BALKAN BLOG: Macedonia best of bunch in western Balkans

By bne IntelliNews July 31, 2009

Nikolai Frank in London -

The people of the western Balkans must be feeling very frustrated. Having lost a decade to the war that followed the collapse of Yugoslavia, the region was just beginning to taste the first fruits of economic growth when the global crisis hit. While the Balkans remain relatively isolated and have escaped the worst ravages of previous crashes, this time they have not been so lucky. Already struggling to deal with difficult macroeconomic and political issues, the region's problems have just got that much harder to solve.

Macedonia doing best

Macedonia is arguably the most successful of the post-Yugoslav republics. Having avoided major military conflict following independence, it has worked hard to modernise its economy and attract some foreign direct investment (FDI) through a low tax regime and other pro-business incentives. Large corporations such as Johnson Controls, a US manufacturer of systems for the automotive and construction industries, have moved in thanks to the incentives, investing nearly $600m in the country in 2008. Last year, Macedonia saw a sturdy 5% GDP growth.

But that was then. Now Macedonia is feeling the massive drop off in capital inflows. "One of the big risks is that firms are just not making relocation decisions right now," says Jon Levy, Europe analyst at Eurasia Group. "They're not making the capital expenditures to support this decision and that is problematic for countries that have taken economic-development strategies that are very dependent on foreign direct investment."

While the International Monetary Fund (IMF) is pessimistic about GDP growth in Macedonia for 2009, forecasting a 2% contraction, it welcomes the drop in inflation from a giddy 8% to nearly zero. Others feel that Macedonia's relatively low current account deficit (by regional standards) of 8% of GDP may mean it is in a better position than its neighbours to come out of the crisis in one piece. According to Sharon Fisher, senior economist at IHS Global Insight, Macedonia is "one of the best-off countries in the region, in terms of external liabilities... They may pull out of this reasonably well."

Geopolitically, Macedonia has worked hard to integrate itself into the West. It is a candidate for EU membership, although further progress in talks has been blocked by Athens over a name dispute (there is an eponymous region in northern Greece). Its Nato accession bid collapsed in March 2008 as a result of the Greek objections.

Montenegro bust

Things could go either way in Macedonia, but the picture is clearer for Montenegro and it is not a good one. This tiny country of 650,000 inhabitants, who gained their independence from Serbia in 2006, has styled itself as something of a Monte Carlo on the Adriatic, and bathed in the limelight shed by a recent James Bond movie. Its luscious coastline and low-tax regime attracted huge amounts of investment in real estate, much of it from Russia. But a credit crunch and a burst property bubble later, and Montenegro's boom is over. Having reached a peak GDP growth of 10.7% in 2007, according to the IMF, Montenegro's economy will shrink by 2.7% this year. Moody's Investors Service expects a 4.0% contraction.

A broader concern is Montenegro's current account deficit of 28%, largely due to the country's overdependence on services and tourism, as well as a sharp rise in imports in recent years as a result of the construction boom. The country's aluminium sector, a key industry, is also feeling the slump in world metals prices. In December, the government bailed out Prva Banka, the country's largest bank and a major investor in the boom (it also happens to be majority-owned by Prime Minister Milo Djukanovic and his two siblings). Having taken on a number of loans already, it is unclear whether the government will be able to borrow from the IMF, which would enforce strict fiscal discipline. Montenegro's woes were reflected by Moody's decision in April to downgrade the sovereign bond rating to 'Ba3' from 'Ba2'.

Amidst the gloom, it must have been welcome news that the European Council, which brings together the heads of the EU member states, formally asked the European Commission to consider Montenegro's EU membership bid in April. One issue that has in the past complicated the country's relationship with the EU is Montenegro's unilateral adoption of the euro in 2002 to replace the German deutschmark. Another concern is the extensive black market and Montenegro's status as an organised-crime hub.

Bosnia bailed out by IMF

While Macedonia and Montenegro are certainly in trouble, at least they are cohesive entities. Bosnia and Kosovo have serious political problems to deal with on top of economic ones: both are international protectorates; neither has a unified government accepted by the entirety of the population.

