SOUTHEAST EUROPE 2010: A partly splendored thing

By bne IntelliNews December 28, 2009

Nicholas Watson in Prague -

The consensus is that emerging Europe will recover in 2010, albeit at a slower pace than certainly other emerging markets, but also perhaps even than the US and Western Europe. However, this view encapsulates what has become a growing problem in looking at the region since the crisis exposed its many vulnerabilities - that it's now simply too diverse to regard as a single entity.

In its top 10 economic predictions for 2010, the consultancy IHS Global Insight says growth in all the emerging regions will recover in 2010 and, with the possible exception of emerging Europe, will outpace the US, Europe and Japan. "Non-Japan Asia will be at the forefront, with GDP growth of 7.1%. Latin America, the Middle East, and Africa will see gains in the 3-4% range. The laggard will be emerging Europe, which will expand only 1.7%."

The CEE region's generally high dependency on foreign credit made the effects of the global economic crisis, when it eventually arrived, that much worse. The forecasted decline in GDP for the ex-communist region as a whole - including the former Soviet Union - is more than 6% for this year, compared with 4% for the Eurozone. However, the European Bank for Reconstruction and Development (EBRD) notes that this regional average hides a multitude of variations.

Neil Shearing, emerging markets economist at Capital Economics, agrees with Global Insight's overall contention that Asia is best placed to prosper, followed by Latin America and Brazil in particular, with CEE continuing to lag behind. He also notes there will be some bright spots in emerging Europe, generally speaking those economies that have received a competitive boost from weaker exchange rates and have comparatively low levels of foreign currency debt. The losers will be those with fixed exchange rates and high external imbalances. Thus Central Europe, bolstered by Poland, will see its GDP contract by only around 3.5% in 2009, while Southeast Europe, where all (except for Albania) the economies entered recession, will likely decline 6.5%.

Danske Bank expects a contraction in CEE in 2009 of 7.5%, while most economies should grow in 2010 - the Baltics notably not until 2011 - though at just 0.8%, it will only be a fragile recovery. "There are large differences between the countries in the region, but in general the recovery will be fragile for most countries due to years of excessive spending and unsustainable credit growth rates," says senior analyst Lars Tranberg Rasmussen.

Those imbalances make countries particularly vulnerable to the kind of shocks delivered from Dubai World and Greece. Those two events might have been absorbed fairly well by the markets, but what will happen when the next shock arrives? And few doubt another will come - in mid-December, the nationalisation of Austria's sixth-largest bank Hypo Group Alpe Adria put the focus firmly back on EU banks with large exposure to CEE. Capital Economics says it has long argued that the pressures facing CEE banks are likely to persist for some time. "While the rebound in global risk appetite over the past six months or so has helped to stem the outflow of capital from the region and ease tensions in interbank lending markets, it is still far too soon to sound the all clear," it says.

In case of another shock, the Baltics, Bulgaria and Hungary all remain worryingly exposed, with foreign debt levels that exceed 100% of GDP. Newsweek talks of a "quiet crisis brewing in Eastern Europe, where Bulgaria, Hungary and the Baltic states face staggering foreign debts in excess of their GDP." Capital Economic's Shearing says the rising sovereign debt concerns on the back of recent events in Greece and Dubai even posed the question of whether investors should be worried about a government default in emerging Europe. However, "while recent developments suggest that it would be complacent to rule out such an event altogether, we think the prospect of an outright default remains fairly low down the list of challenges facing the region."

The crisis was a terrible blow for the region just as it was celebrating 20 years after throwing off the yolk of communism. However, that blow has been felt and absorbed differently by the regions within the all-encompassing CEE, and differently by states within those regions. As renowned investor Warren Buffett noted back in 2001, "You only find out who is swimming naked when the tide goes out."

Finally, East Capital, the CEE-focused investment firm, highlights a developing trend in the region where countries are not only recovering, but are about to enter a period of what it calls "more normal" development after the years of boom and now bust. "The main feature of this new 'normal' is growth in line with potential - rather than over potential - that is not based on low base effect or cheap credit, but rather on low inflation, low positive real interest rates and political stability," East Capital says. "Most countries in the region are still in recovery mode and will remain so during the first half of 2010, before entering this new normal in the second half of the year." It adds that for some of the worst-hit economies in the region, such as the Baltic states, the recovery period will be longer.

East Capital identifies this normalisation trend in Russia, Turkey and Poland. "That these countries are normalising from a macro perspective does not mean that they are fully-fledged market economies, but it should send a message to investors that emerging Europe is moving in the right direction," it says.

