Political uncertainty rises in Southeast Europe

By bne IntelliNews December 19, 2014

Clare Nuttall in Bucharest -


Forecasts for 2015 GDP growth vary widely across the region. Serbia, hit by flooding in May and now embarking on an austerity programme, expects zero or negative growth in 2015. Croatia, in its first return to positive growth after years of recession, is expected to grow by just 0.2%, according to the European Commission’s 2014 Autumn Forecast. At the other end of the scale, some of Southeast Europe’s smaller economies have the best prospects for 2015, with Bosnia and Herzegovina, Macedonia and Montenegro all expected to expand by at least 3%.

A problem facing states across the region in 2015 will be securing natural gas supplies after Russian President Vladimir Putin announced in December that Russia was pulling the plug on the planned South Stream gas pipeline that would have supplied gas to many of the countries in Southeast Europe. Without the prospect of South Stream, they will continue to rely at least for the next few years on notoriously unreliable exports of Russian gas routed via Ukraine. Losing South Stream is a particular blow for Bulgaria and Serbia, both of which depend on Russian gas, and would have benefitted not only from cheap exports but also from substantial transit fees and potentially lucrative contracts for local companies that would have helped boost their economies.

Romania, meanwhile, was not included in South Stream, and may end up gaining from inclusion in alternative transport projects - Bucharest signed a deal with Greece and Bulgaria for the Vertical Corridor inter-connector in December - while at the same time continuing to develop its offshore Black Sea resources.

Political instability is another source of concern. Both Bulgaria and Kosovo enter 2015 with newly formed governments in place, bringing to an end lengthy periods of political uncertainty in both countries. However, following the October elections, Bosnia has not yet formed a new national government. The unexpected defeat of Prime Minister Victor Ponta in the Romanian presidential elections in November has raised questions about his government’s future stability.

The threat to the region from spillovers from the Russia-Ukraine conflict proved to be over-stated. Current indications are that even countries such as Moldova and Montenegro, with strong economic ties to Russia, have not been badly hurt by Russian sanctions, though the picture will become clearer when full-year statistics are published in 2015.

Outside the region’s four existing EU member states, the prospect of EU membership is top priority and an incentive for reform for governments across Southeast Europe. Serbia is expected to open its first EU accession chapters in 2015, while Moldova plans to apply for membership.

Governments across the region plan, to a greater or lesser degree, to continue with privatisations in 2015. Both Serbia and Slovenia have strong pipelines of major companies up for privatisation in 2015.

The surprise victory for centre-right candidate Klaus Iohannis in Romania’s November presidential elections has seriously undermined his rival Prime Minister Victor Ponta. Expected to take the presidency, Ponta is now struggling to hold onto his current position, and 2015 could see a change of premier.

Ponta has already said that he will resign if he comes under investigation in the probe launched by Romania’s anti-corruption agency into election irregularities. He could also be forced out if more of his Party of Social Democrats’ coalition partners follow the Democratic Union of Hungarians in Romania in quitting the ruling coalition. This is likely to be played out in the opening months of 2015.

The first task for Romania’s current government will be to draw up the 2015 budget, which had been put off until after the election. In a December 9 statement the International Monetary Fund (IMF) said it had reached a “broad understanding” with Bucharest on the budget.

GDP growth is expected to remain steady in 2015 at around 2.4% according to the IMF. However, one of the key questions will be to what extent the government will rein in public expenditure - and the implications this will have for already low infrastructure spending.

Meanwhile, an Erste Bank report points out that: “The objective to make Romania energy-independent is to trigger significant public and private investments in both the traditional energy sector (to take advantage of the Black Sea gas fields) and nuclear energy production.” Romania’s IT sector is also expanding rapidly, though from a relatively small base.

Decisions are expected in early 2015 on which companies will be the next to go on the block under Romania’s ongoing privatisation programme. The IPO pipeline is set to reopen with Hidroelectrica expected to list during the year, possibly rivalling the 2014 Electrica IPO  which raised a record €444m. Romania will also have its largest ever international stock market listing when Fondul Proprietatea, the fund set up to compensate Romanians who lost assets under Communism, lists on the London Stock Exchange. The listing will establish Fondul Proprietatea as the third largest fund on the LSE.

Years of political turmoil have taken their toll on the Bulgarian economy. Finance Minister Vladislav Goranov warned on December 8 that GDP growth is now expected to slow to 0.8% in 2015 down from 1.5% in 2014, as consumption and investment remain low.

Although a new government under Prime Minister Boiko Borisov took office in November, following the second snap election in two years, concerns remain about political stability. In mid December there were protests over pension reform plans, while politicians from left and right are at loggerheads over the loss of the South Stream pipeline.

On December 13, rating agency Standard & Poor’s cut Bulgaria’s sovereign rating to junk, blaming financial sector vulnerabilities, demonstrated by the collapse of fourth largest bank Corporate Commercial Bank (CCB) in mid 2014. The government has decided to liquidate the bank, and IHS forecasts “significant losses” for creditors “in view of the capital hole equivalent to more than half of the bank's liabilities estimated at BGN6.7bn ($4.2bn)”.

Devastating floods that hit Serbia in May 2014 were a severe setback for the economy, which is now expected to contract by at least 1% in 2014. The central bank anticipates a 2.0% contraction to be followed by a 0.5% drop in GDP in 2015 as a result of planned austerity measures. 

