Download Economic Trends and Challenges

South Eastern Europe
Main economic trends and
challenges
Christophe de La Rochefordière
DG Economic and Financial Affairs,
European Commission
Budapest, 4-5 April 2005
1
Overview
1. Horizontal overview:
key features. Some surprises….
2. Candidate countries : Bulgaria,
Croatia, Romania (and Turkey, not included).
3. Western Balkan countries : Albania,
Bosnia and Herzegovina, former
Yug. Rep. of Macedonia, Serbia and
Montenegro and Kosovo.
2
Income levels: fairly low and
comparable (except + Croatia and - Kosovo)
Euro
Per capita GDP (current prices and exchange rates - 2004)
6000
6195
5000
4000
3000
2526
2000
1772
1725
1929
2030
2621
1875
1000
1013
0
Albania
BiH
fYRoM
SCG
Kosovo
(SCG)
3
Western Bulgaria Croatia Romania
Balkans
Overall solid growth…
Real GDP growth
%
21.2
20
10.0
7.5
5.0
2.5
0.0
Albania
fYroM
Kosovo
Croatia
-2.5
BiH
SCG
Bulgaria
Romania
Western Balkans
-5.0
2000
2001
2002
P Projections. Sources: National authorities, IMF, EC estimates.
4
2003
2004p
Gradual disinflation continues…
Inflation (CPI, annual average)
%
70%
92.5%
Albania
BiH
fYroM
SCG
Kosovo
Bulgaria
Croatia
Romania
Western Balkans
Candidate Countries
45
35
25
15
5
-5
2000
2001
2002
P Projections. Sources: National authorities, IMF, EC estimates
5
2003
2004p
General Government balance
%4
of
GDP
Government balances (after grants)
3
2
1
2002
2003
2004
2002
2003
0
Western Balkans
P
CC3
Projection. Sources : National authorities, IMF, EC estimates.
6
2004
General Government balance
% of
GDP
Government balances (after grants)
4
3
2
1
Western Balkans
Candidate Countries
0
2002
P
2003
Projection. Sources : National authorities, IMF, EC estimates.
7
2004
First sub-region: SEE
candidate countries
Main trends in
Candidate countries
8
Candidates: output growth appears
to converge towards 4 - 5 %
GDP growth
8
% yoy
6
4
2
Bulgaria
Croatia
Romania
0
2000
2001
2002
9
2003
2004
Candidates: Inflation slowly approaches
EU levels
CPI, yearly average
50
Bulgaria
40
Croatia
%, yoy
Romania
30
20
10
0
2000
2001
2002
10
2003
2004
Candidates: unemployment
rates fall but remain high
LFS Unemployment rate
% of Labour Force
20
15
10
5
Bulgaria
Croatia
Romania
0
2000
2001
2002
11
2003
2004
Candidates: public deficits
move towards sustainability
General Government Balance
2.0
Romania
Croatia
Bulgaria
% of GDP
0.0
-2.0
-4.0
-6.0
-8.0
2000
2002
2001
12
2003
2004
Candidates:
public debt ratio shows mixed picture
Debt ratio
80
% of GDP
60
40
20
Bulgaria
Croatia
Romania
0
2000
2001
2002
13
2003
2004
Candidates:
current accounts and FDI
FDI finances large share of current account needs
in % of GDP
• Bulgaria:
• Croatia:
• Romania:
current account
FDI
coverage
current account
FDI
coverage
current account
FDI
coverage
14
- 8.0
9.1
113 %
- 4.7
2.2
47 %
- 7.5
6.9
92 %
Candidates: challenges
• Macro – monetary: trade-offs between currency
appreciation and internal price adjustments
• Maintain sustainable fiscal stance
• Attract greenfield FDI
• Increased international competition may hit
candidate countries (ex: end of textiles quotas…)
• Continue with unfinished reform agenda:
privatisation, public enterprises restructuring,
labour markets, “acquis” translation /
implementation, improve the judiciary, contract
enforcement, facilitate market entry / exit.
15
Candidates
• Brief country review, challenges
16
Bulgaria
• Maintain prudent fiscal stance
• Ensure sustained foreign investment to
finance current account deficit. Attract
greenfield investment.
