
Q1-10
ALB
J Dec-12
Q3-09
0
0
Q1-09
5
▬ FYR Macedonia
Source: National authorities and World Bank staff calculations.
Source: National authorities and World Bank staff calculations.
Note: Data for Serbia for -Average 2006-2008 quarterly, refers to 2008
only.
Note: Data for Serbia for -Average 2006-2008 quarterly, refers to 2008
only.
20 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
SLOW ROAD TO RECOVERY
evolution of foreign currency exposure to
unhedged borrowers and take measures to
limit or reduce lending in foreign currency or
lending indexed to foreign currencies.
Figure 34: Credit Growth Rates
percent change
60
50
40
30
20
10
Persistent Fiscal Pressures
0
-10
ALB
J 2009
J Q2 2013
BIH
J 2010
KOS
MKD
J 2011
MNE
SRB
J 2012
Q Average growth 2003–05
Source: National authorities and World Bank staff calculations.
Note: Average growth rate for the period 2003-2005 for Albania
and Serbia, and for the period 2004–2005 for FYR Macedonia and
Montenegro.
of the Report (June 2013), NPL levels had
risen considerably and credit growth remained
subdued. This highlights the need for decisive
and comprehensive measures to bring down
NPL levels. Second, further strengthening of
the macro-prudential framework is needed.
Even though considerable work has been
done, additional effort is needed in reinforcing
the capacities of the regulatory authorities
(both human and financial) to implement
recommendations of assessments already made.
Third, foreign currency lending poses risks
not fully recognized in the affected countries.
Weak economic fundamentals and high level of
foreign currency and foreign currency-indexed
lending (ranging from 79 percent in Serbia to
49 percent in FYR Macedonia7) pose a potential
risk in countries with domestic currencies.
These countries should monitor closely the
7
FYR Macedonia managed to decrease foreign currency lending
from 56 percent of all loans at end 2009 to the current level of
49 percent, while at the same time increased the amount of
deposits in local currency from 41 percent of all deposits at end
2009 to 56 at end September 2013.
SEE6 fiscal deficits remained high, in part
because of structural rigidities in public
expenditures, weak tax bases, and depressed
fiscal revenues. Fiscal balances were not
restored in 2013, and deficits remained close to
their peak levels in 2009. Despite some efforts
to control expenditure in 2013, governments
did not address the key structural rigidities
underlying high public expenditures, namely,
the high spending on wages and on poorlytargeted social transfers (Figure 35, Figure 36).
In addition, the large informal economy and
the weak regional economic recovery resulted
in revenue losses in some of the countries
(Albania, Montenegro, Serbia,) where
expenditure cuts were insufficient to contain
deficits. In others (Serbia), expenditures too
continued to increase, postponing the needed
fiscal adjustment. As a result, the SEE6 average
fiscal deficit remained on a rising trajectory
and is projected to reach 4.2 percent of GDP
in 2013 (Figure 37). In this regard, SEE6 fiscal
performance remained worse compared to
EU11 countries, whose average un-weighted
deficit stood at 3.6 percent of GDP 2013.
SEE6 countries with narrowing fiscal
deficits in 2013 were those that were able
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 21
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure 35: Average structural Fiscal Balance
and Economic Growth
Figure 36: structural Fiscal Balances
percent
percent of GDP
8
8
6
6
4
4
2
2
0
0
-2
-4
-2
-6
-4
-8
-10
-6
2000
2002
2004
▬ Structural balance
2006
2008
2010
2012
▬ Average growth
2005
▬ Albania
2006
2007
2008
2009
2010
▬ Bosnia and Herzegovina
▬ FYR Macedonia ▬ Montenegro
2011
2012
▬ Kosovo
▬ Serbia
Source: National governments and World Bank staff calculations.
Note: The structural balance refers to the general government cyclically adjusted balance. The cyclically adjusted balance is the fiscal balance adjusted for the
effects of the economic cycle using the Hodrick-Prescott (HP) filter.
