Albania in a Snapshot Deloitte | May 2018 This Economic Snapshot present an overview of Albania, in terms of country’s perspectives for development in comparison with Western Balkan region.

What does Albania have to offer? What are the key performance indicators based on the latest economic reports? How do they change in short-term and long-term projections? How is the market developing? Next new opportunities…

Deloitte aims to provide a general understanding on opportunities and risks of the current economy in order to support local and international companies in pursuit of their key objectives. Glossary

AKEP – Autoriteti I Komunikimeve Elektronike & Postare

ARPU - Average Revenue Per Unit

B&H – Bosnia and Hercegovina

CAGR – Compound Annual Growth Rate

CPI – Consumer Price Index

EIU - Economist Intelligence Unit

FDI - Foreign Direct Investment

GDP – Gross Domestic Product

NPL – Non Performing Loans

ROE – Return on Equity

ROA – Return on Assets

SEE6- South Eastern Europe 6 countries : Albania, Bosnia and Herce- govina, Kosovo, Macedonia, Montenegro, Serbia.

TAP- Trans Atlantic Pipeline Economic Insights GDP Trends

4.00% 3.90% 3.80% 3.70% 3.60% 3.50% 3.50% 3.40% 3.30% 4.2% 4.0% 3.9% 3.8% 3.3% 3.2% 3.0% 3.0% 3.0% 2.8% 2.7% 2.6% 2.6% 2.5% 2.2% 1.9% 1.9% 0.5% Real GDP Growth rate GDP growth 2018-Albania vs. SEE countries

2016 2016 2017 2017 2018 2019 2020 2021 2022 2017 2018 2019 Forecast in Actual Forecast in Estimate in Forecast in Forecast in Forecast in Forecast in Forecast in Dec 2015 Dec 2016 Dec 2017 Dec 2017 Feb 2018 Feb 2018 Feb 2018 Feb 2018 Macedonia Montenegro Serbia B&H EU Albania

Source: Economist Intelligence Unit

As per EIU, preliminary GDP growth in 2017 is at 4.0%, The GDP of South-eastern European region is expected to increase during 2018 by 2.9%, and surpassing forecasted GDP growth of 3.5% as a result GDP growth at the country level, the highest growth is projected to be registered in Albania at 3.9%, while the of election-related additional government spending Country change lowest is expected in Macedonia at 2.6%. The increase of real GDP is driven by an exponential and strong import demand from the booming euro (forecast vs. estimation) growth in Serbia and Macedonia, where the latter is expected to grow at 2.6% compared to the zone economies. 0.5% during 2017. Albania 0.5% In 2016, actual GDP growth registered 3.5%, higher The SEE6 counties will continue to grow in terms of GDP also during 2019 with 2.97% and 2020 compared to forecast data for the same period of B&H 0 with 3.4%. 3.3%. Macedonia 2.7% GDP growth is expected to remain steady in 2018, Montenegro 1.2% before slowing to an average of 3.6% per year in 2019-22 due to the Industrial Output decline and the Serbia 1.4% growth in import demand in Albania's main euro zone markets moderates. Economic Insights CPI, FDI, Exchange rates trends The projections for 2017 show an increase by 2.1% of the Albanian CPI, A significant portion of the FDI in 2016 is due to two large energy whereas the registered inflation was slightly higher, at 2.2%. The reasons for projects financed by foreign private capital, such as the Trans-Adriatic the CPI upsurge are the expansion of economic activity, the increase of prices Pipeline (TAP) and the Devoll Hydropower plant in the south of the in international markets and the increase in the domestic demand and country. Based on World Bank reports, in 2017 FDI was projected at consumption. 8.0% of GDP, but the actual value was registered at 8.3%, which is equal to USD 1.01 bn.

4.0 40 3.0 3.0 3.0 2.8 30 10.0% 8.9% 8.3% 2.1 8.1% 8.0% 8.0% 7.0% 7.0% 2.0 20 2.3 2.3 1.3 2.2 6.0% 1.9 10 1.0 4.0% 2.0% 0.2 Household consumption (USD mln, global ranking in 2016) Albania and SEE6 CPI (%) 0 0.0 FDI in Albania (% of GDP),bn USD 0.0% 2014 2015 2016 2017 2018 2019 Albania B&H Macedonia Serbia 2016 2017 2018 2019 2020 Household consumption Albania SEE6

Source: Economist Intelligence Unit Source: World Bank, SEE Economic Report No. 12, Fall 2017 Source: World Bank, SEE Economic Report No. 12 i BP6, Fall 2017

Chinese “Invasion” on Western Balkan countries As per Economist Intelligence Unit, China has invested billions of euros to the Western Balkans (Albania, Bosnia and Hercegovina, Macedonia, Montenegro and Serbia). Most of the Chinese companies committed in the Balkans are state-owned or heavy state-controlled, focused mainly in construction services. Additionally, according to UN data, trade in goods between China and the Western Balkans grew by 6.4% per year in 2010-15.

Serbia is the country with the highest number of Chinese investments focused in project financing of Budapest-Belgrade Highway, Kostolac B3 HPP, Belgrade-Bar(Montenegro) Highway.

