Special risk survey: Balkans bounce hides lingering concerns

No clear skies for Bulgaria, the only Balkan country to be downgraded in the latest risk survey

Euromoney’s special risk survey of the Balkans was conducted to find out if the improvement in risk scores shown in the first quarter of 2021 has continued and to gain a deeper understanding of the underlying issues.

Most countries in the region registered some improvement to their risk scores in the latest quarterly survey (to end-March) and this special interim survey shows those trends continuing on the whole.

Albania, Bosnia-Herzegovina, Croatia, North Macedonia and Slovenia are all upgraded quite substantially. Montenegro, Romania, Serbia and Turkey have improved a little, with Bulgaria the only country downgraded.

Panayotis Gavras, head of policy and strategy at the Black Sea Trade and Development Bank, explains the easing of risks across the region. Generally, he says, the impact of the pandemic – and in turn on the various risk factors – was less than feared, while official creditor support and substantial liquidity introduced by central banks provided much help.

Aside from Bulgaria and also Turkey, with its well documented economic and political problems that have led to several rounds of pressure on the lira, all the other countries have seen their risks improving on a five-year trend basis.

It is nevertheless worth noting that four are riskier than Turkey – ranking 95^th out of 174 countries in Euromoney’s global risk table – namely Montenegro (96^th), Albania (97^th), Bosnia-Herzegovina (105^th) and Moldova (124^th).

The survey excludes Kosovo, but throw in Serbia (74^th), Bulgaria (81st) and North Macedonia (92^nd) and it is clear that the majority of the region remains a high to extremely high-risk domain, whatever the story on pandemic control and financial assistance.

Political noise

Some of the risks are purely macroeconomic, but others are more nuanced (political and structural) depending on the country concerned. Analysts cite in particular domestic political noise, transparency and institutional failings as some of the features to watch out for. In certain cases these countries are lagging, while in others notable reforms have been made.

Gavras specifically mentions “turbulent geopolitics”, which has become a crucial element of investor risk in recent years, alongside climate change.

The Balkans, he notes, is a sea of relative calm. There is strong political cooperation, with relations between countries at their best in years. The fact the Balkans is not in the news is a positive sign.

“[But] eastern Ukraine remains a dangerous place, Nagorno Karabakh had a full-blown war last year and the problems in the Middle East could prove destabilizing, either by spilling over or via a new migration crisis.”

Eastern Ukraine remains a dangerous place... and the problems in the Middle East could prove destabilizing, either by spilling over or via a new migration crisis

 - Panayotis Gavras

Milos Vulanovic, an associate professor of finance at the EDHEC Business School, notes that the pandemic risk is not being exerted evenly either. He notes that Croatia and Montenegro are more vulnerable due to the fact that tourism accounts for approximately a quarter of their GDPs, whereas Serbia is much less exposed.

Bojan Ivanc, chief economist of Slovenia’s Chamber of Commerce & Industry, agrees. He sees regional tourism recovering at a slower than expected pace, shifting some growth from 2021 to 2022, especially in Bulgaria, Croatia and Montenegro.

Another survey expert is Vanja Piljak, a lecturer in finance at the University of Vaasa. She agrees that Croatia’s recession in 2020 was crucially a result of its heavy dependence on the tourism and travel sectors. Serbia, which is less exposed, is expected to see a full recovery this year, she states, with projected real economic growth of 5%.

The fiscal risks have also invariably increased. In Croatia, Piljak notes the fact the government debt-to-GDP ratio rose to 88.7% in 2020 from 72.8% in 2019. She also mentions that Serbia’s worsening public finances could create potential risks.

On Bosnia-Herzegovina she says that the economic recovery depends on the pandemic trajectory, which is uncertain. But there are also positive factors, including a stable and liquid banking sector, a government providing crucial support and investing in energy and infrastructure, as well as a stable currency.

Legacy issues

Monetary policy regimes in the region are also considered credible by most analysts, ranging from euro membership in the case of Slovenia, to nominally floating but essentially stable pegged arrangements in Croatia, North Macedonia and Serbia, and currency boards in Bulgaria and Bosnia-Herzegovina.