Figure 37: Fiscal Deficits
Figure 38: Contribution Toward Change in
Deficits, 2012–13
percent of GDP
8
3
7
2
6
1
5
4
0
3
-1
2
-2
1
0
-3
ALB
J 2011
BIH
KOS
J 2012
MKD
MNE
SRB
EU11
SEE6
J 2013
ALB
BIH
KOS
MKD
MNE
J Expenditure contribution J Revenue contribution
SRB
SEE6
Q Change in deficit
Source: World Bank staff calculations.
Source: World Bank staff calculations.
to cut expenditures (Figure 38). In Bosnia
and Herzegovina and Serbia, assuming
implementation of the budget plans, spending
cuts are projected to more than offset revenue
shortfalls and contribute to reducing fiscal
deficits by between 0.5 and 3 percent of
GDP. In Serbia, the fiscal deficit is projected
to narrow from 7 to 6.5 percent of GDP.
Kosovo’s fiscal deficit is projected to decline to
2.4 percent of GDP, down from 2.7 percent.
In Kosovo, the introduction of a fiscal rule
sets a statutory maximum deficit at 2 percent
of GDP from 2014 onwards. In contrast, in
Albania, the deficit is expected to increase by
2.5 percentage points of GDP in 2013 (relative
to the original target) reaching 5.9 percent, on
22 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
SLOW ROAD TO RECOVERY
account of slippages in revenue collection as
well as increased election-related spending.
A weak tax base and an inefficient tax
administration further burdened the fiscal
adjustment by dampening revenues in
SEE6. The average revenue-to-GDP ratio
fell from 37 percent in 2008 to 35.1 percent
in 2012, despite the resumption of growth.
Weak tax collections affected negatively SEE6’s
Figure 39: Public Expenditure
percent of GDP
60
50
40
30
20
10
0
ALB
BIH
J 2011
KOS
MKD
J 2012
MNE
SRB
EU11
SEE6
J 2013
Source: National authorities, Eurostat and staff calculations.
Figure 40: Contribution Toward Change in
spending, 2009–12
fiscal balances. Despite the recent increases
in VAT rates and excises in some countries,
which yielded additional revenues (notably
Montenegro and Serbia), revenues in SEE6
decreased by an average of around 0.6 percent
of GDP in 2013. The main factors behind
the weak SEE6 revenues seemed to be partly
structural (weak tax administration and
custom revenues) and partly cyclical, reflecting
depressed demand and lower VAT revenues.
The large fiscal imbalances in SEE6 were
fueled by a rigid structure of public
expenditures, concentrated on public wages
and social transfers (Figure 39). On average,
the SEE6 countries’ wage bill is very high at
over 9 percent of GDP in 2012, and was still
rising from pre-crisis levels (Figure 40 and
Figure 41). Social transfers, comprising lastresort social assistance, pensions and warrelated benefits, among others, at 12.5 percent
of GDP, remained large and poorly targeted,
failing to protect the poor (Figure 42 and
Figure 43). In Bosnia and Herzegovina, over
12 percent of social benefits were estimated
Figure 41: Wage Bill and Social Benefit
spending, 2012
percent of GDP
35
8
6
30
4
2
25
0
20
-2
-4
15
-6
10
-8
5
-10
-12
0
ALB
J CoE
BIH
KOS
J G&S J Interest
J Social benefits
J Other
Source: World Bank staff estimates.
MKD
MNE
J Subsidies
J Grants
J Capital
Q Total
SRB
ALB
BIH
KOS
J Compensation of employees
MKD
MNE
SRB
J Social benefits
Source: World Bank staff estimates.