Chinese companies have not so far implement large scale finance projects in Albania, still the country is in the focus of the Chinese investors. The presents of Chinese Porjects has been noticed through the Chinese Communications Company which is currently upgrading the Port of Shengjin, Chinese Geo-Jade Petroleum which has recently acquired an interest in two Albanian off-shore oilfields. Meanwhile, Tirana International Airport has been taken over by a Hong Kong company.

However, hardly any of the Chinese projects in the region represent FDI. The majority of Chinese projects in the Western Balkans are in the form of Chinese construction services, which are financed by loans. Economic Insights Labor market in Albania

Country 2017 2050 2017-50 % % population % working Average Age group 15-29 30-64 change growth per age growth Occupation wage (ALL, year per year 2016) Official Albania 2,930 2,664 (9.1) (0.3) (0.7) Teaching 57,000 unemployment 26.6% 11.2% B & H 3,507 3,058 (12.8) (0.4) (0.5) Science & rate 68,344 Engineering Macedonia 2,083 1,931 (0.2) (0.7) Employment rate 33.0% 67.5% (7.3) Health 52,057 Chief executives, Labor force Montenegro 629 588 (0.2) (0.5) 81,870 44.9% 76.0% (6.5) legislators participation rate Serbia 8,791 7,447 (15.3) (0.5) (0.8) Business associates 52,259 Source: Instat,”Labour market”, 2016 Source: EIU, 2018

The unemployment rate has decreased significantly in 2015-2017 period and it is projected to reach a rate of 6% in 2022. 57.3% 49.2% 14.2% There is a positive correlation between the degree area chosen and the average wage of occupation. Thus, the highest number of graduates Labor force Employment Offical preferred social sciences, business, and law studies which are associated with chief executives, legislators, and business associates participation rate Unemployment occupations. rate rate

Population % according to gender 2017 15% Unemployment rate Graduates according to the degree area, in ‘000 14% 13.5% Source: INSTAT, “Labor market” 2016 13% 13.3% 13.3% 1,453,541 male 1,423,050 female 12% 50.5% of population 49.5% of population 11% 10% 10.3% 9% 8% Low birth rates and an ageing population mean that the total popula- 7.7% 7% 7.3% tion SEE6 countries is projected to fall from 2017 to 2050 by 0.5% per 6.9% year on average. Albania follows the same pattern as the region coun- 6% tries expected to decrease annually by 0.3%, while the decline of the 5% Education Arts Social Natural Health working age is expected to be higher at 0.7%. 2013 2014 2015 2016 2017 2018 2019 Engineering Agriculture Services science science 2013 2014 2015 2016 Economic Insights Albania Risk Assessment

Sovereign Currency Banking Political Economic Country risk risk sector risk risk structure risk Risk ...... February 2017 B B B CCC CCC B ...... February 2018 B BB B B CCC B ......

Improvement Upgrade ......

Sovereign risk – The risk score remains unchanged, at 53, due improved tax collection and renewed fiscal tightening expectancy to cut the deficit to 1.4% of GDP in 2019.

Currency risk – Improved to BB, from B, as the political stability increased since the June 2017 parliamentary election. The Lek is expected to strengthen against euro and more strongly against the US dollar in 2019.

Banking sector risk – The rating remains steady with a score of 56, as the banks are well capitalized and liquid but the level of non-performing loans remains high.

Political risk – Upgraded to B, from CCC, as the political environment became calmer after the June 2017 election.

Economic structure risk – The rating remains steady, as the current-account deficit remains large and the export dependence on the poorly performing Italian and Greek economies. Economic Insights Economy Sectors in Albania 5.4 5.1 4.6 4.5 4.5 4.4 4 4 3.8 3.5 2.9 2.5 2.5 2 2 2 1.5 0.6 Economy sectors growth (%) 2017 2018 2019 2020 2021 2022

Source: EIU, country report, 2018

During 2006-2016, services sector has contributed the most towards GDP with an average growth of over 50%, followed by agriculture which has increased with approximately 3%. On the other side, industry sector, has decreased by 3%, during the same period.

From the aggregate supply optics is expected that all main sectors to perform in line with their average historical growth rates. Specifically, agriculture is expected to grow in real terms considering the focus of the government and the financial support to farmers and agro-processing sector from United Nations and EU funds (IPARD, SARED, National scheme, etc.).