Not a Turkey at all

In Southeast Europe, Turkey has come out this global economic crisis particularly well, ironically because it has been so prone to crises in the past that it undertook many reforms to prevent another happening again, including major changes to its banking industry.

This time around, Turkish banks rode out the crisis without any financial help from the government, unlike the massive bailout of lenders and tougher regulations that occurred during the last recession in 2001. "The banking sector is well capitalized and could tackle the downturn in the economy without recapitalisations, and massive interest rate cuts also benefited the banks," says East Capital partner Jacob Grapengiesser, whose East Capital Turkish Fund was the clear winner in bne's equity fund ranking in 2009, managing to post a hefty 9.9% return in the year to June 31. Three of the top holdings in the fund are banks: Garanti Bankasi, Vakifbank and Halkbank.

The strength of the banking system was a major factor behind Fitch Ratings' decision in December to raise Turkey's credit rating by two notches to 'BB+' - a move that many analysts hope and expect Moody's Investors Service and Standard & Poor's belatedly to emulate. "The upgrade reflects Turkey's relative resilience to the severe stress test of the global financial crisis," said Edward Parker, head of emerging Europe sovereigns at Fitch in London. "Credit fundamentals and debt tolerance are stronger than previously thought."

Tim Ash of Royal Bank of Scotland - who wrote a piece entitled, "Ratings agencies need to wake up and smell the Turkish coffee" - has been particularly strident in his criticism of the ratings agencies' attitude toward Turkey. "It was clear to me six months or so ago that Turkey's performance through the current crisis meant that it had done its 'tour of duty' and was deserving of a much better credit rating," he says. "Turkey has funded itself both externally and from a public finance perspective under its own resources, and has managed to avoid going cap in hand to the International Monetary Fund. This stood it in contrast to a bevy of investment grade emerging European credits which have been forced to seek emergency IMF funding, including Latvia, Hungary and Romania."

The contrast with regional neighbour Romania is instructive. Whereas the big story in Romania is about how the IMF has suspended loan payments to the country until a new government is in place to make sure the country abides by the promises the loan was predicated on, a rather tedious story in Turkey has been the ongoing saga about whether the government feels it necessary to sign a new stand-by agreement with the IMF to replace the expired one. The two countries may occupy the same regional space, but their problems couldn't be further apart.

Not that you'd be able to ascertain that from the two countries' ratings: Turkey's debt is rated by Moody's at 'Ba3', three steps below investment grade, while S&P applies an equivalent 'BB-' rating. Romania is rated an investment grade 'Baa3' by Moody's, though S&P at least had the foresight to cut Romania to high yield status in October 2008 to 'BB+', where Fitch now rates Turkey. "I just cannot take Moody's and S&P's ratings on Turkey seriously at all while they continue to rate Turkey below Egypt (Ba1/BB+)," says Ash. "Moody's rating on Turkey has been unchanged now since December 2005, while S&P's has been unchanged since August 2004 - this ratings inertia just defies belief."

The latest GDP figures released in December support the idea that Turkey will be amongst the best performing economies in the region over the next year or so. In the third quarter, Turkey's economy contracted by 3.3% on year, slowing from a revised 7.9% contraction in the second quarter. No official quarterly growth data were available. Sertan Kargin of TEB Investment notes that the financial sector maintained its solid performance in the third quarter, with the sector continuing to provide strong added value to economic activity with 7.8% year-on-year growth coming on top of the 7.5% growth posted in the second quarter, the 10.8% increase in the first quarter and 9.1% increase in 2008. "This was mainly because of the continual solid fee-income and operational productivity," he says.

The 2009 contraction in GDP is put at 5.5-6.0%, while there will be a return to growth in 2010. "The risks to our current 3% growth forecast for next year now lie on the upside," says Shearing. "Reforms undertaken earlier this decade and a relatively low share of foreign currency debt mean that the banking sector is in good shape. Indeed, in contrast to most of the region, credit conditions are showing tentative signs of easing." TEB's Kargin has raised his 2010 GDP growth forecast to 3.7% for 2010 from 3.0% previously.

The weaker lira should continue to give a boost to exporters as external demand recovers, and October's strong industrial production and better export data suggest this might already be happening. October's balance of payments data showed Turkey's exports rose by 4.5% year on year, against weak import demand, which was down 17.5%. This helped the current account post a surprising $671m surplus in October, which compares with the $2.5bn deficit a year earlier. "The silver lining of the global financial crisis is a smaller current account deficit," says Galatia Phoka, emerging markets analyst at Eurobank EFG.