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 23
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure 42: Benefits Coverage of Households
Figure 43: Benefits to Top and Bottom
Quintiles households
percent
percent
9
90
8
80
7
70
6
60
20
5
50
8
15
4
40
6
3
30
2
20
1
10
0
0
35
30
25
10
5
0
ALB
BIH
KOS
J Bottom quintile, lhs
MKD
MNE
SRB
14
12
10
4
2
0
ALB
Q Top quintile, rhs
BIH
KOS
J Bottom quintile, lhs
MKD
MNE
SRB
Q Top quintile, rhs
Source: National authorities and Europe and Central Asia Social Protection expenditures and evaluation Database, World Bank.
Note: Data are from the following years ALB: 2008; Bosnia and Herzegovina: 2007; KOS: 2009; MKD: 2010; MNE: 2011; SRB: 2010.
to go to the wealthiest quintile and in FYR
Macedonia, over 11 percent. By contrast, less
than 40 percent of benefits reached the bottom
quintile in Bosnia and Herzegovina. There
and in Kosovo, war veterans’ benefits took up
a large share of social protection budgets but
failed to reach the poor and most vulnerable.
There is, therefore, ample scope to rationalize
social expenditures in this area while increasing
social protection to the poor and prospects for
shared prosperity of the bottom quintiles of the
population.
Figure 44: General Government Debt without
Guarantees
Figure 45: state Guarantees
percent of GDP
percent of GDP
Public debt levels continued to rise in 2013
in most SEE6 countries. Average public
debt (excluding guarantees) increased from
36.2 percent of GDP in 2011 to 42 percent
in 2012 and 44.8 percent of GDP in 2013.
70
14
60
12
50
10
40
8
30
6
20
4
10
2
0
0
ALB
J 2011
BIH
KOS
J 2012
MKD
MNE
SRB
EU11
SEE6
J 2013 (proj.)
Source: World Economic Outlook, April 2013 and Kosovo Ministry of
Finance.
24 |
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
ALB
J 2012
BIH
KOS
MKD
MNE
J 2013 (proj.)
Source: National authorities and World Bank staff estimates.
SRB
SLOW ROAD TO RECOVERY
Levels of public debt remained particularly
worrisome in Albania, Montenegro, and
Serbia in 2013. Notably, the Albanian public
debt is projected to exceed 66 percent of GDP
without including the announced payment of
arrears, which amount to another 4.1 percent
of GDP. State guarantees are non-marginal and
can add to public debt pressures (Figure 44 and
Figure 45). These reached around 7.5 percent
of GDP in 2012, but are projected to fall in
2013, because of a call on a large guarantee in
Montenegro. Standard and Poor’s sovereign
credit ratings have remained unchanged since
June 2013 (Table AI.1).
ChAPTER 1: RECENT MACROECONOMIC DEvELOPMENTs
| 25
SLOW ROAD TO RECOVERY
Chapter 2: Macroeconomic Outlook
Weak Growth Ahead
With depressed demand, uncertain export
prospects, and significant external risks,
the SEE region is expected to grow at the
rate of 1.8 percent in 2013, broadly in line
with the SEE6 RER June report projection.
Bosnia and Herzegovina and Kosovo remain
the slowest and the fastest growing SEE6
economies, respectively. Growth prospects for
2013 for FYR Macedonia and Montenegro
have been slightly upgraded, while downward
revisions were made for Albania, Kosovo, and
Serbia (Table 3).
Economic activity is moderating, reflecting
major weaknesses in domestic demand, despite
the recovering external demand and the surge
in exports. The Serbian economy is beginning
a sizeable fiscal consolidation to bring its debt
to a sustainable level and this is likely to act
as a drag on activity. The economies of FYR
Macedonia, Kosovo, and Montenegro have
some momentum in construction, services, and
tourism, but their shares in the regional SEE6
economy is too modest to change the overall
regional picture.
Table 3: Economic Growth Rates 2012–14
Thus, the 2014 SEE6 economic growth
prospects remain subdued and hinge upon
a sustained recovery of external demand.
Overall, net exports will continue to drive
growth in the short term. However, unfavorable
labor market conditions, poor investment
climate, and subdued consumption and
investment will constrain economic activity.
