Albania looks to leverage 2009 growth to sell Eurobond

By bne IntelliNews March 9, 2010

Clare Nuttall in Almaty -

As one of only two European countries to actually grow in 2009, Albania's government regards now as a good time to issue its first-ever international bond. To maintain that strong growth, though, analysts warn Tirana needs to step up the reform process.

On February 23, Deputy Finance Minister Nezir Haldeda told newswires that Albania is preparing to issue a Eurobond "in excess" of €300m in the last week of April as the Balkan country seeks to repay bank loans. The bonds will "most probably" have a five-year maturity, Haldeda said after the government chose JPMorgan Chase and Deutsche Bank to lead manage the sale. The country has credit rating of 'Ba1' by Moody's Investors Service, one level below investment grade. "We have just mandated the book runners and will start meeting investors at the beginning of April," Haldeda told Bloomberg. "The issue will be in the excess of €300m, probably €350m."

The bond sale comes as the country's relatively closed economy - imports and exports of goods account for only around 28% of GDP - kept the global economic crisis at bay and grew by 3.5% in 2009. Foreign debt levels are also low. Even so, this GDP figure was still down from the annual average of 6% posted between 2000 and 2008. The dip in growth was due in part to falling local consumption as credit growth and investment activity slowed. The impact of the crisis on its main trading partners - Italy and to a lesser extent Greece - also affected the Albanian economy, though failed to stop growth altogether.

UniCredit Group forecasts growth of just 2% in 2010, but is "cautiously optimistic" about the prospects for the Albanian economy over the longer term. The expected return to growth of the EU this year will benefit Albania, not least by ensuring that remittances will revive. However, with Italy and Greece still in the doldrums, a sharp upturn in exports isn't likely. "The timely response of monetary policy also softened the blow on the economy. While macroeconomic stability has been maintained and the budget for 2010 contains contingencies should revenue dynamics disappoint, reforms to mitigate bottlenecks to faster growth need to be undertaken," says the report.

When financing conditions tightened as the crisis first became felt in Albania, the central bank responded quickly by increasingly local currency liquidity. The banking sector, which is almost wholly foreign owned, remains well capitalised and stable, says UniCredit. And with low loan/deposit ratios, the banks will be able to finance loan growth relatively stably.

Over the medium term, UniCredit forecasts an average of 5% GDP growth a year as the country remains in catch-up mode. As of 2008, Albanian GDP at purchasing power parity was just 25% of the EU27 average. It is expected to take seven years for Albania to reach Serbia's end-2009 GDP per capita level.

Opening up

The economy has already been developing over the past few years. The share of agriculture in GDP has fallen from 25% in 2000, though was still relatively high at 18.5% in 2008. The construction and tourism sectors grew strongly during this period. Albania is a low-cost production base for some export-oriented production, in particular clothes, leather, shoes and minerals, but manufacturing still accounts for only 9% of GDP (up from 6% in 2000). Infrastructure investment has been important for the country's growth. Construction of a motorway to Kosovo was one of the main drivers for growth in the first half of 2009.

UniCredit highlights the importance of further investment to reducing Albania's isolation from the global economy. "The main issue will be how to accelerate the integration of Albania into the global economy," says the report. "The capital stock of the country remains poor despite recent investment in motorways. Ports, energy and roads will all require investment in the long term to boost productivity for Albania to be able to continue attracting investment from abroad in the long term. This will be important if Albania's very slow share of manufacturing (below 10% of GDP) is to increase."

To fund spending in 2010, there's the Eurobond, with T-bill issuance to cover the rest of the budget deficit. This follows a fall in tax revenues in 2009 as local demand fell. Although the fiscal deficit is expected to shrink this year, UniCredit warns that reforms will be needed to bring down spending in the medium term.

Other, potentially unpopular, steps also need to be taken, UniCredit says. "In the medium term, authorities will have to embark on politically more challenging reforms to mitigate the adverse effects of bottlenecks to faster growth and to anchor fiscal policy settings, thereby allaying any underlying investor concerns, while at the same time improving access to international financial markets," says the report.

These include increasing tax collection rates, and improving the definition and protection of property rights. "The quality of the labour force and the ability of the education system to produce the skilled cadre which would attract foreign investment is another bottleneck for future growth," says UniCredit.

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