Albania insists Eurobond to go ahead despite Greece and protests

By bne IntelliNews May 5, 2010

Genc Kondi in Tirana -

The Albanian economy may have avoided recession last year, but a long-running political crisis that brought tens of thousands of opposition protesters onto Tirana's streets on April 30 threatens the country's recent hard-earned stability as well as the planned Eurobond.

The political crisis stems from the elections in June last year, which were narrowly won by Prime Minister Sali Berisha's Democrats, but have been contested since by the opposition Socialists, bringing the workings of government to a virtual standstill. The Socialists accuse Berisha's ruling coalition of manipulating the results of the elections, which gave the Democrats 75 of parliament's 140 seats, and have boycotted parliament to demand a recount, which the government has so far refused.

The opposition was claiming that the rally was attended by 200 000 people and Edi Rama, leader of the Socialists and mayor of Tirana, has called for protests to be held throughout the country, urging Albanians to erect a "human barricade against the government." On May 3, 22 Socialist MPs and 180 ordinary Albanians were still on hunger strike in the centre of Tirana, camped out directly beneath the office window the PM, to support their demand for a parliamentary inquiry into the June elections.

Analysts warn that the political deadlock is undermining the country's EU ambitions. Albania submitted its candidacy for EU membership in April 2009 and has been hoping to obtain the lifting of visa requirements for its citizens to travel throughout the Schengen zone, which covers most EU countries.

The crisis also threatens the stability the country has shown in the teeth of the global economic crisis. The economy grew by 3.1% in 2009 and growth is forecast to accelerate to 3.2% in 2011 after expanding 2.3% this year, according to a report from the International Monetary Fund. As such, Deputy Finance Minister Nezir Haldeda told Bloomberg on April 30 that the government feels confident enough to push ahead with its first ever sale of Eurobonds even after the biggest surge in emerging-market borrowing costs in a year after Greece was downgraded at the end of April. Albania's government wants to sell between €300m-400m of five-year notes.


On a more positive front, the central bank has taken the step of reversing a decision it made last year that was designed to help restore confidence in the banking system, but the effectiveness of which was debatable.

By the end of March 2009, the mass withdrawal of funds caused deposits at the nation's banks to fall to 55% of GDP from the 63% mark in September 2008. This prompted the central bank to take two steps, the first of which could be considered in line with what took place elsewhere in the world, while the second was highly questionable.

The first decision was to increase the bank deposit insurance level, which at around €5,000 was undeniably too low. At the prompting of the central bank, parliament increased the limit to ALL2.5m (about €18,000), which immediately stemmed the withdrawal of deposits. Given 26% of the country took home last year an average of €1,897, this level was more than sufficient.

The second decision by the Bank of Albania stopped foreign bank branches transferring capital abroad. Why? Local branches of foreign firms were facing demands from their parents to transfer the maximum of liquidity abroad due to difficulties they were experiencing from the crisis. As such, profits in 2009 transferred to foreign companies abroad totaled around €350m, up 35% from the previous year.

However, the central bank revoked this policy in March, given it had no significant impact on improving the banking sector's problems and it merely stopped banks from lending to businesses and individuals. The decision was also widely seen by the foreign business community in Albania as a restriction on the free movement of capital.

Governor Ardian Fullani tells bne that the policy introduced on March 2, 2009 was only meant to be temporary. "Taking into account the multiple commitments of our country, especially those related to future membership in the European Union and actual membership in the World Trade Organization, the measure was contrary to the spirit of capital account liberalization. Repatriation of capital and profits to foreign investors (including the transfer of dividends) is a capital transaction, liberalized since the middle of 1992," he says. "To this end, the decision had a limited duration, having as a goal the stabilization and full restoration of public confidence towards the Albanian banking system."

Foreign banks in the country, which make up 14 of the 16 banks in the country, reported a profit of around €70m for 2009 (according to information declared by the Albanian Association of Banks) and they are now free to transfer capital without restrictions to their parent banks.

2009 proved a mixed year for the country's banking sector, which is highly concentrated with five of the 16 banks holding more than 75% of total assets. Eight out of the 16 suffered losses, though capital adequacy ratios remained solid at an average of 16%. The return on equity of the sector fell to 4.6 in 2009 from 20.7% in 2007.

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