Western Balkans in Post-Brexit Europe

Bank of Albania & SEESOX annual conferenceTirana, 27 October 2016

Bas B. Bakker Senior Regional Resident Representative

for Central and Eastern Europe

Financial market impact Brexit: strong and permanent for pound, short lived for CEE currencies

2

Change in Exchange Rates vis-à-vis EUR(log differences)

-0.14

-0.12

-0.10

-0.08

-0.06

-0.04

-0.02

0.00

0.02

0.04

GBR CZE MKD ALB SRB POL ROU HUN

Exchange rate reaction to Brexit (June 24th)

Change between June 24th and end-September

Change between June 23rd and end-September

0

1

2

3

4

GBR Euro Area CESEE-EU Western Balkans

Near-term economic fallout has also been less than initially feared

3

WEO Apr-16

WEO Oct-16

GDP growth projections for 2017 by WEO vintage

Uncertainty about future relationships with EU may lead to a postponement of investment

-10

-8

-6

-4

-2

0

2

4

6

8

Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16 Aug-16 Sep-16 Oct-16

Longer-term impact on Britain remains uncertain

4

Consensus forecast investment growth in UK for 2017(percent)

min-max range

mean ±st.dev.

mean

What happens if hard Brexit?

5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2016 2017 2018 2019

Scenarios for GDP growth in the UK(percentage points)

Adverse

WEO Oct 2016 projection

Baseline (no Brexit)

Limited

For SEE, direct links and financial links with Britain are small

6

Exports of goods to UK(percent of GDP)

0

0.5

1

ALB MNE BIH MKD SRB

Indirect trade links may be larger

7

0

10

20

30

40

ALB MNE BIH MKD SRB0

0.5

1

ALB MNE BIH MKD SRB

Exports of goods to UK(percent of GDP)

Exports of goods to EU(percent of GDP)

Exports to other EU(percent of GDP)

The UK is not the main destination for emigration from SEE

8

Residents of Britain and Germany Born in Western Balkans(percent of population in countries of origin, latest census)

0

1

2

3

4

BIH ALB MNE MKD SRB and UVK

In Germany

In Britain

0

2

4

6

8

10

12

MKD SRB BIH ALB MNE

Impact on tourism receipts unlikely to be substantial

9

0.0

0.5

1.0

1.5

2.0

2.5

3.0

MNE BIH MKD SRB

Contribution of tourism to GDP in 2015(percent)

Share of UK residents in total foreign visitorsin 2015 (overnight stays, percent)

Brexit may have consequences for EU budget

10

DEU17%

FRA13%

GBR12%

Other EU1532%

Non-EU157%

Traditional own resources

13%

Other6%

Contributions to EU budget in 2015

Most important for SEE may be impact on future of EU

Confidence of EU citizens in EU has fallen Appetite for further integration has dropped Will this impact appetite for further expansion? If prospect EU memberships of SEE were to

diminish, what would be impact on Reforms? Future growth?

11

In the past decade there has been a sharp decline in confidence in the EU

12

Level of confidence in the European Union(percent of population surveyed by Eurobarometer)

Why has confidence fallen?

EU has been hit by several crises 2008/09 crisis Eurozone sovereign debt crisis Large scale immigration/refugees

13

In the North, immigration is the main issue; in the South, the economy

14

Most important issues facing the EU countries in 2016(according to Eurobarometer)

Confidence in EU is lowest in countries most affected by Eurozone crisis

15

AUTBEL

FRA DEUITA

NLD

FIN IRL

PRT

ESP

GRC

SVKSVN

EST

LVA

LTU

HUNPOL

ROU

SWE

GBR

CZE

LUX

BGR

CYP

y = 0.4831x + 36.892R² = 0.3627

10

15

20

25

30

35

40

45

50

55

60

-30 -10 10 30

Leve

l of c

onfid

ence

in t

he E

U in

201

6

Change in real GDP per capita 2007-15(Percent)

Change in real GDP per capita and level of confidence in the EU

In this environment, political support for further integration has fallen

16

Increased political uncertainty Less support for free trade More calls for protectionism

Support for EU enlargement has fallen

17

Support for the EU enlargement(Percent of population surveyed by Eurobarometer)

How will this affect further expansion to Western Balkans?

18

Enthusiasm in SEE for EU remains high

19Note: For ALB data for 2014 and 2015; percentage of surveyed population which answered “Would benefit” to the question “Taking everything into account, would you say that your country would benefit or not from being a member of the European Union?”

Support for the European Union in 2012 and 2015(percent of surveyed population by Eurobarometer)

0

10

20

30

40

50

60

70

80

90

100

SRB MNE MKD ALB

20152012

The EU has been very important to former European transition countries

As export markets Source of private capital Source of technology Source of EU funds

20

Average annual net flows from the European Commission

(percent of GDP, 2010-2015)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

BIH

MKD SR

BA

LBSV

NCZ

ESV

KRO

UPO

LES

TBG

RLV

ALT

UH

UN

Note: Orange bars – non-EU countries.

And also as a key engine for reforms

21

1

2

3

4

BLR BIH SRB MDA UKR RUS ALB MKD SVN ROU BGR HRV HUN SVK LVA LTU POL EST

EU membersNon-EU members

Average of Six EBRD Transition Indicators

2014

1990

0

10

20

30

40

50

60

70

80

90

0 10 20 30 40 50 60 70 80 90 100

SEE still relatively poor; and would really benefit from strong EU

0

10

20

30

40

50

60

70

80

90

0 10 20 30 40 50 60 70 80 90 100

22

Empl

oym

ent r

ate

(per

cent

)

Labor productivity(PPP adjusted 2014 USD, thousands)

Labor utilization and productivity

22

19952015Labor utilization and productivity

Flags size reflects GDP per capita in 2015 (PPP-adjusted).Western Balkans highlighted in blue.

Thank you

23