However, the lack of that IMF deal, while a sign of the country's strength, could also hold back growth. "In the absence of an IMF programme, it could take at least three years for growth to return to its potential rate around 5%," says Shearing.

The big concern is how, absent an IMF deal, the government will continue to finance its fiscal deficit, especially given the risk of a pre-election splurge in the run-up to the elections in 2011 (the reason, incidentally, why the government is so loath to accept money from the IMF, since it comes with stringent spending conditions attached). With local banks, which have so far funded the deficit, looking increasingly to lend to the private sector, the government will have to look to foreign investors for the money. Given foreign demand for Turkish debt has dried-up as yields have fallen, yields and interest rates would have to rise to attract the foreign capital back.

No Romanian holiday

Romania is in a frightful mess. No government in place since October, a disputed presidential election in December and a hold on loans from international lenders until the political situation is normalised and the lending conditions adhered to, has pushed the country to the verge of bankruptcy - a sad state for a country that only joined the EU in 2007.

As Romania enters 2010, some resolution to the country's turbulent politics is seen as vital to getting the economy moving again. In the short term, that might've been achieved in mid-December with incumbent President Traian Basescu being declared the winner of a close-fought presidential run-off race after the Constitutional Court rejected a complaint by his rival, Social Democratic Party (SDP) leader Mircea Geoana, who had accused him of rigging the ballot. This offers Basescu the chance to get a government in place and appeal to the IMF to give it another €1.5bn tranche of the €20bn loan it agreed earlier in 2009. However, Basescu is likely to face an uphill struggle to win parliamentary approval of his new government. "To achieve this, he will have to strike numerous compromises with the SDP-dominated opposition. Should he fail to form a government after two attempts, Basescu will have to call parliamentary elections, thus perpetuating political uncertainty," says Vlad Sobell of Daiwa Securities.

The IMF duly visited Bucharest in December to discuss a cost-cutting 2010 budget. However, cutting spending will be far from politicians' minds as the country gears up for those probable parliamentary elections later in 2010, which will mean a return to the situation of politicians spending more time point-scoring and being obstructive than actually working to solve the country's myriad problems. "Elections do not necessarily have to bring more uncertainty or for that matter worse economic policy, but again, it is hard to imagine the governments facing voters in 2010 being happy to engage in significant fiscal reform," says Danske's Rasmussen.

But fiscal, reform is what Romania desperately needs after years of a pro-cyclical fiscal policy that fuelled the macroeconomic imbalances that blight the country right now. The government needs to push through a spending plan for 2010 with a deficit of 5.9% of GDP from the expected 7.3% in 2009. Given that expenditures are customarily skewed towards the last two-three months of the year, we expect the full-year consolidated government budget deficit to surpass the 7.3%-of-GDP IMF revised target, coming in at 8.0% or higher against

4.9% last year," says Ioannis Gkionis, economist with Eurobank EFG.

The most pressing need is to slash perhaps more than 100,000 jobs from the bloated public sector, which makes up a third of all Romanian jobs. Further, "before resorting to a potential increase of a major category of taxes, the next government should tackle other problems like undeclared work, tax evasion in the VAT area or stronger control of the local governments," says Eugen Sinca of Banca Comerciala Romana (BCR).

Reform to the public finances would sit well alongside the predicted stronger growth in 2010. Third-quarter GDP figures released in December were surprisingly positive. GDP contracted 7.1% on year and just 0.6% on quarter, implying the country could emerge from recession as soon as the fourth quarter of 2009 if the positive trends in the Eurozone continue. Following the better-than-expected third-quarter data, BCR changed its forecast for 2009 to a contraction of 7.2% from a previous 8.0%, and revised up its 2010 forecast to 0.6% growth from just 0.2% before. "However, real GDP will remain below the potential in the years ahead, as many companies shut down production facilities during the crisis and the recovery of the investments will be slow and difficult," says Sinca.

Bulgaria blues

At least neighbouring Bulgaria has a functioning and perhaps even effective government, which should help the country get out of the hole it finds itself in.

Bulgaria has been badly mauled by the recession in the EU, especially because it is one of those countries whose currency is pegged to the euro under a currency board arrangement regime, which prevents the authorities from adjusting monetary policy at a time of external shocks, leaving the government having to rely almost entirely on fiscal policy.