The SEE6 region is projected to grow at a rate
of 1.8 in 2014 instead of a previously projected
2.7 percent. The main drag on regional growth
is a likely slowdown of the Serbian economy.8
Serbia is now expected to grow only 1 percent
in 2014 compared to previously projected
3 percent on the back of declining private
percent
2012 2013f 2014f
Albania
Bosnia and Herzegovina
Kosovo
1.6
1.3
2.1
-1.1
0.8
2.0
2.7
3.0
4.0
FYR Macedonia
-0.4
2.5
3.0
Montenegro
-2.5
1.8
2.5
Serbia
-1.7
2.0
1.0
SEE6
-0.7
1.8
1.8
Memo item:
Euro Area
-0.6
-0.4
1.1
Source: World Bank staff projections.
Note: Weighted average.
The one-time effects of the bounce-back of
activity following the recession and improved
weather conditions are dissipating, however.
8
Downwards revision of projections for Kosovo’s growth for 2014 is
only by marginal 0.1 percentage point.
ChAPTER 2: MACROECONOMIC OUTLOOk
| 27
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
consumption and fiscal consolidation. In
contrast to Serbia, economic growth in the
other five SEE countries is expected to firm
up in 2014 and exceed the pace of economic
expansion of 2013.
The balance of risks to this outlook is on
the downside. Given that the developing and
the emerging market economies, including the
SEE6, are entering a period of expected global
financial tightening, business-as-usual policy
stance is no longer an option: policymakers
would be well advised to reduce macroeconomic
vulnerabilities, rebuild fiscal buffers, and
reinvigorate structural reforms geared towards
growth. The main external risks to the SEE6
outlook related to: (i) the pace at which global
interest rates are may rise, with the expected
tapering of quantitative easing in the U.S., (ii)
the Euro Area recovery, and (iii) the potential
impact of parent bank exit on the banking
systems of SEE6 countries. The internal risks
to the SEE6 outlook relate to “reform fatigue,”
which may delay policy implementation, and
the daunting fiscal challenges to stabilize and
reduce public debt in several countries. Also,
lack of progress on NPL resolution, and private
sector arrears could adversely impact credit
recovery and growth prospects.
From Weak to Robust Growth: Improving Productivity and
Competitiveness
Beyond this difficult short-term horizon,
how can SEE6 raise their longer-term growth
prospects? Maintaining
macroeconomic
stability remains a top policy priority: SEE6
countries, in particular those with high public
debts, would need to step up fiscal adjustment
and rebuild fiscal buffers, especially in view
of the likely rise in their sovereign borrowing
costs due to changes in international market
conditions (e.g. US tapering of quantitative
easing). Equally important, structural reforms
will have to be pursued with vigor. The nascent
export-led growth is a positive development,
but sustaining it will be a challenge. The SEE6
need to improve their fiscal positions, decrease
public debts, and strengthen banking systems
while facing significant structural challenges in
improving productivity and competitiveness,
including in the areas of the investment climate,
the labor market, and the public sector.
28 |
ChAPTER 2: MACROECONOMIC OUTLOOk
SEE6 region still does not fare well on
most comparative metrics on the structural
reforms. With major progress in reducing the
cost of doing business, FYR Macedonia has
started to attract modest FDI flows. The SEE6
countries have major advantages compared to
many other developing countries: their reforms
are anchored in the EU-accession process and
they are located right next to one of the world’s
largest economic blocks. Furthermore, the
recent agreement between Serbia and Kosovo
has heralded greater stability and security in the
region. Croatia’s accession to the EU (Box 3),
the opening of the accession process of Serbia
and Montenegro, as well as recent political
changes in the region, may provide a renewed
impetus for reforms and future prosperity for
the region. The time to use that opportunity
is now.
