Western Balkans countries on strong convergence path, IMF survey shows

By bne IntelliNews April 12, 2016

The International Monetary Fund’s latest World Economic Outlook released on April 12 forecasts steady growth of more than 3% for the Southeast Europe region between 2016 and 2021, outstripping most of Western and Central Europe as countries from the region continue on their convergence path.

According to the IMF, growth in the emerging and developing Europe region - which includes Turkey, Poland, Hungary, and all of Southeast Europe except Slovenia and Moldova - is projected to remain broadly stable at 3.5% in 2016 and 3.3% in 2017.

“Activity in the region has benefited from lower oil prices and the gradual recovery in the euro area, but elevated corporate debt is hindering private investment,” the IMF says.

In Southeast Europe’s largest economy, Romania, GDP expansion will accelerate to 4.2% in 2016 from 3.7% y/y in 2015. The projection represents an upgrade from the 3.9% growth expected in October - the highest increase within the region. The country’s strong growth is mainly consumer driven, a result of VAT cuts and a series of hikes in public sector wages. However, growth is set to slow to 3.6% next year.

The decline in consumer prices - again a result of the VAT cuts in June 2015 and January 2016 - is also expected to ease to 0.4% this year from 0.6% in 2015, under the IMF’s scenario. Consumer prices are expected to rise by 3.1% in 2017.

In the medium term, Romania’s GDP growth forecast for 2021 is estimated at 3.3%, equal to the region’s average. Across Southeast Europe 2021 forecasts vary substantially, from just 2.0% in Croatia to 4.2% in Montenegro.

The remaining EU member states in the region - Bulgaria, Croatia and Slovenia - will grow at a slower pace than the average, while aspiring member states from the Western Balkans are expected to outstrip the average as they gradually converge towards European GDP levels. Along with Montenegro, growth of 4% or over is expected in Albania, Bosnia, Kosovo and Serbia.

There is also a stark difference in terms of unemployment between the two groups. Unemployment remains relatively low among the longer-standing EU member states. In Bulgaria, Romania and Slovenia unemployment is on a downward trend in 2016 and 2017. Forecast unemployment rates for 2016 range from 8.6% in Bulgaria to 6.4% in Romania.

By contrast, the fund expects Serbia’s unemployment rate to reach 18.7% and 18.9% in 2016 and 2017 respectively, going up from 18.5% in 2015. The unemployment rate in Croatia is only slightly lower at 16.9% in 2015, though it is expected to drop somewhat to 15.9% by 2017. No unemployment forecasts are given for the remaining states in the Western Balkans, but data from local statistics offices show their unemployment rates are similar and in some cases even higher.

At the same time, most Western Balkans countries have above-average growth forecasts for 2016. Montenegro's economy is expected to post the highest growth of 4.7% among the countries in Emerging and Developing Europe this year, driven by strong investments in infrastructure and tourism.

However, the forecast for Montenegro was revised down compared to the 4.9% projected in the October’s WEO, and is also significantly higher than the projection in the World Bank’s April 8 Economic Report report of just 3.7%. The Adriatic country’s growth is projected to significantly slow down next year to 2.5%, before accelerating to 4.2% in 2021, the IMF said.

The IMF has upgraded its forecast for Macedonia’s 2016 GDP growth to 3.6% from 3.2% in the previous forecast, while for Albania, the IMF forecast a GDP growth of 3.4% in 2016, unchanged from its previous projection. Bosnia's economy is expected to grow by 3.0% in 2016, slowing from an estimated 2.8% in 2015. The IMF’s latest forecast matches the government’s projections and is more optimistic than the expectation of the World Bank, which projected that Bosnia’s economy will expand by 2.6% this year. In the April WEO, the IMF lowered its forecast for Kosovo’s 2016 real GDP growth to 3.4% from 3.8% projected in October, though a rebound to 4.3% is anticipated in 2017.

The IMF report did not comment on the drivers for growth in the region, but the earlier World Bank report noted that growth in the Western Balkans was underpinned by a revival in investments and exports, which overtook domestic consumption as the main growth driver. However, it warned that, “Improving productivity remains pivotal for boosting growth in the region".

While the small Western Balkans economies power ahead, four other countries – Bulgaria, Croatia, Moldova and Serbia – are expected to perform worse than the regional average.

The IMF’s projection for Moldova’s GDP growth this year is just 0.5%, the slowest in the region, reflecting expectations of a moderate recovery. The small economy remains highly volatile and dependent on the performance of the agricultural sector. However, at minus 0.5% according to initial estimates, last year’s growth was better than the 1.1% contraction forecast by the IMF.

The World Bank’s short-term expectations for Moldova’s economy are consistent with the IMF’s scenario for this year. However, while the fund sees Moldova’s economy gaining ground at moderate pace - to 2.5% in 2017 and 3.8% in 2021 - the bank is more optimistic, expecting more robust rates of 4%-4.5% in 2017-2018, as investment confidence increases. A forecast issued by the local Expert Grup think tank on April 6 projects a much more robust 2.5% growth this year and 5.6% y/y in 2017 under its baseline scenario.

In the April WEO, the IMF raised its forecast for Bulgaria’s 2016 GDP growth to 2.3% from 1.9% projected in October, which is largely in line with the World Bank’s figure of 2.2%.

Serbia’s economy is set to grow by 1.8% in 2016, accelerating from expected 0.7% growth in 2015 as Serbia continues to recover from the devastating floods that hit the energy and mining sectors particularly badly in 2014. The 2016 figure has been revised upwards from the 1.5% anticipated in its October 2015 report, and the fund expects the positive trend to continue through 2021 when GDP should grow by 4%.

The IMF raised its 2016 growth forecast for Croatian economy to 1.9% from the 1% projected in October. However, Croatia remains an under-performer in the Emerging and Developing Europe group, only restoring economic growth in 2015 following six years of recession while the region grew 3.5% on average.

Slovenia is also expected to grow by 1.9% in 2016, up from 1.8% anticipated in October. This is a slight deceleration compared to 2015, when the Slovenian economy expanded by 2.9% thanks mainly to stronger domestic demand,.


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