2. 1 Budapest, 4-5 April 2005 South Eastern Europe Main economic trends and challenges Christophe de La Rochefordière DG Economic and Financial Affairs, European Commission

3. 2 Overview 1.Horizontal overview: key features. Some surprises…. 2.Candidate countries : Bulgaria, Croatia, Romania ( and Turkey, not included ). 3.Western Balkan countries : Albania, Bosnia and Herzegovina, former Yug. Rep. of Macedonia, Serbia and Montenegro and Kosovo.

4. 3 Income levels: fairly low and comparable (except + Croatia and - Kosovo)

5. 4 Overall solid growth…

6. 5 Gradual disinflation continues…

7. 6 General Government balance

8. 7

9. 8 First sub-region: SEE candidate countries Main trends in Candidate countries

10. 9 Candidates: output growth appears to converge towards 4 - 5 %

11. 10 Candidates: Inflation slowly approaches EU levels

12. 11 Candidates: unemployment rates fall but remain high

13. 12 Candidates: public deficits move towards sustainability

14. 13 Candidates: public debt ratio shows mixed picture

15. 14 Candidates: current accounts and FDI FDI finances large share of current account needs in % of GDP Bulgaria: current account - 8.0 FDI 9.1 coverage 113 % Croatia: current account - 4.7 FDI 2.2 coverage47 % Romania: current account - 7.5 FDI 6.9 coverage92 %

16. 15 Candidates: challenges Macro – monetary: trade-offs between currency appreciation and internal price adjustments Maintain sustainable fiscal stance Attract greenfield FDI Increased international competition may hit candidate countries (ex: end of textiles quotas…) Continue with unfinished reform agenda: privatisation, public enterprises restructuring, labour markets, “acquis” translation / implementation, improve the judiciary, contract enforcement, facilitate market entry / exit.

17. 16 Candidates Brief country review, challenges

18. 17 Bulgaria Maintain prudent fiscal stance Ensure sustained foreign investment to finance current account deficit. Attract greenfield investment. Continue reforms, in particular: Public enterprises restructuring (coal, energy, railway…). Improve SME business environment Improve judiciary – contract enforcement

19. 18 Croatia Good track record of moderate growth, low inflation and exchange rate stability Fiscal and external imbalances call for tightening of public spending Structural reforms need to be accelerated, in particular enterprise restructuring and privatisation Continued public administration reform, land and cadastre, judiciary is essential

20. 19 Croatia Particular sector challenges: Reform of health care to stop arrears accumulation Railway restructuring and liberalisation State aid to shipbuilding Restructuring of steel sector Development of tourism

21. 20 Romania Macro stability : preserve momentum in disinflation, strengthen fiscal sustainability Reduce public sector deficit: enforce financial discipline; continue energy prices adjustments; improve public enterprises’ financial performance Deepen structural reforms : restructuring of key sectors, such as energy, mining, transport and agriculture; continue privatisation (ex: Distrigaz Nord and Sud) Enhance business environment : progress in the functioning of the judiciary and the public administration. Implement bankruptcy law.

22. 21 Second sub-region Main trends/challenges in the Western Balkans

23. 22 Uneven fiscal consolidation

24. 23 External deficits remain fairly large …

25. 24 … and FDI overall not sufficient to finance current account deficits

26. 25 Despite substantial fiscal tightening, current account did not clearly respond

27. 26 Structural reforms: progress has been achieved... The core legislative framework of a market economy is in place throughout the region Price and trade liberalisation well advanced Privatisation is continuing in the region

28. 27... but much remains to be done Need to pursue fiscal consolidation Reform of the public administration and the management of public finances Enterprise restructuring / privatisation Access to finance for SMEs Rule of law, enforcement the weak point Reform of the cadastre and clear ownership rights Size of the informal economy

29. 28 Western Balkans Brief country review: key features and critical challenges

30. 29 Albania The economy has regularly posted high growth figures (above 6%) Slow but steady fiscal adjustment. Low inflation and stable currency, but high external imbalances Weak state and considerable structural problems

31. 30 Albania Privatisation regained momentum in 1994 : sale of Savings Bank to Raiffeisen Bank. Privatisation of Albtelekom and ARMO (fuel company) underway. Banking sector almost 100% private. Increased confidence in banking sector. Weak points: Commercial legislation enforcement. Fraud and corruption. Size of informal economy.

32. 31 Albania

33. 32 Bosnia and Herzegovina Growth resuming in 2004 (around 5%) Low inflation (below 1%) Challenging external trade and current account deficits. Recent increases in FDI Drastic fiscal consolidation in 2001-2003. Close to balanced budget 2004 Recent progress with structural reforms (privatisation, indirect tax authority…)

34. 33 Bosnia and Herzegovina Remaining impediments to growth and investment Fragile institutional setting Risk perception Size of the informal economy + corruption Weak productivity and financial situation of PoEs Weakness of commercial courts, very slow liquidation procedures, difficult contract enforcement

35. 34 Bosnia and Herzegovina

36. 35 former Yugoslav Rep. of Macedonia Sluggish growth (3.1% in 2003, 2.2% in 2004) But stable macroeconomic environment with low inflation Considerable progress in fiscal consolidation in 2004 (provisionally 1% surplus) High external imbalances (current account deficit at 8-9% of GDP) Core legislative framework of market economy in place.

37. 36 former Yugoslav Rep. of Macedonia Impediments to growth and investment Privatisation failed to generate new dynamics Insufficient determination to address structural reforms (closing down defaulting enterprises or addressing the informal sector) Reluctance to open business to foreigners (hidden barriers to market entry) Ownership rights, weak judiciary

38. 37 former Yugoslav Rep. of Macedonia

39. 38 Serbia and Montenegro Growth 3% in 2003, 7.2% in 2004 on strong domestic demand Unfinished stabilisation: inflation re- accelerated to an annual rate of 13.8% in December 2004 High public and external debt, fiscal sustainability an important issue Current account deficit remains high (at 13% before grants) Fragmented internal market

40. 39 Serbia and Montenegro Impediments to growth and investment Private sector share of GDP still low -45%- Low productivity of state and socially owned enterprises Bankruptcy procedures need to be initiated when enterprises have failed and where privatisation not an optio Weak judiciary. Difficult contract enforcement

41. 40 Serbia and Montenegro

42. 41 Kosovo (SCG) Slow growth (3.1% 2003, about the same in 2004) hampered by political instability, declining donor assistance Huge external imbalances (trade deficit 45% of GDP, current account deficit 17% after grants) Rapidly increasing public deficit (7% in 2004) Business-friendly legislation in place Delays in progress with enterprise restructuring and privatisation

43. 42 Kosovo (SCG) Impediments to growth and investment Temporary status, risk perception Uncertain ownership rights Contingent / hidden liabilities Lack of law compliance / enforcement Energy sector. Supply shortage. KEK unsustainable financial situation Size of informal / underground economy

44. 43 Kosovo (SCG)