Rising Uncertainties Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized

WESTERN BALKANS REGULAR ECONOMIC REPORT No.16 | Fall 2019 Public Disclosure Authorized Rising Uncertainties Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Western Balkans Regular Economic Report No.16 Rising Uncertainties Fall 2019 Acknowledgements This Regular Economic Report (RER) covers economic developments, prospects, and economic policies in the Western Balkans’ region: Albania, Bosnia and Herzegovina, Kosovo, Montenegro, North Macedonia, and Serbia. The team was led by Marc Tobias Schiffbauer and Edith Kikoni (Task Team Leaders). This issue’s core team included World Bank staff working on the Western Balkan countries (with additional contributions to specific sections): Bojan Shimbov, Sandra Hlivnjak (External section), Milan Lakićević (Fiscal section), Hilda Shijaku, Johanna Jaeger, and Christoph Ungerer (Monetary and Financial section), Sanja Madžarević-Šujster (Labor section), Asli Senkal and Milan Lakićević (Growth section), and Lazar Šestović, Natasha Rovo (Outlook section). Additional contributions were made by: Stefanie Brodmann (Labor section); Alena Kantarovich (Financial sector section); Christoph Ungerer (Fiscal section); Alen Mulabdic (External section); and Collette Wheeler and Julia Norfleet (Outlook Section). Anne Grant provided assistance in editing, and Budy Wirasmo assistance in designing. Valentina Martinovic, Nejme Kotere, Samra Bajramovic, Ivana Bojic, Eranda Troqe, Hermina Vukovic Tasic, Jasminka Sopova, Boba Vukoslavovic, Dragana Varezić, and Leah Laboy assisted the team. The dissemination of the report and external and media relations are managed by an External Communications team comprised of Lundrim Aliu, Anita Božinovska, Paul A. Clare, Ana Gjokutaj, Jasmina Hadžić, Carl P. Hanlon, Vesna Kostić, John Mackedon, Mirjana Popović, Kym Louise Smithies, and Sanja Tanić. The team is grateful to Linda Van Gelder (Regional Director for the Western Balkans); Lalita Moorty (Regional Director, Equitable Growth, Finance and Institutions); Gallina A. Vincelette (Practice Manager, Macroeconomics, Trade, and Investment Global Practice); and the Western Balkans Country Management team for their guidance in preparation of this report. The team is also thankful for comments on earlier drafts of this report received from the Ministries of Finance and Central Banks in Western Balkans countries. This Western Balkans RER and previous issues may be found at: www.worldbank.org/eca/wbrer/. © 2019 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW Washington DC 20433 Telephone: 202-473-1000 Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. Rights and Permissions The material in this work is subject to copyright. Because The World Bank encourages dissemination of its knowledge, this work may be reproduced, in whole or in part, for noncommercial purposes as long as full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: [email protected]. WESTERN BALKANS REGULAR ECONOMIC REPORT NO.16 Contents Rising Uncertainties 1 1. Overview 2 2. Growth slows with lower contributions from exports and investments 5 3. As employment picked up in 2019, unemployment fell to historic lows 9 4. Rising uncertainties call for rapid improvement in public finances 14 5. Positive credit growth is driven by household lending 21 6. Exports slow amid rising international trade tensions 26 7. The outlook is positive but vulnerable to rising external risks 29 Country Notes 33 Albania 34 Bosnia and Herzegovina 39 Kosovo 44 Montenegro 49 North Macedonia 54 Serbia 59 Key Economic Indicators 65 VI | CONTENTS RISING UNCERTAINTIES List of Figures Figure 1.1. After strong growth in 2018, employment increased. 4 Figure 1.2. But economic growth is slowing in 2019 with lower contributions from exports and investment. 4 Figure 1.3. Growth is slowing despite a surge in public spending and widening internal imbalances… 4 Figure 1.4. …at a time when external imbalances are also growing. 4 Figure 1.5. The positive outlook for 2020–21 is thus surrounded by downside risks, including higher external risks amid rising trade tensions. 4 Figure 1.6. The global economy continues to slow adding to rising uncertainties. Creating more job opportunities thus requires strong commitment to structural reforms to unleash productivity. 4 Figure 2.1. In 2019 growth in the Western Balkans is projected to decelerate. 5 Figure 2.2. Higher public spending supported consumption and investment growth in 2018. 5 Figure 3.1. Employment picked up and… 9 Figure 3.2. …unemployment fell in all Western Balkans countries. 9 Figure 3.3. Kosovo’s 2016 labor market gains were nullified. 