“The fiscal space of countries is narrower though,” says Ivanc. “Some countries, such as Albania, Bosnia-Herzegovina and Kosovo, have problems with finding the necessary tools to disburse the state help to final recipients, which is also due to the higher share of the shadow economy.

“And some countries have legacy issues, such as Montenegro and the repayment of a bank loan [from China’s Exim Bank] to construct the Bar-Boljare highway.”

Montenegro, he says, signed a deal to borrow €809 million in 2014. The loan has a 20-year repayment period, five years’ grace period and 2% fixed interest. The government began drawing on it in 2015. As Montenegro’s fiscal problems mounted in 2020, with tourism hit, the government decided to sue China’s CRBC that is building the motorway for “devastating the Unesco-protected Tara River”.

Vulanovic reinforces that most countries resorted to borrowing in the financial markets, leading to increased debts. However, he remains sanguine, stating that: “Although it is debatable whether the current debt levels are healthy in the long run, in the short run they are fully sustainable.”

There is some concern, too, for incipient inflation and for the ethnic tensions that can cause volatility. Ivanc mentioned an informal paper circulating in April suggesting Kosovo should unify with Albania, Republika Srpska (part of Bosnia-Herzegovina) with Serbia and some Croatian cantons in Bosnia-Herzegovina with Croatia. Remaining Bosniaks would then gain an independent state.

Nevertheless, the various analysts also see improvements taking place.

Piljak, for instance, mentions opposition parties winning local elections in major cities in Bosnia-Herzegovina that will address corruption and implement reforms, while successful vaccination campaigns and a fresh tourism season is brightening the outlook for countries such as Croatia.

Ivanc mentions investments in digitalization with the help of the EU and IMF, notably in Croatia and Slovenia. This will “help to increase the accessibility of public goods to the broader population, as well as transparency etc.”

Vulanovic cites the increasing EU visibility in the region resulting in various initiatives pushing towards the freer movement of capital and labour causing a marginal decline in risk.

Basket cases

Yet the final word is reserved for Steve Hanke, a prominent critic and survey contributor, who is professor of applied economics at the Johns Hopkins University.

Hanke has considerable expertise in the region as a former chief adviser to the government of Ante Markovic in Yugoslavia, a state counsellor in Montenegro, and chief adviser to the council of ministers in Albania.

And he does not mince his words either, when describing most of the Balkans countries as: “Basket cases, mired in corruption, with poor governance, a lack of virtually any semblance of the rule of law, a politicization of all aspects of life and a constant festering of old, unsettled disagreements among nations and ethnic groups.”

Hanke backs up this forceful opinion with facts, first using the Cato Institute measure of economic freedom. By that measure, Balkan countries rank, on average, 57^th out of 162 countries, in comparison those in western Europe average 30^th; while for the rule of law the gap is wider.

They argue that, once received, foreign assistance will make everyone prosperous. That’s the Balkan business model

 - Steve Hanke

On corruption, using Transparency International’s metric, the Balkan’s average rank is a pathetic 83^rd out of 180 countries, he says, while western Europe ranks a respectable 17^th; and he goes on to quote similar disparities using the World Bank’s measure of government effectiveness.

Hanke puts all this down to the fact Balkans leaders have embraced the idea that foreign aid (primarily from the EU) “will be something akin to manna from heaven”.

“They argue that, once received, foreign assistance will make everyone prosperous. That’s the Balkan business model. Indeed, the political classes in the Balkans spend most of their time trying to extract foreign assistance from western Europe through beggary or blackmail,” he states.

This foreign aid concentrates power in the hands of politicians and bureaucrats, fuelling corruption and feeding the politicization of society, diverting attention from sound policies and productive activities.

Hanke’s damning assessment is nonetheless broadly encapsulated in the risk scores for the region, which although improving – largely due to economic recovery – are mostly much lower than those for western European countries.

This highlights that while investing in the region can offer potentially strong returns, it also comes with considerable risk.