Western Balkans and Macroeconomic Overview in 2019

Western Balkans and Macroeconomic Overview in 2019

Economies of WB6 maintain a similar economic structure in their contribution to GDP, and consequently face similar challenges in their efforts for sectoral economic developments.

The GDP of the Western Balkans in 2019 is estimated to have reached US. D 113.13 billion. If we analyze the structure of GDP, it is noticed that 45.5% of it consists of GDP of Serbia. Bosnia and Herzegovina come in second place with 17.8% of GDP. Albania ranks third with 13.2% of GDP. Northern Macedonia’s GDP ranks fourth with 11.2%. Fifth place is Kosovo with 7.8% and the last place is held by Montenegro with 4.8% of GDP.

GDP growth rate in 2018, according to estimates, reached 3.9%. In 2019, from the preliminary estimates it is declared to be at the level of 3.3%. The year-on-year growth rate is down 0.6 percentage points.

The highest level of economic growth in 2019 is expected to be reached in Kosovo at 4%. In second place is Serbia with an estimated economic growth of 3.5%. Northern Macedonia is expected to achieve economic growth of 3%. Meanwhile, Bosnia and Herzegovina and Montenegro are experiencing economic growth at the same level in both countries with 3%. Albania seems to have the lowest level of economic growth at 2.9%. The decline in growth rates, or the slowdown in economic expansion, is an indicator to be held accountable in almost all WB6 countries, except Kosovo and Northern Macedonia. The slowdown in the economy in 2019 has come for specific factors of each country, but also for common factors, which are present in each of them.

Among the common factors are (a) public confidence in governance and transparency, (b) corporate governance and ethics of doing business, (c) infrastructure quality, (d) truncated ownership and property rights, (e) barriers for trade, (f) low productivity of the economy, (g) informality and high evasion.

Specific factors for each country, although they may seem common, are estimated to be (a) organized crime, which is more active in Northern Macedonia and Albania, (b) the polarization of political wings and the lack of economic stability, mainly in Albania, Kosovo, North Macedonia, (c) lack of rule of law, where specifically Albania and Bosnia and Herzegovina are more problematic in this regard.
Meanwhile, other factors may also have an impact on the development of the economy, such as market dimensions, competitiveness of the economy, diversification of public spending portfolios, and other challenges that are mentioned in many studies and reports for each country.

According to the OECD , the economies of WB6 have above the world average the Economic Complexity Index (ECI) and opportunity values (OV). This fact means that while ECI shows the status of WB6 economies at the level of medium-sized developing economies, their capacities are different. In this context, these economies can expand towards more complex products, which means similarities of the economy with more developed countries.

Growth tendency of economies of WB6 in 2019 showed GDP growth at a slow pace that has not exceeded the 4% level limit. But the tendency to use the economy’s capacities and accelerate the pace of growth is projected to occur during the second half of 2020 for countries that have performed lower than projected for 2019, because of external and internal risks. These risks are tripled by the effects of natural disasters and pandemic by Covid-19, which are expected to affect a more resilient structure, which will be oriented by the external demand for products and services.

In several countries of WB6 it affected a moderate increase in their economies, which are connected directly or not with each-other. In this economic environment, we see the data about the slowdown in public investment in Kosovo, but also the slow level of export growth in Albania and Serbia, which together contribute to an increase of no more than 3.2%. If we compare the pace of economic growth of the WB6 with the economic growth of the EU, it seems that the trend of economic growth in these countries is higher than the economic growth of EU countries. However, noting the productive and developmental capacities of the economy and the labor force of each WB6 country, it can be said that all of them operate under real opportunities for the use of resources and capacities.

Sustainable growth, which is a common approach for WB6 economies, aims to improve the structured modeling of the economy through the development of 4 vital sectors in order to strengthen and streamline capacity, but also to ensure a strong guarantee for the sustainability of economies by improving the well-being of their citizens. The energy, transport, tourism and environment sectors will be committed to increasing the competitiveness of the economy to enable the extension of products and services beyond the physical borders of the WB to EU countries and beyond. The combined approach is aimed at achieving the objectives that each WB6 country must meet, taking into account that the continued growth and development of the economy through natural resources as to this day will be limited, as long as these resources have their limits, both physically and economically to reduce costs and increase benefits by reducing the impact on the environment.

The main exports of WB6 are electricity, also materials and electrical equipment, as well as machinery and transport equipment, not forgetting the part of computer services, which is growing in recent years. In years, if one looks at the export statistics of the last 10 years there is a qualitative increase indicating the inclusion of technology in generating value added of economy in the external market. From WB6 economy statistics, studies and analyzes, it can be seen that the share of cross-border trade in relation to GDP, which performs each country in the regional market, has changed slightly in relation to the traditional partners that each country has had.

In the structural plan of export destinations, WB6 economies are partners and members of agreements with the same EU countries. While the trade in goods has increased among WB6 countries, it is a different situation and with little advancement in the trade in services. This fact shows that although free trade commitments, barriers removal engagements, and competitiveness through increased productivity and quality of services and goods have enabled the strengthening of economic cooperation, still WB6 economic operators feel ineffective to succeed beyond borders of local markets.