11 Figure 3.4. While more people joined the labor force and found jobs, progress is slow and uneven. 11 Figure 3.5. In some countries, inactivity is high and heading up. 12 Figure 3.6. The female–male labor participation gap narrowed to below 18 percentage points. 12 Figure 3.7. While across the region minimum wages have gone up recently... 13 Figure 3.8. ...in several countries productivity has not. 13 Figure 4.1. The fiscal deficit is projected to go up in all countries except Kosovo and Montenegro… 14 Figure 4.2. …higher revenues are offset by a surge in spending. 14 Figure 4.3. Social benefits are driving increased government spending… 15 Figure 4.4. …and together with public wages account for over half of total spending. 15 Figure 4.5. Public and publicly guaranteed debt (PPG) rises in Montenegro, North Macedonia, and Kosovo… 18 Figure 4.6. …and external PPG debt is expected to go up in Montenegro, Serbia, and North Macedonia. 18 Figure 5.1. Inflation is trending down, tracking global food and oil prices. 21 Figure 5.2. Core inflation remains subdued. 21 Figure 5.3. Central banks in North Macedonia and Serbia further lowered policy rates… 22 Figure 5.4. …and Serbia intervened in foreign exchange markets. 22 Figure 5.5. Credit outstanding continued to be positive throughout the region. 22 Figure 5.6. Credit to households grew consistently, but not credit to firms. 22 Figure 5.7. Nonperforming loans are declining. 23 Figure 5.8. Banks are adequately capitalized. 23 Figure 6.1. By yearend-2019, the CAD is expected to widen slightly for the region… 26 CONTENTS | VII WESTERN BALKANS REGULAR ECONOMIC REPORT NO.16 Figure 6.2. …mainly because of rising imports for infrastructure projects. 26 Figure 6.3. Total FDI inflows to the region were generally steady in 2019… 28 Figure 6.4. …but net FDI inflows fell in North Macedonia and Serbia. 28 List of Tables Table B.4.1. Recent Eurobond issuances in the Western Balkans. 19 Table 7.1. Growth Rates in the Western Balkans, 2017–21f 29 List of Boxes Box 2.1. Low productivity limits Western Balkan’s potential output 7 Box 3.1. Unemployment declines in the Western Balkans 10 Box 4.1. Fiscal Rules in the Western Balkans: What Does the Public Say? 16 Box 4.2. Recent Eurobond Developments in the Western Balkans. 19 Box 5.1. The Assessment Framework on Preconditions and Capital Market Development 24 Box 6.1. The Central European Free Trade Agreement (CEFTA) 27 Box 7.1. Emerging Global Risks 30 VIII | CONTENTS Rising Uncertainties WESTERN BALKANS REGULAR ECONOMIC REPORT NO.16 1. Overview Supported by strong economic growth in consumption continues to be the main driver of 2018, unemployment fell to historic lows economic activity in Western Balkan countries. in the first half of this year.By June 2019, Consumption growth has been fueled by higher 150,000 additional jobs have been created in public spending and near double-digit growth the Western Balkans compared to a year earlier. in household lending, raising questions on Some 43,000 young people have found jobs, the sustainability of the consumption-driven especially in Albania, as youth unemployment growth in the region. in the region has fallen supported by the growing business-process outsourcing sector. And internal and external imbalances are Economic activity in 2018 has also attracted rising. Growth is slowing despite a surge more women into the labor force. Despite in public spending stimulated by buoyant these positive labor market developments, cyclical revenues. The rise in revenues has less than half of those of working-age in the not been enough to offset the rise in current Western Balkans have a job (44 percent). In spending which was dominated by public Bosnia and Herzegovina and in Kosovo, only wages and social benefits, including higher 34 percent and 30 percent of the working-age spending on untargeted social programs in population has a job and youth unemployment Bosnia and Herzegovina and Kosovo. As a remains high in both countries. Sustaining result, fiscal deficits are projected to go up in high and equitable economic growth is thus 2019 in all countries in the Western Balkans essential to create many more, much-needed except Kosovo and Montenegro. External job opportunities in the region. imbalances also started to rise as exports slow because of falling demand from EU trading But economic growth in the Western partners amid rising trade tensions. The current Balkans is slowing after a short-lived revival account deficit (CAD) is expected to go up in in investment in previous years. In 2019, all Western Balkan countries in 2019.

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