Continue reforms, in particular:
• Public enterprises restructuring (coal,
energy, railway…).
• Improve SME business environment
• Improve judiciary – contract enforcement
17
Croatia
• Good track record of moderate growth,
low inflation and exchange rate stability
• Fiscal and external imbalances call for
tightening of public spending
• Structural reforms need to be accelerated,
in particular enterprise restructuring and
privatisation
• Continued public administration reform,
land and cadastre, judiciary is essential
18
Croatia
Particular sector challenges:
• Reform of health care to stop arrears
accumulation
• Railway restructuring and liberalisation
• State aid to shipbuilding
• Restructuring of steel sector
• Development of tourism
19
Romania
• Macro stability : preserve momentum in disinflation,
strengthen fiscal sustainability
• Reduce public sector deficit: enforce financial
discipline; continue energy prices adjustments; improve
public enterprises’ financial performance
• Deepen structural reforms : restructuring of key
sectors, such as energy, mining, transport and agriculture;
continue privatisation (ex: Distrigaz Nord and Sud)
• Enhance business environment : progress in the
functioning of the judiciary and the public administration.
Implement bankruptcy law.
20
Second sub-region
Main trends/challenges in the
Western Balkans
21
Uneven fiscal consolidation
% of
6
GDP
Government balances (after grants)
2002
2003
2004 p
4
2
0
-2
-4
-6
-8
Albania
P
BiH
fYroM
SCG
Projection. Sources : National authorities, IMF, EC estimates.
22
Kosovo
Western
Balkans
External deficits remain fairly large …
External accounts (2004p)
% of
GDP
40
Trade deficit
Current account deficit (after grants)
30
20
10
0
Albania
P
BiH
fYroM
SCG
Projection. Sources : National authorities, IMF, EC estimates.
23
Kosovo
Western
Balkans
… and FDI overall not sufficient to
finance current account deficits
Western Balkans - Foreign direct investment (2004p)
Mio.
1,400
EUR
% of6
GDP
5.0
5.2
% of GDP
1,200
Mio EUR
1,000
4
800
2.9
600
2.3
2.0
2
400
200
n.a.
0
0
Albania
P
BiH
fYroM
SCG
Projection. Sources : National authorities, IMF, EC estimates.
24
Kosovo
Western
Balkans
Despite substantial fiscal
tightening, current account did not clearly respond
General Government and Current Account balances, 2004p
(after grants)
Albania
BiH
fYroM
SCG
Kosovo
Western
Balkans
5
1.0
0
-1.7
-0.1
-5
-5.5
-5.8
-2.7
-6.0
-10
-7.0
-11.6
-15
-11.6
Current account
-18.5
General Government
-20
25
-18.0
Structural reforms:
progress has been achieved ...
• The core legislative framework of a
market economy is in place throughout
the region
• Price and trade liberalisation well
advanced
• Privatisation is continuing in the region
26
... but much remains to be done
• Need to pursue fiscal consolidation
• Reform of the public administration and
the management of public finances
• Enterprise restructuring / privatisation
• Access to finance for SMEs
• Rule of law, enforcement the weak point
• Reform of the cadastre and clear
ownership rights
• Size of the informal economy
27
Western Balkans
Brief country review:
key features and
critical challenges
28
Albania
• The economy has regularly posted high
growth figures (above 6%)
• Slow but steady fiscal adjustment.
• Low inflation and stable currency, but
high external imbalances
• Weak state and considerable structural
problems
29
Albania
• Privatisation regained momentum in 1994 : sale
of Savings Bank to Raiffeisen Bank. Privatisation
of Albtelekom and ARMO (fuel company)
underway.
• Banking sector almost 100% private. Increased
confidence in banking sector.
• Weak points:
 Commercial legislation enforcement.
 Fraud and corruption.
 Size of informal economy.
