OUTLOOK 2021 Kosovo

OUTLOOK 2021 Kosovo
By bne IntelliNews January 7, 2021

1. EXECUTIVE SUMMARY

Political outlook 

2021 will be a challenging year in every respect. Kosovo will hold a snap election on February 14. Parties have so far failed to agree on a presidential candidate to replace Hashim Thaci, who was arrested on war crimes charges. 

The decade-long EU-mediated dialogue with Serbia has reached a critical stage. A final solution is in sight but could be difficult to sell to the population. 

Macroeconomic outlook 

The coronavirus epidemic resulted in a GDP contraction and loss of jobs. By implementing economic stimulus measures and recovery programmes the new government will try to revive the economy in 2021, but capital investments were slow even before the pandemic. 

Budget outlook 

Kosovo’s government projected a budget deficit in 2021 equivalent to 4.2% of the planned GDP. Higher revenues and lower costs than in 2020 are forecast. Maintaining healthcare spending and supporting the private sector are priorities. 

Real economy outlook

Businesses across economic sectors, especially services, were badly hit by the pandemic in 2020 but a recovery is expected in 2021. 

Markets 

Kosovo has no stock market but the transmission system operators (TSOs) of Albania and Kosovo set up a joint power exchange in October 2020. 

 

2. POLITICAL OUTLOOK 

Kosovo is heading towards another snap election on February 14 after the Constitutional Court ruled on December 21 that the parliament vote to approve the government of PM Avdullah Hoti in June 2020 was invalid, as the deciding vote was cast by an MP who was convicted of corruption and jailed.

The motion to the highest court, which claimed that Hoti's government was voted in in a unconstitutional way due to the vote by MP Etem Arifi, was filed by the opposition Vetevendosje.

The ruling Democratic League of Kosovo (LDK) decided Hoti will be its candidate for PM in the upcoming snap general elections.

The political parties in Kosovo represented in the parliament also failed to agree on a presidential candidate after Thaci's resignation. Presidential elections are due in spring 2021.

For the time being, parliament speaker Vjosa Osmani is Kosovo’s acting president, but Kosovo needs to appoint a new president, the responsibility of the parliament, after the arrests of Thaci and other senior politicians on war crimes charges in 2020. 

Hoti became prime minister in June 2020, after months of political crisis in the country which erupted after the previous cabinet led by Albin Kurti, leader of the now opposition Vetevendosje party that won the October 2019 election, was dismissed in a no-confidence motion in March 2020. The LDK also participated in the Vetevendosje-led government.

The current cabinet has only a slim majority in the parliament and is involved in constant confrontations with the main opposition party Vetevendosje, which is the biggest party in the assembly. Since independence in 2008, all Kosovan governments except the first, led by Thaci, have been short-lived.

Thaci and several other politicians, including ex-speaker of the parliament Kadri Veseli, are now being prosecuted by The Hague-based war crimes court for crimes committed during the independence war with Serbia. The former president is accused of war crimes and crimes against humanity. He has been sent to The Hague detention facility. 

The trials of former Kosovo Liberation Army (KLA) fighters will drag out in the coming years with implications for the domestic political scene. The start of Thaci’s trial is expected no earlier than 2022.

Meanwhile the ongoing EU-mediated negotiations with Serbia, aimed at reaching a final settlement between the two sides, are another serious challenge for 2021. 

Kosovo unilaterally declared independence from Serbia in 2008 but it is still not recognised by Belgrade as an independent state. Talks between the two sides started in 2011, but despite some progress they have been marked by ups and downs. Kosovo expects the final agreement to include recognition of Kosovo by Belgrade, for which there is no signal from Serbian side. The talks will continue in 2021, but the series of war crimes cases launched against Kosovan politicians, mainly for crimes against Serbs, suggests that the Kosovan position is weakening.

Serbia and Kosovo reached what was billed as a “historic” agreement on normalisation of their economic relations on September 4 in Washington under the auspices of US President Donald Trump, which is seen as a step towards full normalisation of the relations between the two sides, though it met with criticism as details emerged. 

The deal envisages implementation of several major infrastructure projects worth several billion euros. They include the completion of the motorway from Nis to Pristina worth €1.1bn and the reconstruction of the Nis-Pristina railway line estimated at €1bn that will be financed by the US government. The US International Development Finance Corporation (DFC) also pledged funds for both countries. However, the implementation of the deal will depend on the commitment of the new US administration led by Joe Biden.