SLOW ROAD TO RECOVERY
Box 3: Implications of Croatia’s EU Accession for sEE6
Following the Croatia’s accession to the EU, the Central Europe Free Trade Agreement (CEFTA)
had to be amended. On July 1, 2013, the new trade regime between the SEE6 and Croatia
introduced an asymmetric trade liberalization regime. That means that the SEE6 countries retained
the custom-free export preferences to the Croatian market as regulated under the EU Stabilization and
Association Agreements. However, Croatian exports are subject to tariffs applied to the EU products.
Current exports to CEFTA countries comprise 20 percent of total Croatian exports. In 2012, Croatia
exported products worth EUR1.66 billion, twice as much as was imported from CEFTA to Croatia.
Croatian companies have lost some competitive edge—the most affected being tobacco and
agricultural products. For example, Agrokor Ltd. (focusing on food processing, wine and agribusiness), had to transfer 18 percent of its EUR1.38 billion worth of investments into the SEE6
region (since 1993) in 2012, ahead of the Croatian accession to the EU. Serbia has experienced a rise
in investments from Croatian firms in the year before accession. For the SEE6 countries, wine, beef,
sugar and fish export will be limited to a certain quota, while other agricultural products will be dutyfree under the EU Stabilization and Association agreement although subject to higher phytosanitary
and veterinary standards harmonized with the EU.
The EC has launched a discussion with CEFTA members on the Article 7 in the CEFTA
Stabilization and Association Agreement, which implies mitigation of prescribed conditions
and a reduction of high rates. However, it may take time for Croatia to restore to their previous
level the trade flows affected by the exit from the CEFTA area, if they can be restored at all. Croatian
companies that had been present in the SEE6 markets, in particular in the food industry, have
transferred part of their production to SEE6 to mitigate the impact of tariff barriers.
The road to robust long-term growth
passes through gains in productivity and
competitiveness. In this issue of the RER,
one such area is highlighted––improving
the business environment, which will help
dismantle barriers to the expansion of businesses
and ease the burden on private investment.
Improved Business Climate,
but Further Reforms Needed
The SEE6 countries continued to remove
regulatory obstacles to business. The index for
the overall ease of doing business, as measured
by the latest Doing Business Indicators, improved
in the SEE6 countries from 60.4 in 2009 to
64.9 in 2013. The increase was larger than
the EU11’s progress of 3.4 percentage points,
though the SEE6 average still remained below
that of the EU11. In 2013, Kosovo and FYR
Macedonia recorded the largest improvements
in the SEE6 region, with 9.8 and 9.1 percentage
points, respectively (albeit in Kosovo these were
ChAPTER 2: MACROECONOMIC OUTLOOk
| 29
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
from a low basis compared to 2010). Albania,
on the other hand, remained the only country
in the region with a deteriorating position
despite its recent marginal progress (Figure 46).
Bosnia and Herzegovina is the worst performer
in the region and needs to catch up rapidly
with its neighbors if it is to attract investments
and improve its economic growth.
Figure 46: Distance to Frontier on the Ease
of Doing Business, 2009–13
distance to the frontier (best practice=100)
80
75
70
65
60
55
50
ALB
J 2009
BIH
KOS
J 2010
MKD
MNE
J 2011
SRB
J 2012
SEE6
EU11
J 2013
Source: World Bank Doing Business Report, 2013.
position from 46.6 to 55 in 2013. The SEE6
progress primarily came from Kosovo and FYR
Macedonia, with the latter becoming a regional
leader with its position improving to 80.4 in
2013 with respect to the world’s best practice.
However, despite this progress, further
reforms are needed to address the structural
rigidities and increase the competitiveness of
the region. For example, resolving insolvency
remained the weakest area for the SEE6 group
with only 2.5 percentage points of moderate
improvement in the ranking between 2009
and 2013. While all six countries made some
improvements between 2009 and 2013, the
progress is insufficient to engender effective
insolvency procedures. In addition, the areas
of enforcing contracts and protecting property
rights remained particularly burdensome
(Figure 47).
