Albania: Risk Assessment

Country Rating¹

Rating: C

Business Climate Rating¹

Rating: C

Risk Assessment²

Economic growth below the levels prevailing before the crisis
The recovery is expected to continue in 2011 but will remain below pre-crisis levels, which amounted 6% on average from 2003 to 2008. Activity in the construction and telecommunication sectors will likely continue to contract but will offset by good performance in various industry segments like energy and services (hotel industry, catering, transport). In 2011, ore exports will be dynamic, provided there is an adequate supply of electric power supplier, and will derive support from the recovery in foreign direct investment from the euro zone. Textile exports will remain relatively strong due to the relative weakness of the Albanian lek. Food exports, however, could suffer from the repercussions of the floods late last year. The recovery of private transfers from abroad, meanwhile, is expected to boost household consumption.

Fiscal adjustments on the horizon
The trade balance is structurally in deficit. After a sharp depreciation in 2010, lek is nonetheless expected to remain stable thanks to the recovery of private transfers from immigrant workers and to the high interest rates payable in local currency, which attracts foreign currency deposits from non-residents. And external financing needs continue moreover to be covered by foreign direct investment and international aid. The Eurobond successfully floated late 2010, enabled Albania to continue to finance its large public deficit at relatively low cost. Public-sector debt exceeded 60% of GDP in 2010, and it will likely grow further in 2011 with nearly half denominated in foreign currency. If it is not brought under control, however, especially by basing fiscal budgets on realistic revenue hypotheses, the growth of public-sector debt could undermine the domestic private investment rate in the medium term.

A gridlocked political situation but not entirely hopeless
Albania has taken pains to develop strategic cooperation with the United States and the European Union. The country joined NATO in April 2009 and since then has doubled the number of its troops in Afghanistan. And it has submitted its candidacy for admission to the European Union. But in November last year the European commission rejected this request. A positive response in the future would notably depend on the efforts made by the government to combat corruption and organized crime. Moreover, the political dialogue between the government and the opposition also calls for greater effort. After refusing to sit in Parliament until February 2010, in the wake of the disputed outcome of the 2009 legislative elections, the opposition has systematically blocked the adoption of reforms necessitating a qualified majority, particularly reforms required by the European Union. Despite call by the international community to find a compromise solution, the situation has remained blocked, with the opposition insisting on the holding of elections. The pressure exerted by the United States, which has threatened to discontinue grants in development aid if no solution is found, will be unlikely to have any greater impact in 2011.

Strengths

• Higher standard of living thanks to several years of strong growth
• Effort on investment, particularly on infrastructure
• Low inflation
• Limited foreign debt
• Improvement in public debt management and banking system oversight

Weaknesses

• Large foreign trade deficit with exports concentrated in textiles and dependent on the Italian market
• Dependence on remittances from expatriate workers
• Bank loans and public debt denominated in foreign currency to an appreciable extent
• Poor infrastructure, particularly for energy
• Deficiencies in the legal system and the anti-corruption campaign