New Market Report Now Available: Albania Business Forecast Report Q3 2013

We expect Albania's economic recovery to remain sluggish in 2013 and 2014, as bleak external demand, weak investment spending and subdued government expenditures weigh on headline growth.

While Albania has a comparatively low level of trade and financial integration with Western Europe, this will not prevent its economy from the marked deterioration that has taken place in the eurozone.

Weak demand in Albania's main trading partners will prevent exports from delivering a more significant narrowing of the current account deficit in 2013, while subdued domestic demand will ensure that import growth remains restrained over the next few quarters.

Albania's headline inflation slowed to 2.4% year-on-year in March, supporting our view that inflationary pressures will continue easing in 2013. With subdued domestic demand weighing on price growth, the Bank of Albania cut interest rates by 25 basis points (bps) to 3.75% in January, and we expect to see a further 50bps of cuts by end-2013.

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With the Albanian government being heavily criticised by the EU, US and IMF for its conduct in the run up to the June 23 parliamentary elections, we reiterate our view that the elections will not be run to internationally accepted standards. Instead, we expect the conduct of the elections, the polarisation of the two main parties, and the slow pace of government reforms to continue undermining the country's progress towards joining the EU over the medium term.

Major Forecast Changes

With real GDP increasing by just 0.3% y-o-y in Q412, we revise our forecast for real GDP growth to 1.3% in 2013 and 2.5% in 2014, from 1.5% and 2.7% previously.

We revise our current account forecasts to -8.8% of GDP in 2013 and -8.4% in 2014, from -9.1% and -8.7% respectively, as Q412 data showed the current account shortfall contracting by 32.7% y-o-y. With inflation averaging 2.5% in Q113, we downgrade our average inflation forecast to 2.5% in 2013, from 2.9% previously.

Key Risks To Outlook

Albania's strong economic and financial links to Greece and Italy remain a key risk to our outlook, even beyond the extent to which we have factored this exposure into our forecasts. On top of being the source of economically important remittance inflows, Albania's commercial banking sector is dominated by Greek subsidiaries. An uncoordinated credit event in Greece would put those parent banks under pressure, possibly leading to a sharp withdrawal of credit from their peripheral operations.

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