While other countries appear to have seen their economies bottom out, Bulgaria looks as though its economy won't reach the nadir until the fourth quarter of 2009 or even the first quarter of 2010. As such, Bulgaria is one of the few countries in CEE not expected to return to growth in 2010.

Even so, third-quarter GDP numbers released in December were a pleasant surprise. GDP decreased 5.4% on year in the third quarter, revised from a 5.8% decline reported initially. In the second quarter, GDP fell 4.9%. For the first nine months of the year, GDP shrank 4.7% compared with the same period of the previous year, revised from 4.8% decrease estimated earlier. With the new data in hand, the Bulgarian finance ministry upgraded its economic forecast for 2009 in December, projecting a 4.9% contraction in GDP instead of a drop of 6.3%. For 2010, Eurobank forecasts Bulgaria's GDP to contract by a further 1.1%; the Economist Intelligence Unit (EIU) expects it to actually grow by 1.1%.

Better growth should help the recently-elected government, led by a new centre-right party headed by Prime Minister Boiko Borisov, maintain its fiscal discipline. The new government took some bold initiatives to repair the fiscal accounts and help reverse the budgetary loosening that took place ahead of the July parliamentary elections. The new government reduced budgetary spending by 15%, pushed back infrastructure projects and reformed the National Revenue Agency in an effort to boost tax revenues. These measures helped the budget switch to a small surplus in October after recording a BGN74m deficit in September. Yet, this isn't likely to be enough to avoid running a small full-year budget deficit in 2009 compared with a modest surplus of 1.8% of GDP in 2008. Finance Minister Simeon Djankov conceded in December that Sofia would likely run up a budget deficit of BGN500m (€255m), or around 0.75% of GDP. Nevertheless, that would still be the smallest budget deficit in the whole EU.

Euro adoption is the cornerstone of the government's economic agenda and such budgetary discipline should enable the government to file an application for entry into the euro-precursor, the European Exchange Rate Mechanism (ERM II), by early 2010, most probably in February. PM Borisov said in December his government's goal is to enter the Eurozone in two-a-half years to three years.

Another area where Bulgaria's relatively stable political situation will help it is over EU funds, which both Bulgaria and Romania had frozen due to their lack of progress in dealing with corruption. In keeping with his hard man image, Borisov, a former bodyguard, ran on a campaign to root out corruption in the country and has already taken several steps to do so. Indeed, the European Commission has commented favourably on the government's latest measure, the establishment of a new unit in the public prosecution office to investigate fraud related to the disbursal of EU funds, and in November unblocked an old EU budget line of €83m of aid to Bulgaria in recognition of the anti-corruption steps takes to date by the new government. "The next critical date is July 2010 when the European Commission is to assess Bulgaria's progress. A satisfactory appraisal would yield an authorisation of €11bn of aid for the period of 2010-2013," says Daiwa's Sobell.

Slovenly slovenia

The other Southeast European EU member is Slovenia, which has also been hard hit by the crisis, though is expected to return to growth next year. Slovenia's membership of the euro helped it maintain a level of stability not afforded other countries outside the Eurozone.

Third-quarter data in December showed that Slovenia's GDP contracted 4.8% on year. The Organisation for Economic Cooperation and Development (OECD) forecast in its economic report in November a 7.9% drop in Slovenia's GDP for the whole of 2009, while projecting a moderate 2.7% growth rate fuelled by exports in 2010, rising to 3% by 2011. The EBRD puts growth also at 2-3% in 2010.

Growth is benefiting from increased demand in Germany and in the European car industry in particular, reflected in the acceleration of export and manufacturing activity; more than 20% of Slovenia's exports go to Germany and production of car components is an important sector of the country's export-oriented economy. However, economists worry the continent's car industry, as well as a more general rebound of demand, was based on fiscal stimulus measures, including car scrappage schemes, and a rebuilding of inventories. Both of these effects will wane in 2010, while high unemployment, weak earnings and patchy foreign investment and lending make it unlikely household spending and investment will take over as drivers of a sustained recovery. Discouragingly, employment has declined further even as the economy has rebounded; most strikingly, manufacturing employment fell by 11.3% on year in the third quarter. "We expect the economy to continue to expand at a healthy pace going into 2010, but see a distinct risk of a renewed slowdown in the course of the year," says Dun & Bradstreet (D&B).