30
Albania
Albania - Current account balance
Goods, services and income
% of GDP
15
Remittances
12.8
11.9
Official transfers
Current account
12.6
12.3
11.9
10
5
3.0
3.0
2.5
2.5
2.1
0
-5
-6.2
-7.4
-10
-7.5
-7.6
-9.0
-15
-20
-19.3
-18.9
-20.2
-21.4
-19.4
-25
2000
2001
2002
2003
2004p
p
Source: National authorities, IMF and EC estimates
31
Projections
Bosnia and Herzegovina
• Growth resuming in 2004 (around 5%)
• Low inflation (below 1%)
• Challenging external trade and current
account deficits. Recent increases in FDI
• Drastic fiscal consolidation in 2001-2003.
Close to balanced budget 2004
• Recent progress with structural reforms
(privatisation, indirect tax authority…)
32
Bosnia and Herzegovina
Remaining impediments to growth and investment
• Fragile institutional setting
• Risk perception
• Size of the informal economy + corruption
• Weak productivity and financial situation of PoEs
• Weakness of commercial courts, very slow
liquidation procedures, difficult contract
enforcement
33
Bosnia and Herzegovina
Bosnia and Herzegovina - Government balance
% of GDP
0.4
0
-0.1
-2.2
-3
-3.0
-3.3
-3.2
-6
-7.0
-7.3
-9
-10.5
-12
-15
-18
Source: CBBiH
General government balance before grants
General government balance after grants
-16.5
2000
2001
2002
34
2003
2004
former Yugoslav Rep. of Macedonia
• Sluggish growth (3.1% in 2003, 2.2% in 2004)
• But stable macroeconomic environment with
low inflation
• Considerable progress in fiscal
consolidation in 2004 (provisionally 1% surplus)
• High external imbalances (current account
deficit at 8-9% of GDP)
• Core legislative framework of market
economy in place.
35
former Yugoslav Rep. of Macedonia
Impediments to growth and investment
• Privatisation failed to generate new dynamics
• Insufficient determination to address structural
reforms (closing down defaulting enterprises or
addressing the informal sector)
• Reluctance to open business to foreigners
(hidden barriers to market entry)
• Ownership rights, weak judiciary
36
former Yugoslav Rep. of Macedonia
Growth, inflation and public finances
%
6
4
2
0
-2
-4
-6
Inflation (%)
General govt. balance (% of GDP)
Real GDP growth (%)
-8
1998
1999
2000
2001
2002
2003
2004p
p
Projections
Source: National Bank and IMF
37
Serbia and Montenegro
• Growth 3% in 2003, 7.2% in 2004 on strong
domestic demand
• Unfinished stabilisation: inflation reaccelerated to an annual rate of 13.8% in
December 2004
• High public and external debt, fiscal
sustainability an important issue
• Current account deficit remains high (at
13% before grants)
• Fragmented internal market
38
Serbia and Montenegro
•
•
•
•
Impediments to growth and investment
Private sector share of GDP still low -45%Low productivity of state and socially
owned enterprises
Bankruptcy procedures need to be
initiated when enterprises have failed and
where privatisation not an optio
Weak judiciary. Difficult contract
enforcement
39
Serbia and Montenegro
General Government and Current Account balances
(after grants)
2001
2002
2003
2004
2005
0
-2
-4
Fiscal balance (incl. grants)
-6
Current account (after grants)
-8
-10
-12
40
Kosovo (SCG)
• Slow growth (3.1% 2003, about the same in 2004)
hampered by political instability, declining
donor assistance
• Huge external imbalances (trade deficit 45% of
GDP, current account deficit 17% after grants)
• Rapidly increasing public deficit (7% in 2004)
• Business-friendly legislation in place
• Delays in progress with enterprise
restructuring and privatisation
41
Kosovo (SCG)
•
•
•
•
•
•
Impediments to growth and investment
Temporary status, risk perception
Uncertain ownership rights
Contingent / hidden liabilities
Lack of law compliance / enforcement
Energy sector. Supply shortage. KEK
unsustainable financial situation
Size of informal / underground economy
42
Kosovo (SCG)
Kosovo - Balance of payments - Factor income and foreign assistance
70.4
% of
70
GDP
Remittances
Wages of local employees in donor community
Foreign assistance
60
52
50
40.7
40
32.9
30
20
13.4
13.9
13.4
11.4
8.6
10
13.2
6.8
5.6
2003
2004p
0
Source: IMF
2001
2002
43
p
Projections