South East Europe economy shrinks in 2012, faces risks in 2013, World Bank report says

Written by on December 19, 2012 in Bulgaria, Business, Europe, News - No comments

The combined economies of the six South East European countries will shrink by 0.6 per cent in 2012, and face formidable risks going into 2013 with expected growth of 1.6 per cent, according to a new World Bank South East Europe Regular Economic Report, released on December 18 2012.

The South East Europe Regular Economic Report (SEE RER) covers six countries (SEE6) – Albania, Bosnia and Herzegovina, Kosovo, Macedonia, Montenegro, and Serbia – and foresees that the road to sustained recovery will be arduous with sluggish growth in 2013 at best, and with significant risks.

Among the clouds on the horizon for 2013 are the risks to recovery of the euro zone and high commodity prices – risks to which all the SEE6 countries are highly vulnerable, a World Bank statement said.

The risk of a new food price shock could also exacerbate poverty and put pressure on the middle class.

In this uncertainty, Serbia, Albania, and Montenegro in particular will need to persevere in reducing fiscal deficits and bringing down public debt, even as they must continue to improve the investment climate and reform labour markets and the public sector, the World Bank statement said.

In all SEE6 countries, public sector arrears pose special challenges to fiscal management and the private sector, and there are unfinished, structural reforms agendas.

“In this fragile environment, Western Balkan governments need to pursue reforms that make a difference for long-term growth and jobs,” said Željko Bogetić, World Bank Lead Economist and Coordinator for Economic Policy for the Western Balkans and lead author of the SEE RER report, the third of a series of regular bi-annual reports.

“What is needed first and foremost is more intensive policy reform to reduce public debt and accelerate structural reforms, especially in public sector governance, the investment climate, and labour markets.”

In 2012, deteriorating external conditions, the impact of the severe winter on economic activity, and a continuing rise in unemployment took a toll on consumption, investments, and exports, the report says.

It also notes that credit recovery and fiscal consolidation are under threat, while non-performing loans are again on the rise. As a result, both within and outside the region the environment has become much more difficult to navigate, and the policy trade-offs necessary to stabilise economies and reignite growth are tougher, the World Bank statement said.

The report highlights that, pressured by the external environment, more competitive global economy, and inadequate revenues, SEE6 governments are seeking ways to improve efficiency, strengthen infrastructure, reform labour markets, attract foreign direct investment (FDI), rebuild their export base, and ensure financing.

Several countries improved their investment climates and moved up on the global Doing Business ratings. But without further labour market reforms and significant infrastructure investments, especially in energy, it will be difficult to reduce unemployment, improve competitiveness, and achieve robust growth.

Intensifying the privatisation process is one option (building on past lessons, good and bad) that governments are increasingly considering as part of “a second wave or privatization”––a general effort to ease the financing constraint and improve competitiveness. SEE6 governments are therefore looking for sources of capital not only in the OECD countries but also in such resource-rich and growing middle-income countries as Turkey, Russia, China, and Azerbaijan. To be successful, new privatisations should build on the lessons from experience, including the fundamental importance of transparency, the World Bank statement said.

The report underlines that if such accelerated reforms materialize, external support—well-co-ordinated and targeting the region as a whole –from the EU and global international financial institutions could help ease the transition to a more sustained growth in medium term, according to the statement.

(Photo, of Sarajevo: igor dugonjic/sxc.hu)

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