In 2015, Serbia hopes to open the first chapters of its EU accession talks after formally launching negotiations in January 2014. While the European Commission commended progress Belgrade has made on economic reform in an October report, normalisation of relations with Kosovo remains an outstanding issue.

Serbia is accelerating its privatisation process, with plans to sell off Telekom Srbija and other major companies in 2015. The government has pledged to privatise the companies with potential and close down those that cannot find a buyer by the end of the year.

The Croatian economy continued shrinking through 2014, contracting by 0.5% in Q3, though both the European Commission and the EBRD expect a return to modest growth in 2015.

“The economy continues to face long-standing problems of weak competitiveness, a large public sector and difficulties in the business environment,” according to the EBRD’s 2014 Transition Report. “Over the medium term ... growth prospects will depend on the extent to which long-awaited reforms to public administration and economic governance are implemented.”

Erste Bank analysts agree that despite some recent progress overall, Zagreb “has been doing very little in the sense of deregulation and the flexibilisation of the Croatian economy”.

However, the government plans privatisations of major companies, including fertiliser producer Petrokemija and Hrvatska Postanska Banka in 2015 after failing to offload the two companies in 2014.

Although presidential elections are scheduled for December 28, little impact is expected as polls show incumbent Ivo Josipovic is well ahead of his rivals.

Slovenia’s economy showed signs of an upturn in the second half of 2014, with both exports and investments starting to rise. Much still depends on how strictly the government enforces plans for public sector cuts,that may dampen consumption and private sector investment.

The IMF forecasts 2.5% growth in 2014, slowing to around 1.75% in 2014. “The recovery faces headwinds from necessary fiscal consolidation, the corporate sector’s need to restructure and reduce its debt, and the weak external environment,” the IMF said on December 12.

Despite a €3bn state bailout in mid 2013, the banking sector remains a source of concern. Two of the country’s largest banks, the Nova Kreditna Banka Maribor (NBKM) and Nova Ljubljanska Banka, failed ECB stress tests in October.

Politically, there are fears of a return to instability after the landslide victory for newcomer Miro Cerar in the 2014 elections shows signs of running out of steam, as recent polls reveal a slump in Cerar’s popularity. Meanwhile, his government is pushing ahead with plans to sell off some of Slovenia’s largest state-owned enterprises, including Telekom Slovenje, NKBM and flag carrier Adria Airways.

Macedonia has become one of the region’s fastest-growing economies, largely thanks to efforts to attract foreign direct investment under Prime Minister Nikola Gruevski. A combination of rising exports and public infrastructure spending will continue to drive growth in 2015, although limited domestic consumption may constrain growth in the longer-term.

Politically, tensions remain. In addition to a long-standing opposition boycott of parliament, in 2014 there were violent clashes between ethnic Macedonians and Albanians. Macedonia also enters 2015 having made no progress on EU accession. There is little prospect of a speedy resolution of the long-standing name dispute with Greece. The European Commission has also voiced concerns over the increasingly divisive political culture, politicisation of state institutions and government control over the media.

Montenegro’s GDP growth is expected to accelerate in 2015, with large investment projects as the main growth driver. However, according to Standard Bank analysts, while the Bar-Boljare highway project could be “transformational” for the economy, both the IMF and Moody’s have voiced concerns over the fiscal strain this will cause.
 Podgorica has also been struggling to privatise state owned assets. Further attempts at privatisation, for example for the Bijela shipyards, are expected in 2015. Potentially deterring investors, the government remains locked in a bitter legal battle with a subsidiary of Oleg Deripaska’s En+ Group over the country’s largest employer Kombinat Aluminijuma Podgorica (KAP).

Bosnia and Herzegovina is expected to see growth accelerate dramatically from just 0.7% in 2014 to 3.5% in 2015, despite damage done by widespread flooding in May, according to the IMF, though it points to “considerable uncertainty” in the outlook.

This includes political uncertainty, since as of mid December a ruling coalition had not yet been formed at national level since the October general elections, meaning that decisions in critical areas such as infrastructure investment and privatisation will be further delayed.

Albania’s 2015 budget is based on a growth forecast of 3%, though planned tax increases to bring down the budget deficit and state debt down have concerned investors, who fear a decline in competitiveness.

On a more positive note, Albania is progressing towards EU entry after being accepted as a candidate country in 2014. Tirana is now under pressure to address EU concerns over corruption and organised crime. This includes a clean-up operation at the central bank where longstanding governor Ardian Fullani was dismissed in September after thefts of over €5m of cash were uncovered.

The appointment of a new government in Kosovo in December - after six months of political wrangling - bodes well for 2015, raising hopes of an upturn in investments that had previously been put on hold. In an address to the parliament on December 8, Kosovo’s new Prime Minister Isa Mustafa told MPs that he would focus on stable government, economic development, the rule of law, and dialogue with Serbia.

2014 was a critical year for Moldova, with the signing of the EU Association Agreement in June, followed by a victory for pro-EU parties in the November general election. Chisinau will continue its course towards the EU with plans to apply for membership in 2015.

Allaying fears of the impact of Russian sanctions, Moldova’s GDP growth accelerated to 5.9% year-on-year in the third quarter of 2014, according to the state statistics office. The IMF forecasts 3.5% growth in 2015, though it warns of downside risks connected to Russian sanctions and weaker economic activity in its main trading partners. A Moody’s report also points to the risk Moldova’s links to Russia - its main gas supplier and an important export market and source of remittances - pose to the country’s economy. 

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