1. Sanja Madzarevic Sujster Podgorica, November 16, 2017
WESTERN BALKANS Regular Economic Report No. 12 (Fall 2017)
Sanja Madzarevic Sujster
Podgorica, November 16, 2017

2. MAIN MESSAGES
Western Balkans continued to grow in 2017, although at a slower pace than in 2016
Employment reached pre-crisis levels and poverty was reduced
Exports on the rise, but external imbalances remain
Still high fiscal deficits urge to ensure fiscal sustainability
Economic outlook is positive with risks

3. GROWTH CONTINUED WITH EMPLOYMENT GAINS

4. Growth continued in Western Balkans at slower pace than in 2016
Growth slowed down from 2.9 percent in 2016 to 2.6 percent in 2017 underpinned by robust consumption and investment recovery.
Real GDP growth, percent
Decomposition of real GDP growth, percent
Source: World Bank staff calculations based on data from national statistical offices.

5. Employment returned to pre-crisis levels although unemployment remains high
Employment growth accelerated and unemployment rate declined in most countries, while increase in disposable incomes reduced poverty rate.
Employment index, Q2 2008=100
Unemployment rate, percent
Poverty ($5/day at 2005 PPP) is expected to decline across the region. In MNE to 11.1 from 11.9 percent.
Source: National statistical offices and World Bank staff estimates.
Note: The regional total excludes Kosovo.
Source: National statistics offices and World Bank staff estimates.
Note: Long-term Unemployment is presented as percentage of the labor force, instead of the conventional percentage of the unemployed.

6. Labor participation increased and more jobs are created by the private sector
More people seem to be joining the labor force and finding jobs. Despite still high public sector wage premiums, more than half of jobs were created by the private sector.
Labor market trends, Percent of population aged 15+
Public/private net wage ratio, percent
Poverty ($5/day at 2005 PPP) is expected to decline across the region. In MNE to 11.1 from 11.9 percent.
Source: National statistics offices, Serbian insurance registry and World Bank staff estimates.
Source: National statistical offices and World Bank staff estimates.

7. Current account deficits broadly unchanged in 2017, except in Albania.
Despite strong exports, external positions remain vulnerable due to fast-growing imports
Current account deficits broadly unchanged in 2017, except in Albania.
Current account balance, percent of GDP
Contribution to changes in current account deficit, 2016, percent of GDP v
Source: Data from central banks and national statistical offices; World Bank staff estimates.
Source: Data from central banks and national statistical offices; World Bank staff estimates.
Note: “Others” category mainly refers to repatriation of profits.

8. FDI inflows remain steady, helping to finance external deficits
FDI flows increased, while portfolio investments recovered. Net FDI inflows increased in Montenegro--the frontrunner in the region.
Four-quarter rolling sum, Euro mln
FDI, percent of GDP
Source: Data from central banks and national statistical offices; World Bank staff estimates.

9. SUPPORTIVE POLICY RESPONSES

10. Fiscal deficits increased and public debt remains high
Except for Serbia, fiscal deficits are expected to rise in the region in 2017, being procyclical. However, Montenegro is implementing Fiscal Consolidation Strategy to tackle deficit and debt over the medium term.
Fiscal deficits by country, , Percent of GDP
Public and publicly guaranteed debt, percent of GDP
Sources: National statistical offices, Ministries of Finance, World Bank staff projections.

11. Fiscal space for growth needs to be created in the region
Growth-stimulating public investment is not accompanied by cuts in recurrent spending.
Contribution to change in the fiscal deficit, 2016, Percent of GDP
Public spending, 2017, percent of GDP
Source: National statistical offices, Ministries of Finance, World Bank staff projections.
Source: National statistical offices, Ministries of Finance, World Bank staff projections.

12. As deposits recovered, so did credit, driven by lending to households
Expanding credit supported economic growth, while credit to households grew faster than credit to firms in most of the region.
Private sector credit growth, percent y-o-y
Credit growth, percent y-o-y in August 2017
Source: National Central Banks.

13. Asset quality is gradually improving, while banks remain well-capitalized and liquid
Although still high, NPLs declined in all countries and banks are well capitalized and liquid, with possible further consolidation ahead. In Montenegro, new legislation helped further reduce NPLs.
Capital adequacy ratio, percent and percentage point
Non-performing loans (% of total loans)
Source: National Central Banks
Source: National Central Banks

14. Positive near-term outlook

15. Positive outlook, with broad reform agenda ahead
Risks and opportunities
External
Less favorable borrowing conditions related to ECB monetary tightening
Debt servicing risks related to dollar appreciation
Stronger EU growth and still favorable liquidity conditions
The EU accession agenda enhances growth prospects
Domestic
Policy uncertainty may delay implementation of the structural reforms  Risks for policy reversal and slippages
Weather-related vulnerabilities
Fiscal consolidation is expected to reduce fiscal risks and improve confidence
Real GDP Growth, percent,
2016
2017e
2018f
2019f
Albania
3.4
3.8
3.6
3.5
Bosnia and Herzegovina
3.1
3.0
3.2
Kosovo
4.4
4.8
FYR Macedonia
2.4
1.5
3.9
Montenegro
2.9
4.2
2.8
2.5
Serbia
2.0
Western Balkans
2.6
3.3
Source: Data from central banks and national statistical offices, World Bank staff projections.
Note: *Western Balkans is a weighted average.

16. Sustaining reform momentum and ensuring fiscal sustainability for growth
Western Balkans
Montenegro
Sustain reform momentum and pursue fiscal consolidation
Eliminate disincentives and barriers to formal employment
Improve the business climate and governance
Enhance the equity, quality and efficiency of public services and social protection systems, while reducing the governments’ footprint
Deepen global integration
Advance the structural reforms and the EU accession agenda
Continue to pursue the fiscal consolidation
Strengthen tax revenues and review tax exemptions
Review pension policy
Public administration reform and staff rightsizing
Continue efforts to reduce NPLs, enhance prudential and banking resolution frameworks
Support the technology transfers, standardization, connectivity
Refocus the government investments to environmental projects and use EU funds

17. Western Balkans Regular Economic Report # 12
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