New chapters in Croatian life

The big event for Croatia in 2010 will be the hoped-for wrapping up of negotiations for EU accession in the first half of the year, with a view to joining the bloc in January 2012. Talks had been bogged down by a border dispute with Slovenia, but once that was resolved, Croatia closed in November another three EU negotiating chapters, bringing the total number of closed chapters to 15 while the opened chapters are 28. The biggest obstacle to completion of the EU talks is the chapter on justice, which is blocked by several EU members over a negative report from the International Criminal Tribunal for the former Yugoslavia chief prosecutor Serge Brammertz regarding missing documents relating to the 1990s Balkan wars.

This completion of talks won't be overseen, as had been expected, by Ivo Sanader, who suddenly resigned as prime minister and leader of the centre-right Croatian Democratic Union (HDZ) in the summer to be replaced by his deputy, Jadranka Kosor. The global economic crisis has injected a degree of volatility into Croatian politics, with a string of resignations and arrest of several corporate figures in the autumn as corruption scandals came to light. Transparency International, the anti-graft agency, said the level of corruption in Croatia worsened in 2009, ranking it as the 66th most honest among 180 countries in the survey.

The crisis is also taking its toll on several high-profile Croatian corporations, exposing the dodgy finances and the seamier side of the country's business world. International investors may have demonstrated their faith in Croatia's long-term economic prospects by buying $1.5bn worth of 10-year sovereign Eurobonds in November. But in the local Croatian debt market there are worrying signs that recessionary economic conditions are severely affecting Croatian corporates ability to repay debt. Among companies strapped for cash are computer and electronics retailer HG Spot, clothing and toy retailer Magma, construction company Zagreb-Montaza and medical equipment supplier Hospitalija trgovina.

The problems of business have had a terrible effect on workers. Croatia's unemployment rate rose sharply again in October, with the total number of unemployed persons surging by 5.4% on month and 19.6% on year to 273,265 or 15.5% - the fastest rate of increase this decade and the highest jobless rate since April 2007. As seasonal developments in tourism and construction will cause additional lay-offs of temporary workers and overall consumption remains weak, analysts expect the unemployment rate to exceed 16% by the end of 2009.

The initial third-quarter GDP data showed the economy contracted 5.8% on year, which should, says Erste Bank, put the GDP contraction for the whole of 2009 in the 5.5-6% range. "Despite some mild improvement, the recovery remains slow," the bank says. As a result, most estimates put 2010 growth below 1.0%. The EIU reckons Croatia will be among the 20 slowest-growing countries in 2010 with expected GDP growth of just 0.5%. This figure is what the 2010 budget is based on, which aims to reduce the deficit from 3.0% of GDP in 2009 to 2.5%.

Stand-by me, Serbia

S&P's decision in December to revise Serbia's outlook back to stable from negative was recognition the country has managed to ride out the crisis and even managed to improve its reputation in the global community as a reliable and responsible partner, unlike other countries in the region such as Romania.

The IMF mission completed the second review of its €3bn stand-by agreement with Serbia in early November after reaching an agreement with the government over the fiscal targets for 2009 and 2010. The IMF agreed to relax the budget deficit target for this year - the only conditionality of the programme the government was unable to comply with - from 3.0% to 4.5% of GDP. S&P said that the narrowing of the country's previously high current account deficit - it shrank by 72.3% on year in January-September - and the commitment of the government to comply with the IMF programme have alleviated concerns over Serbia's external liquidity and stabilized exchange rates. "The stable outlook reflects our opinion that external pressures facing Serbia have eased, and our opinion that, in line with the country's IMF programme, budgetary consolidation will occur over the medium term," S&P analyst Marko Mrsnik said.

The falls in industrial and agricultural output appeared to have stabilised in the third quarter, tentative signs, say analysts, that the economy has bottomed and the contraction in 2009 GDP growth will be contained at around 3.5%. Ironically, Serbia's relative backwardness in terms of the boom that was going on around it might have actually insulated its economy from the worst of the crisis, since it didn't have the excesses of borrowing seen elsewhere. "Had the indebtedness gone too far and external deficits caused the accumulation of an even larger external debt, the bust phase would have been more dramatic," reckons Dr. Tassos Anastasatos, senior economist at Eurobank.

Yet any recovery from the recent output declines will be slow and painful, as the economy's export base remains low, the public sector's contribution to overall GDP is still high by regional standards and capital inflows are significantly lower compared to levels recorded in recent years. Meanwhile, domestic demand will be subdued in the coming few quarters, as disposable incomes remain weak, unemployment is high and bank lending restrained. Eurobank expects a mild GDP growth rebound to 1.5% in 2010, even though fiscal policy next year is likely to be conducive to growth.