Resolving the longstanding dispute is a prerequisite for the two countries to make progress towards EU integration. Kosovo signed a Stabilisation and Association Agreement with the EU in April 2016 and is a potential candidate country. Pristina expects to obtain EU visa free liberalisation, a process that has been delayed for several years. However, at present Kosovo cannot apply for EU candidate status as it is not recognised by five EU member states. 

In a more positive development, Kosovo was invited to join the "mini-Schengen" economic area, a cooperation framework of Serbia, Albania and North Macedonia aimed at creating a common market in the Western Balkans, in 2020.

 

2. MACROECONOMIC OUTLOOK

One of the main priorities of the government is to contain the consequences of the coronavirus (COVID-19) pandemic, which greatly affected the economy, resulting in a GDP contraction and loss of jobs. By implementing economic measures and recovery programmes the government will try to revive the economy in 2021, though it struggled to attract investments even before the pandemic. 

Since the outbreak of the coronavirus pandemic Kosovo, a country with a population of 1.9mn, registered over 42,000 positive cases and over 1,100 deaths until December 6.

Following the expected GDP contraction in 2020 of 8.8% in 2020, a modest recovery of 3.7% is expected in 2021, which will depend on a rebound in EU growth and the successful containment of the pandemic until vaccines are available and accessible, according to a World Bank projection.

Kosovo's central bank projects that the country’s economy will decline by about 7.2% in 2020, while during 2021, it expects GDP growth above its historical trend, by about 5.2%, returning to a similar level to that recorded before the COVID-19 crisis. The main contribution to economic growth in 2021 is expected to come from exports, especially of services, and private investment.

However, according to the World Bank, the level of international travel restrictions, particularly from Germany and Switzerland, where many Kosovars work, and the financial sector response to a prolonged pandemic are seen as the main determinants of the recovery. 

The effective delivery of the government’s economic recovery packages and an increase in investments expected as a result of the US-sponsored economic normalisation agreement with Serbia are seen as upside risks for the outlook for 2021.

The COVID-19 pandemic caused a decline in service exports, and reduced investment and consumption. To cushion the impact of the recession, the government is expected to continue investing in effective health management of the pandemic, accelerate implementation of public projects with international financial institution (IFI) financing, improve the effectiveness of social protection and prioritise limited fiscal space to support private sector jobs.

Kosovo is anticipated to post slim inflation of 0.5% and 0.6% in 2020 and 2021 respectively. Kosovo’s current account deficit is seen by the World Bank at 5.8% of GDP in 2021 down from 7.2% of GDP in 2020.

Net foreign direct investments are seen rising to 4.6% of GDP in 2021 from 3.7% of GDP in 2020.

According to the central bank, the banking sector is stable, liquid and well-capitalised despite the coronavirus crisis.

In September 2020, the active loans in the banking sector of Kosovo totalled €3.2bn, an increase of 7.6%. 

Deposits continue to represent the main source of funding for the banking sector and marked an annual increase of 8.6% in September 2020, when deposits of households represent 67% of total deposits an increase of 7% y/y.

The non-performing loan (NPL) rate remains at a low level of 2.7%, while their coverage with provisions was 137.8%.

The central bank has announced plans to undertake new measures, similar to those undertaken by the European Central Bank, such as temporarily reducing the regulatory requirement for capital of banks, which is expected to release a significant part of the capital that may be used for lending to the economy.

 

3. BUDGET AND DEBT OUTLOOK 

Kosovo’s government projects a budget deficit in 2021, equivalent to 4.2% of the planned GDP. Budget revenues are projected at €1.89bn in 2021, which will be 5.5% up from the plan for 2020.

The budget costs are envisaged at €2.4bn, or €200mn less than in the 2020 budget. The main priority remains the health sector, which must deal with the pandemic, the private sector as well as the overall recovery of the economy after the pandemic.

The government plans to reduce the amount for capital investments for 2021-2023 by 13% from €672mn to €583mn. The reason for the reduction of the budget for capital expenditures is the delays in carrying out procedures for some capital projects, due to the low level of economic activity during the pandemic, but also due to the need for the transfer of funds aimed for programmes covered by the measures in the Emergency Fiscal Package. 