Competitiveness is not the forerunner of economic development policies, although for this purpose have been engaged by governments increasing resources and capacities. Inter-regional trade is still an important component of exports to WB6, although it is not the most essential part of exports, with the exception of Kosovo and Montenegro, which have major exports to EU countries, as well as Albania and Serbia, which are more market-oriented in EU countries. Meanwhile, North Macedonia and Bosnia-Herzegovina have a balanced share between exports within the region and exports outside the region. Cross-regional trade is mainly focused on semi-finished and agricultural products. Given this fact, inter-regional trade has not had an impact on changing the structure of exports and in the future may play a small declining role in relation to the total volume of exports.

However, rising consumer demand and increased access to credit, influenced by the still apparent competitiveness constraints by WB6 companies, continue to maintain a high trade deficit.

Despite the positive developments in employment growth in the labor market, it is found that close to half of the labor force is able to have a job. Below this average is Bosnia and Herzegovina with an employment level indicator of 42.1% of the able-bodied workforce and Kosovo with an employment rate of 40.9% .

The share of labor forces in GDP in 2019 is at the level of 51.6%. The highest level of participation in work is in Albania with 59.6%, and followed by North Macedonia with 56.9% and continue Montenegro with level of 56%. Serbia has a 54.5% share of the workforce.

Looking at the bottom part of the graph above is the quantitative labor market structure, given the busy population with at least a job in each of the countries.

Serbia accounts for 41.1% of the labor market structure in the WB6 region. Albania is the second largest labor market in the WB6 with only 18.6% of this market and less than half of the labor market occupied by Serbia. Bosnia and Herzegovina hold the third place with 15.9% and North Macedonia is fourth with 12.9% of the WB6 market. Kosovo is in fifth place with a market share of WB6 labor market of 7.9%. The last place is held by Montenegro with 3.6% of the labor market in WB6.

The level of inflation during 2019 in WB6 has an average annual level of 1.6%, where Bosnia-Herzegovina, North Macedonia, Montenegro have an inflation rate below the WB6 average (see Tab.2).

The need to increase the level of technology of traditional and new products, as well as to improve macroeconomic indicators has forced WB6 governments in the last 10 years to adopt reforms in almost all major productive sectors of the economy. These reform initiatives have been the strongest incentive to focus on attracting FDI as well.

Talking of indicators linking the development of foreign investment with the part of the integration of WB6 domestic economies with the EU, it is seen that the inflow of foreign investment in these countries has reached levels that exceed expectations, reaching the average level by the end of 2019 totaling 5.2% of regional GDP.

The FDI level is 0.3 percentage points lower than in 2018. FDI inflows in 2018 and 2019 remain the highest in the last 5 years. According to the WB Autumn Report 2019 , Montenegro and Albania hold the top positions with a net FDI inflow rate respectively of 8% and 7.8% of GDP. Serbia ranks third at the level to 6.2% of GDP. Meanwhile, Kosovo, North Macedonia and Bosnia and Herzegovina hold the last places with investment levels in a downward order below the regional average, where Bosnia and Herzegovina maintain the lowest level with 2.3% of GDP.

The composition of FDI for this period consists of the automotive industry and car parts, renewable energy and tourism and technology services.

FDI in WB6, however, is considered limited if compared to the FDI per capita in EU countries, as well as the potential for attracting investment from these countries, or even from other fast-growing countries. GDP per capita in WB6 is as much as half of GDP per capita in EU countries.

Investments in research and development (R&D) continue to be at low levels, reaching up to 1% of the total budget expenditures planned and realized in the WB6, with the exception of Montenegro, which has increased expenditures for 2019, by changing the approach as early as 2018. This approach, if not changed in practice will cause shortages in the product of scientific research, but also in goods and services generated by advanced technology. Lack of attention needed to change both the capacities needed, but also the resources to enable change will produce negative effects that time will not be able to heal or systematize, as the development of this sector requires time to be effective in economy and social life. It is appropriate that development strategies should consider a balance between long-term productivity and those that can be considered future products, which are considered valuable capital reserves to reshape the economy in difficult times, as well as to serve growth. qualitative economics towards more complex products.

However, WB6 countries have stepped up efforts to improve the research and innovation sector by adapting policies, as well as regulatory frameworks and action plans to change current performance and increase the impact of innovation on education and the economy. To this end, this approach, which is expected to advance further in 2020, is seen in certain cooperation at the regional level, with the EU framework in mind, as well as some objectives set with the launch of the Berlin Process.

Although fiscal consolidation, for each WB6 country, remain the key word in public finances, it is a fact that the high level of public debt remains unchanged, albeit with slight reductions. Even in those cases when there is a decrease in public debt, it is seen that governments control public spending, mainly capital, thus curbing the effect that this category of investment has on the economy, but justifying keeping the budget deficit under control. Meanwhile, the risks of maintaining and increasing social spending, local government, and keeping pace with reforms are associated with a risk that remains a threat to the long-term consolidation of public finances.

The banking sector has shown signs of recovery of bad debt recovery (non performin loans = NPL), affecting their good capitalization and increasing liquidity for lending to businesses and individuals. But a more efficient link between the banking sector and businesses is still a partially addressed problem, but it also affects the financial market of WB6 countries, as well as maintaining still low levels of innovation and its greater reach in the economic environment.

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