Figure 47: sEE6 Distance to the Frontier in
the Areas of Doing Business, 2009 vs. 2013
distance to the best practice (best practice=100)
100
30 |
ChAPTER 2: MACROECONOMIC OUTLOOk
80
60
40
J 2009
Overall
Starting a
business
Getting credit
Registering
property
Trading
across borders
Getting electr.
Paying taxes
Protecting
investors
Dealing with
constr. permits
0
Enforcing
contracts
20
Resolving
insolvency
Specific areas where the SEE6 countries
made most progress in the past few years
include: starting a business, dealing with
construction permits and paying taxes. On
the scale of starting a business, SEE6 improved
its position relative to the world’s best practice
from 78.8 in 2009 to 86.1 in 2013, with
Kosovo recording the highest rate of progress
among SEE6. In terms of paying taxes, five
of the SEE6 countries continued closing their
gaps with the world’s best practice between
2009 and 2013, with Montenegro reporting
the most and Serbia the least progress. Progress
in dealing with construction permits was also
remarkable: a gain of 8.3 percentage points
between 2009 and 2013, as SEE6 improved its
J 2013
Source: World Bank Doing Business Report, 2013.
In sum, while economic growth in the SEE6
region has resumed, the countries need
to continue to strengthen their domestic
macroeconomic fundamentals and pursue
SLOW ROAD TO RECOVERY
policies that boost productivity and
resilience to external turmoil. Shifting from
a slow export-led recovery path to a robust
growth remains a key policy challenge for
SEE6. The first ingredient of success is ensuring
lasting and sustainable macroeconomic
stability, which in SEE6 means reducing and
sustaining moderate levels of fiscal deficits and
debt. On the structural policy front, robust
long-run growth requires productivity and
competitiveness-enhancing reforms, elements
of which are highlighted above, in addition to
labor market and public sector reforms.
ChAPTER 2: MACROECONOMIC OUTLOOk
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SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Annex: Macroeconomic Indicators
Table AI.1: sEE6: select Economic
Indicators and Projections, 2012–14
2012 2013f 2014f
2012 2013f 2014f
Unemployment rate3 (percent)
Real GDP growth (percent)
Albania
Bosnia and Herzegovina
Kosovo
1.6
1.3
2.1
Albania
13.0
12.8
-1.1
0.8
2.0
Bosnia and Herzegovina
28.0
27.5
2.7
3.0
4.0
Kosovo
30.9
Macedonia, FYR
-0.4
2.5
3.0
Macedonia, FYR
31.0
28.8
Montenegro
-2.5
1.8
2.5
Montenegro
20.0
19.2
Serbia
-1.7
2.0
1.0
Serbia
24.0
24.1
Fiscal deficit (percent of GDP)
Current account balance (percent of GDP)
Albania
-3.4
-5.9
Albania
-10.9
-9.7
Bosnia and Herzegovina
-2.7
-2.0
Bosnia and Herzegovina
-9.6
-7.5
Kosovo
-2.7
-2.4
Kosovo
-7.6
-10.7
Macedonia, FYR
-3.9
-4.0
Macedonia, FYR
Montenegro
-5.4
-4.3
Montenegro
-7.6
-6.5
Serbia
Serbia
-3.1
-3.1
-18.7
-15.0
-10.5
-6.0
External debt (percent of GDP)
Public debt (percent of GDP)
4
1
Albania
59.4
66.2
Albania
56.6
56.9
Bosnia and Herzegovina
45.1
44.7
Bosnia and Herzegovina
53.0
54.2
8.4
9.7
7.6
7.2
34.3
35.5
Macedonia, FYR
67.0
66.1
Kosovo
Macedonia, FYR
Kosovo
Montenegro
54.0
54.2
Montenegro
Serbia
50.6
55.9
Serbia
119.2 113.4
86.2
81.0
Consumer price inflation (percent, period average)
1 Excludes guarantees.
Albania
2.0
2.1
2 2013 data shows period average through September except August for
Bosnia and Herzegovina.