Bosnia's fragmented structure has hampered efforts to attract foreign direct investment. The World Bank's "Ease Of Doing Business" report for 2009 ranks it near the bottom of the list at 119th worldwide and behind all other Balkan countries.

Security has become an issue again for Bosnians since politicians in the Bosnian Serb Republic half of the country started making secessionist noises of late. This reflects fears that Sarajevo, located in the Federation of Bosnia and Herzegovina, dominated by Bosniaks and Croats, is attempting to strengthen central government.

The mood is tense, but violence is unlikely. The more immediate threat is economic. The Federation is bankrupt, having failed to attract much investment during the good times. The state has also undermined its fiscal position by dolling out hefty benefits to war veterans of the 1990s Yugoslav conflict. The Bosnian Serb Republic, meanwhile, is somewhat better off: it underwent a substantial privatisation process and maintains a more disciplined budget. However, it too is now coming under strain as a result of the global downturn. The country as a whole faces a current account deficit of 13% - enviably low by Montenegrin standards, but sufficiently large to be a major headache.

So it was reassuring to say the least when, in May, Bosnia signed a new stand-by agreement with the IMF that will provide access to €1.2bn over the next three years. However, it also requires Bosnia to make budget cuts totalling BAM560m (€286m). A plan to slash veterans' benefits by 10% in June sparked large demonstrations, leading the government to cave in and cut civil servants' pay instead.

While it is unclear how the necessary spending cuts will be achieved, analysts believe Sarajevo will pull through. In late June, the IMF and European bankers met Bosnian politicians in Vienna to assure them of the banks' continued support for the country, largely because no one wants to see a bankrupt Bosnia that could destabilise the region again.

The underlying problem of economic sluggishness will, however, require a concerted political effort on the part of the country's leaders. "IMF loans or bilateral consortium loans... will get a basic minimum level of government operations and stabilisation, and potentially help to implement some anti-inflationary measures, maintain currency stability and guarantee bank deposits," says Global Insight's Fisher. "But I don't know that they are going to precipitate significant economic growth."

Kosovo - young and poor

On June 28, several thousand Serbs, including ministers and royalty, convened at Gazimestan in Kosovo to commemorate the anniversary of the 14th-century battle that lost the region to the Ottomans. The following day, Kosovo's president and prime minister, Fatmir Sejdiu and Hasim Thaci, were in Washington celebrating their country's acceptance into the IMF and the World Bank.

The contrast between the two ceremonies reflects Kosovo's situation, and the hurdles it faces. One of the greatest obstacles to progress in Kosovo remains the question of its legitimacy. The government in Pristina will strive for wider international acceptance, as well as ultimate membership of the EU, whose Rule of Law Mission in Kosovo (Eulex) is slowly taking over from Nato's peacekeeping force Kfor and the UN Mission in Kosovo (Unmik).

But piecemeal recognition by a few countries won't alter the fundamental issue of a missing UN mandate for the military intervention that made possible Kosovo's current sovereignty. Russia, which has a permanent seat on the UN's Security Council, won't recognise it, even though its five-day war with Georgia last year undermined its legal objections to Kosovo's existence.

The territory's only hope is to continue along the path of de facto independence under the guidance of the EU and the UN. Yet in the long term, economic growth is the surest way of gaining some international sway. Small is beautiful in Kosovo and the country has untapped potential in the manufacturing, retail, mining and hydropower sectors.

But for now it remains one of the poorest countries in Europe: according to aid agencies, more than half of Kosovars live in poverty. Unemployment is at 45%; state benefits and pensions average around €60 a month. The majority of families are almost entirely dependent on remittances sent home by the more than half-a-million Kosovars working abroad. While official data is scarce, WorldVision, a development charity, reckons remittances have dropped by 50% in recent months. With the boom-time demand for casual labour in Western Europe and elsewhere drying up, a vital source of disposable income is evaporating.

Having tasted bloody conflict in the 1990s, the western Balkans now face a harsh struggle to overcome an economic crisis that risks taking back many hard-fought gains of the past years from a population eager to leave the past behind.

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