Due to its weight to aggregate supply structure, services are expected to contribute significantly more than the other sectors in the GDP growth. Sector- Mobile

6.8% 8.2% 4.3% 4.5% There are three mobile companies operating in the Albanian market, Mobile Operators 13.6% 14.2% 14% , Telekom Albania (Deutsche Telecom group), 000' EUR 2014 2015 2016 16% (majority shareholder is a Turkish company). Revenues stopped providing services on Jan 1st 2018, after sold to Vodafone and 118,442 116,793 127,425 32.1% 32.2% Telekom Albania. Vodafone is the company who has the largest mobile 39.7% 34.3% Telekom Albania 84,531 85,532 78,568 network infrastructure, valued at c. EUR 99 mln in 2016, followed by Albtelecom Eagle 17,054 16,358 15,693 Telekom Albania with c. EUR 48 mln. Plus Communication 13,452 16,124 22,772

49.4% 49.2% 39.9% 41.5% EBITDA Margin Based on AKEP annual reports, Vodafone has the highest revenues in Vodafone Albania 10.5% 3.6% 2.3% Mobile services users- Market share breakdown 2014-2016. Regarding the ARPU (EUR/monthly), Vodafone has the Telekom Albania 13.1% 0.6% (4.5%) 2014 2015 2016 2017 highest rate in 2014, then in 2015 it is slightly overpassed by PLUS **Albtelecom Eagle (44.7%) (63.0%) (7.2%) Vodafone Albania Telekom Albania Albtelecom Plus ARPU, which increases significantly in 2016. Plus Communication (61.2%) (34.8%) 46.8%

Net profit Vodafone Albania 10,555 1,675 (3,563) Telekom Albania 18,097 4,007 163 **Albtelecom Eagle (14,857) (16,346) (9,220) Plus Communication (10,202) 650 7,008 4.3% 5.1% Average Net Profit 898.1 (2,503.4) (1,402.8) 14.6% 16.5% 13.7% 13.9% 10.49 24.8% 29.0% 27.3% 30.2% 6.18 6.11 6.13 5.75 5.82 5.97 5.78

4.29 Throughout the years (2011-2017), Vodafone has the highest 2.94 60.6% 3.20

54.5% 54.7% 2.79 50.7% percentage of market share in terms of Mobile Services users, in addition to Broadband services (2014-2017), followed by Telekom, Average revenue per unit (EUR/unit monthly)

Broadbend services users - Market share breakdown Albtelecom, and Plus in the respective order. 2014 2015 2016 2017 2014 2015 2016 Vodafone Albania Telekom Albania Albtelecom Plus Telekom Vodafone Albtelecom Plus Communication Source: AKEP Quarterly Report 2017 Financial Service Industry - Bank

Bank Assets to GDP Total assets to GDP, captures the overall size of General Data for the Banking System in Albania the industry. The chart illustrates that among ALL million FY15 FY16 FY17 CAGR Albania 95.7% regional countries Montenegro and Albania has Total assets 1,317,843 1,407,286 1,445,330 4.7% the highest rate, more related to a low GDP Total loans 585,957 600,367 600,876 1.3% levels rather then the development of the B&H 83.7% Retail loans 154,561 168,667 178,001 7.3% banking sector. Corporate loans 431,396 431,700 422,874 (1.0%) Total deposits 1,100,290 1,157,753 1,165,679 2.9% Kosova 86.4% Albania has a total number of 16 second tier Retail deposits 936,535 965,893 970,378 1.8% banks. The largest five banks hold about 75% of Corporate deposits 163,755 191,860 195,302 9.2% the system’s total assets and deposits. During Profit (net,cumulative) 15,699 9 ,270 22,074 18.6% Macedonia FYR 70.2% 2015-2017, average total assets for the second tier banks has increased by a CAGR of 4.7%, Equity Capital 125,528 136,883 146,953 8.2% Montenegro 96.6% reaching ALL 1.44 bn. Capital adequacy in % 16 16 17 2.7% ROE 13.2% 7.2% 15.7% 9.3% ROA 1.2% 0.7% 1.5% 13.4% Serbia 72.7% Problem loans/Total loans Ratio 18.2% 18.3% 13.2% (14.8%) No. of outlets 518 506 494 (2.3%) Source: Albanian Association of Banks, 2017 Bank Ratio Analysis Source: Deloitte analysis The average loan to total assets in the banking Profit (net,cumulative) sector decreased from 44.5% in 2015 to 41.6% in Based on Bank of Albania, the structure of regulatory capital appears favorable as 2017, lower compared to the peer banks in the regards its capacity to cover any potential losses, since Tier 1 capital continues to region. dominate.

53.3% The higher increase in the regulatory capital to risk weighted assets led to rise in the 51.9% Total deposit volume in the market increased by 51.5% capital adequacy ratio to 16.6%, from 15.7% a year earlier.

4.6% during 2015-17, resulting in a decline of loan 44.5% 42.7% to deposit ratio from 53.3% in 2015 to 51.5% in 41.6% ROE/ROA 2017, significantly lower compared to the regional While overall NPLs have steadily declined by over 20% in the region in 2016, the data of 71.5%, which have higher loan portfolio Albanian NPL (15.7%) and Serbian one (12.2%) still account for the highest rates in the level (more developed financial sector). region. At 3.9%, Kosovo has the lowest NPLs in the region. 26.1% 22.3% Net Interest Income to total assets in higher in In 2017, the Bankruptcy Law and old loans write-offs have improved Albanian NPL

Albania compared to peers of 3.3%, in line with 4.4% 4.2% ratio over total loans to 13.2%, or c.5% less than a year before. interest expense to interest income ration. Loan to total assets Loan to deposit market Net Interest Interest Expense/ Income/Assets Interest Income 2015 2016 2017