Bosnia and Herzegovina
2.1
0.7
3 2013 data shows first quarter estimates for Bosnia and Herzegovina; and
second quarter for the rest. 2012 data shows annual averages.
Kosovo
2.5
2.2
4 2013 data shows second quarter external debt stock.
Macedonia, FYR
3.3
3.3
Montenegro
4.1
2.9
Serbia
7.3
8.2
2
32 |
ANNEx: MACROECONOMIC INDICATORs
SLOW ROAD TO RECOVERY
Figure AI.1: Real GDP: Percentage Change since Pre-Crisis Peak
percent change from 2008
real GDP index (2002=100)
Albania
170
Bosnia and Herzegovina
160
Kosovo
150
FYR Macedonia
140
Montenegro
Serbia
130
SEE6
120
EU11
110
EU15
100
-5
0
5
10
15
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f
20
▬ Albania
▬ Kosovo
▬ Montenegro
▬ FYR Macedonia
▬ Bosnia and Herzegovina
▬ Serbia
Source: World Bank staff calculations.
Figure AI.2: Real GDP Growth Projections for 2013
projected GDP growth in 2013, percent
percent
Albania
12.5
Bosnia and Herzegovina
10.0
Kosovo
7.5
FYR Macedonia
5.0
Montenegro
2.5
Serbia
0
SEE6
-2.5
EU11
-5.0
EU15
-7.5
-0.5
0
0.5
1.0
1.5
2.0
2.5
3.0
3.5
2002
2004
2006
2008
2010
2012 -13f -14f
▬ Kosovo
▬ FYR Macedonia
▬ Montenegro
▬ Albania
▬ Bosnia and Herzegovina
▬ Serbia
Source: World Bank staff projections.
ANNEx: MACROECONOMIC INDICATORs
| 33
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure AI.3: Unemployment Rate
H1 2013, percent of labor force (aged 15–64)
percent of labor force (aged 15–64)
40
Albania
Bosnia and Herzegovina
35
Kosovo
FYR Macedonia
30
Montenegro
25
Serbia
20
SEE6
EU11
15
EU15
10
0
5
10
15
20
25
30
35
2006
2007
2008
2009
2010
2011
2012 H1 2013
▬ FYR Macedonia
Q Kosovo
▬ Bosnia and Herzegovina
▬ Serbia
▬ Montenegro
▬ Albania
Source: World Bank staff calculations.
Notes: Kosovo as of 2012; Bosnia and Herzegovina as of Q1 2013.
Figure AI.4: Fiscal Balance
projected 2013, percent of GDP
percent of GDP
Albania
7.5
Bosnia and Herzegovina
5.0
Kosovo
2.5
FYR Macedonia
0
Montenegro
-2.5
Serbia
SEE6
-5.5
EU11
-7.5
-7
-6
-5
-4
-3
-2
Source: World Bank staff calculations.
34 |
ANNEx: MACROECONOMIC INDICATORs
-1
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f
▬ Bosnia and Herzegovina
▬ Kosovo
▬ FYR Macedonia
▬ Montenegro
▬ Albania
▬ Serbia
SLOW ROAD TO RECOVERY
Figure AI.5: Public Debt
projected 2013, percent of GDP
percent of GDP
80
Albania
70
Bosnia and Herzegovina
60
Kosovo
50
FYR Macedonia
40
Montenegro
30
Serbia
20
10
SEE6
0
0
10
20
30
40
50
70
60
80
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f
▬ Albania
▬ Montenegro
▬ Serbia
▬ Bosnia and Herzegovina
▬ FYR Macedonia
▬ Kosovo
Source: World Bank staff calculations.
Figure AI.6: Export Growth
2012, percent of GDP
annual growth, percent
50
Albania
40
Bosnia and Herzegovina
30
Kosovo
20
FYR Macedonia
10
Montenegro
0
Serbia
-10
SEE6
-20
-30
EU15
0
10
20
30
40
50
-40
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 H1 2013
▬ Serbia
▬ Montenegro
▬ Albania
▬ Bosnia and Herzegovina
▬ FYR Macedonia
▬ Kosovo
Source: World Bank staff calculations.