The extent to which capital expenditures will be affected also depends on the form of financing of interventions in the economy by the government and when the pandemic eventually end. Capital investment in general was quite low even before the pandemic. In 2019, only 68% of planned capital investments were implemented. 

In the governing programme for 2020-2023, the government of Kosovo has foreseen a second package through which it aims to mobilise about €1.2bn for economic recovery within two years (2020-2021).

The mobilisation of these funds will be made through various measures that include facilitation of financing, tax exemptions, support with subsidies for employment and support for the agricultural sector.

Funding for the recovery package is expected to come from a variety of sources, including budget savings, internal or external financing and budgetary assistance.

According to the World Bank, Kosovo budget deficit is expected to fall to 6.7% of GDP in 2021 from 9.5% of GDP in 2020 while the debt is projected to deepen to 27.3% of GDP in 2021 from 22.6% of GDP in 2020.

 

4. REAL ECONOMY OUTLOOK 

The COVID-19 crisis is expected to reduce employment in Kosovo and, despite the measures adopted by the government to protect jobs and incomes, poverty is expected to increase by around 5 percentage points in 2020.

According to the latest statistics office data, Kosovo’s trade gap narrowed by 11.4% to €2.25bn in the first ten months of 2020. The decline of the gap was due to the higher exports and lower imports since the beginning of this year. The huge trade gap is one of the biggest problems for the Kosovan economy. In 2019, Kosovo’s trade gap deepened by 4.5% y/y to €3.1bn.

The latest data on retail showed that sales of fuel in the second quarter dropped by 9.1% q/q while retail sale of food, beverages and tobacco in specialised stores declined by 7.1% q/q. In the same period, sales of IT equipment jumped 32.6% from the previous quarter and sales of household appliances increased 14.6%.

In the second quarter the industrial production in the electricity, gas, steam and air conditioning supply increased by an annual 7.4% while in mining and quarrying it increased by 4.3%. However, decreases at an annual level were recorded in the water supply (-36.3%) and in the manufacturing (-16.8%).

The biggest planned investment to date in Kosovo, the €1.3bn, Kosova e Re coal-fired power plant, is now off as US power generation company ContourGlobal pulled out. Pristina says it may still go ahead if it can’t secure gas deliveries instead. ContourGlobal has launched international arbitration.

The future of the Trepca mining complex, Kosovo’s largest industrial asset, is still unclear. In November Kosovo's government allocated €1.1mn for the complex to help it overcome financial issues due to accumulated debts of €8mn. Hoti said that inadequate management is also to be blamed for Trepca’s financial crisis.

Hoti said that Trepca should quickly accept a business plan to deal with the situation and improve the liquidity in the short-term and in the long term the board should submit proposals on how to bring in foreign investment to the company. 

Labour force participation stood at 38.8% of the working age population (WAP) in the first quarter of 2020 before COVID containment measures were implemented, similar to the same period in 2019. The employment rate has been largely constant since 2017, at 28%-29% of the WAP, suggesting that growth was not accompanied by significant job creation. 

A World Bank survey showed that most businesses reported reduced working hours and unpaid leave during the pandemic, and 12% of firms surveyed had laid off at least one worker in April. 

The situation worsened by the end of the year, but a recovery to some degree is expected in 2021. 

2021 is to be a better year for exports, which are expected to increase 16.5% in 2021 following a projected 30% drop in 2020. Imports are seen rising by 6.3% in 2021 after the 12.1% contraction in the previous year.

According to statistics office data, the number of jobseekers jumped to 198,063 at the end of September 2020 from 105,711 a year earlier.

The average wage in Kosovo’s public sector was €592 at the end of September 2020, while the gross wage was €671. Over 82,400 people worked in the public sector. 

 

6. MARKETS OUTLOOK 

Kosovo has no stock exchange, but in October 2020, the transmission system operators (TSOs) of Albania and Kosovo, OST and KOSTT, signed an agreement to set up joint power exchange company that will operate the short-term electricity markets in both countries

The power exchange operator, called ALPEX, will be headquartered in Tirana and will operate the day-ahead market coupling between Albania and Kosovo soon after commencing operations. ALPEX is expected to extend its services to the intraday market segment in future.

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