This will be a difficult year for Albania as the government struggles to overcome one of the country’smost acute political crises in recent years, at a time when the economy remains mired in recession.
In the Q110 Business Forecast Report, we show how political risk will be a key factor drivingthe Western Balkan state’s underlying risk profile through the medium term, blocking the policyformationprocess and putting further stress on economic stability. Indeed, in our latest Albanianlek currency forecast, we highlight how the breakdown of the country’s political institutions risksdriving the unit to new record lows over the coming quarters. We also highlight the relatively bleakoutlook for Tirana’s EU accession prospects going forward, with recently released reports arguingthat June’s parliamentary elections failed to meet basic standards of democratic accountability.
With Albania’s opposition Socialist Party (PS) continuing its parliamentary boycott, in addition tocalling for mass protest rallies in early October, our view that the Western Balkan state would fallinto a protracted period of political instability following the general election last June appears to beplaying out. As we previously cautioned, political institutions in the country remain in a relativelynascent stage of development, increasing the likelihood that even a slight period of extra-parliamentaryopposition would result in a significant deterioration in the state’s underlying risk profile.
To be sure, this is reflected in our short-term political risk (STPR) rating for Albania, which comesin at 57.7 out of 100 (in comparison we score neighbouring Macedonia 61.5).
In contrast to the majority of economies elsewhere in emerging Europe, latest balance of paymentsdata show Albania’s current account deficit expanding in year-on-year terms through thefirst six months of 2009, with a considerable influx in foreign direct investment inflows helping fundthe widening shortfall. Through H109, the Western Balkan state’s current account deficit grew toEUR683mn, compared to EUR630mn through the same period last year. The primary driver behindthe current account’s widening was a deterioration in the services trade deficit, which increased toEUR383mn (from EUR338mn) on the heels of a 6.5% year-on-year (y-o-y) contraction in exports(imports fell by only 0.5% y-o-y). We expect Albania’s current account deficit to remain elevatedin the near term, coming in at 15.9% of GDP in 2009 (EUR1.2bn), and moderating to only 14.4%(EUR1.1bn) by the end of next year.
Dritan Prifti, Albania’s new economy minister, said on October 1 that he wanted to open a newstock exchange in the Western Balkan state in the next two years. Citing the desire to have adomestic bourse for the privatisation of remaining state-owned companies, Prifti also said that thegovernment would need to educate investors, carefully license brokers, and provide an effectiveawareness campaign before launching the new stock exchange. The World Bank and IMF haveappeared to support the idea, offering to provide Albania with free consulting in developing theproject. With Albania’s capital markets remaining in a relatively nascent stage of development, thecreation of a new stock exchange will significantly improve the ability of domestic firms to raisenecessary funding over the long term.
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