ANNEx: MACROECONOMIC INDICATORs
| 35
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Figure AI.7: Import Growth
2012, percent of GDP
annual growth, percent
Albania
60
Bosnia and Herzegovina
50
40
Kosovo
30
FYR Macedonia
20
Montenegro
10
Serbia
0
SEE6
-10
EU15
0
10
20
30
40
50
60
70
-20
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 H1 2013
▬ Serbia
▬ Montenegro
▬ FYR Macedonia
▬ Kosovo
▬ Albania
▬ Bosnia and Herzegovina
Source: World Bank staff calculations.
Figure AI.8: Current Account Balance
projected 2013, percent of GDP
percent of GDP
Albania
20
Bosnia and Herzegovina
10
Kosovo
0
FYR Macedonia
-10
Montenegro
-20
Serbia
-30
SEE6
-40
EU11
-50
-20
-15
-10
Source: World Bank staff calculations.
36 |
ANNEx: MACROECONOMIC INDICATORs
-5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013f
▬ FYR Macedonia
▬ Serbia
▬ Bosnia and Herzegovina
▬ Albania
▬ Kosovo
▬ Montenegro
SLOW ROAD TO RECOVERY
Figure AI.9: Deposit and Private Credit Growth
private credit growth, percent
deposit growth, percent
50
90
80
40
70
60
30
50
20
40
10
30
20
0
10
-10
0
-20
-10
-20
-30
Jun-08
Apr-09
Feb-10
Dec-10
Oct-11
Aug-12
Jun-13
Jun-08
Apr-09
Feb-10
Dec-10
Oct-11
Aug-12
▬ Albania
▬ Bosnia and Herzegovina
▬ FYR Macedonia
▬ Albania
▬ Bosnia and Herzegovina
▬ FYR Macedonia
▬ Serbia
▬ Kosovo
▬ Montenegro
▬ Serbia
▬ Kosovo
▬ Montenegro
Jun-13
Source: World Bank staff calculations.
Figure AI.10: Non-Performing Loans
H1 2013, percent of total loans
percent of total loans
25
Albania
Bosnia and Herzegovina
20
Kosovo
15
FYR Macedonia
10
Montenegro
5
Serbia
0
-5
0
5
10
15
20
H1
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013
▬ Albania
▬ Montenegro
▬ Bosnia and Herzegovina
▬ Serbia
▬ FYR Macedonia
▬ Kosovo
Source: World Bank staff calculations.
ANNEx: MACROECONOMIC INDICATORs
| 37
SOUTH EAST EUROPE REGULAR ECONOMIC REPORT NO.5
Table AI.2: sovereign credit ratings
Dec 2010
Dec 2011
Dec 2012
Sep 2013
ALB
B+
B+
B+
B+
Bosnia and Herzegovina
B+
B
B
B
MKD
BB
BB
BB
BB-
MNE
BB
BB
BB-
BB-
SRB
BB-
BB
BB-
BB-
Source: Standard and Poor’s.
Note: Kosovo does not have a credit rating.
Figure AI.11: Ease of Doing Business
2013, proximity to frontier (best practice=100)
proximity to frontier (best practice=100)
Albania
80
Bosnia and Herzegovina
75
70
Kosovo
65
FYR Macedonia
60
Montenegro
55
Serbia
50
SEE6
45
EU11
40
40
45
50
55
60
65
Source: World Bank staff calculations.
38 |
ANNEx: MACROECONOMIC INDICATORs
70
75
80
2005
2006
2007
2008
2009
2010
2011
2012
▬ FYR Macedonia
▬ Montenegro
▬ Kosovo
▬ Serbia
▬ Albania
▬ Bosnia and Herzegovina
2013
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