There also appears to be a shifting in the mentality of Serbs at long last about their country's place in the region and the wider world - notwithstanding lingering issues over Kosovo - helped along by concrete steps that the EU has taken recently to help along its accession progress. In its latest progress report, the European Commission made a positive assessment on Serbia's recent efforts towards EU integration. Serbia was praised for its effort to co-operate with the International Criminal Tribunal and meet the necessary requirements for visa regulations, which has allowed the lifting of visa restrictions for Serbian citizens for the first time since the 1990s. EU foreign ministers also recently decided to unfreeze the interim trade agreement that Serbia had been unilaterally implementing since the start of the year, which will allow Serbia to submit its candidacy for EU membership within the coming months.

All of this is positive for Serbia's long-term growth. GDP/per capita in Serbia still stands at only 69% of its 1989 level and 32% of the Eurozone average. "Longer-term, this can only mean one thing: faster growth," notes Anastasatos.

Rest of the Balkans

Albania too achieved several important milestones in 2009 - general elections in June that were deemed free and fair by Brussels, joining Nato in April and the formal application to join the EU later that month. Another will be GDP growth of around 1-2% - the only country to record positive growth in Southeast Europe. In November, Albania's parliament passed the 2010 budget, which is based on a projected deficit of 3.8% of GDP and forecasted real GDP growth of 6.0-6.5%. Though the country has clocked up GDP growth of more than 5% each year between 2004 and 2008, that's deemed by most analysts to be overly optimistic; D&B projects growth of just 1.5% while the IMF expects 3.0%.

Even so, this economic growth has come from a terribly low base - this is still the second poorest country in Europe (after Moldova). Per-capita income was $3,500 in 2008, according to the Bank of Albania, around a quarter of the EU average - and even this may be an overstatement. Were it not for its substantial metal deposits, most notably chrome, the country would be an economic basket case. The oil industry is handicapped by aged technology, while previously fertile fields that could boost exports lie untended due to migration to the cities and abroad, with complex land ownership issues holding back agricultural investment. This isn't stopping investors, though; the central bank said in December that foreign direct investment grew 61.4% on year to €565m in the first nine months of the year.

Bosnia-Hercegovina's problems are mainly political, a fact cited by S&P in its December explanation of why the country's sovereign rating is stuck at a junk 'B+'. Even so, S&P says the outlook is stable due to the robust growth potential and its expectation that it will continue to adhere to the IMF stand-by agreement in the face of "a difficult budgetary situation, complex political environment, and external and financial system vulnerabilities." The IMF expects Bosnia's economy to shrink in 2009 by 3.5% and then grow by 0.5% in 2010.

For Bosnia-Herzegovina, reconciling relations between the state and its constituent Muslim-Croat and Serb parts remains key to securing much-needed constitutional reform. Without constitutional changes, the EU's Stabilisation and Association Agreement with Bosnia, if and when signed, would be immediately suspended because its constitution violates the European Convention on Human Rights by precluding, for instance, members of the Jewish and Roma communities from the highest levels of political office because of their ethnic and religious heritage. To date, US-EU brokered talks have failed to bear fruit, with the Bosnian Serb Republic keen to safeguard the autonomy granted to it by the Dayton Peace Agreement that ended the war in the 1990s. With elections approaching in autumn 2010, the environment looks increasingly unfavourable for achieving concession and compromise. The citizens of Bosnia, however, along with Albania, look set to enjoy visa-free travel from next summer.

Along with Serbia, both Macedonia and Montenegro saw visa restrictions lifted by the EU. Macedonia is busy reforming itself and was ranked as the third-best reformer of business regulation in the World Bank's latest "Doing Business" report, but its accession prospects continue to be hampered by an ongoing name dispute with neighbours Greece. Having vetoed Macedonia's membership of Nato in 2008, Greece is threatening to do the same with respect to Macedonia's bid to start accession negotiations. D&B expects Macedonia's GDP to contract 3.0% in 2009 while remaining flat in 2010.

Montenegro's economy, until last year the fastest growing in the Balkans, is likely to stay in recession until mid-2010 after contracting 4-5% in 2009, the central bank governor, Ljubisa Krgovic, said in a recent interview. Forecasts for 2010 are better, ranging from a fall of 2% to growth of 2%. "Next year we will have problems. It will be a very difficult year for Montenegro," Krgovic told Reuters in an interview. "Last year we had problems in the banking sector. Now we will have an effect on the real sector."

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