ALBANIA: HEAD IN THE SAND?

C O N F I D E N T I A L TIRANA 000811

SENSITIVE
SIPDIS

DEPT FOR EUR/SCE JISMAIL, TREASURY FOR VIMAL ATUKORALA

E.O. 12958: DECL: 11/13/2018
TAGS: EFIN ECON AL
SUBJECT: ALBANIA: HEAD IN THE SAND?

REF: TIRANA 653

Classified By: Ambassador J. Withers, reasons 1.4 (b),(d)

Summary
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1. (C) Prime Minister Berisha appears so obsessed with
winning the 2009 election that he seems totally oblivious to
the possible economic problems facing Albania. Although the
IMF and other international financial institutions (IFI) have
forecast a relatively smooth passage through the global
financial crisis, Albania's fragile economy is exposed to
several external factors over which the GOA has no control.
Weakening economies in other countries could cause a
reduction of remittances, which could have a domino effect by
reducing construction activity and causing depositors to
accelerate their withdrawals. As banks see their deposits
decreasing, they could become more reluctant to buy
government securities, causing a widening of the budget
deficit. Finally, these factors could reduce the leke-euro
exchange rate, hurting many borrowers who have taken out
euro-denominated loans. While the probability of any of
these events is unknown, a responsible government should plan
for the worst, something the PM seems unwilling to do. End
Summary.

Albania Is Only Partially Protected
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2. (C) In the IMF's latest report, Albania,s six percent GDP
growth rate for 2008 is forecast to soften to 4.5 percent in
2009 because of the global financial crisis. A recent
Economist report suggested that 2009 GDP might fall only
slightly and remain just below six percent. Prime Minister
Berisha has pointed to these reports and taken the position
that all is well. His focus on winning the 2009 elections
seems to have caused him to ignore potential problems raised
by the IFIs.

Remittances and Foreign Jobs Are Key
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3. (C) Although somewhat insulated from the turmoil in global
markets, Albania could still face financial troubles caused
by events it has no control over. For instance, Albania,s
economy is highly dependent on remittances, which comprise
about 14 percent of GDP. If remittances continue to decline
as they have over the last few months, a domino effect could
ensue. While there are no data connecting remittances with
construction or other elements of the economy, international
experts believe that a decline in remittances would reduce
construction activity with a subsequent loss of jobs.
Another portion of remittances is deposited into bank
accounts. Declining remittances could cause some depositors
to reduce their deposits or accelerate their withdrawals.


4. (C) Although many Albanians have taken residence in
foreign countries, there are many temporary or seasonal
workers abroad. A softening in the economy of their host
countries could force many of these workers to return home,
adding to the financial burden on their families in addition
to the loss of foreign earnings.

The Budget Deficit and Exchange Rate
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5. (C) The Central Bank has noted that withdrawals have
declined over the last two months but have recently
stabilized. Clients could increase their withdrawals once
again for any of a number of reasons, including the failure
of a weak Albanian bank, loss of family income, or alarming
news of some kind from abroad. If depositors once again
begin to draw down their accounts, banks would have less
money to buy government securities. Since 70% of the
government's budget is financed by banks buying government
securities, the government would be faced with a widening
budget deficit and consequent weakness of the leke. Bankers
estimate that a 10-15 percent loss of deposits could force
banks to stop buying government securities.


6. (C) Although Albania,s exchange rate with the Euro has
held steady for several years, an increasing budget deficit
or worsening of the trade balance could cause the leke to
weaken. (Note: Albania's largest exports are shoes and
clothing destined for high-end stores in Europe and the U.S.)
That would give rise to yet another problem. Albania,s
consumer credit has been growing at a very rapid rate - too
rapid according to the IMF. Since Albanians have become used
to a stable exchange rate, many consumer loans have been
taken in Euros to get better interest rates. A weakening of
the leke could further raise the loan default level, which is
already a concern (reftel).

Comment
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7. (C) Berisha,s sugarcoating of the recent EU progress
report sent a clear message to the international community
that he does not intend to acknowledge any problems,
political or economic, ahead of the elections. While Albania
has no control over external factors that could affect its
economy, Berisha could take some reasonable precautions. For
instance, the IMF could provide a significant safety net, but
Berisha clearly does not want to be constrained ahead of the
elections by the fiscal discipline the IMF would require. He
could also begin planning for a soft landing by beefing up
welfare programs and creating jobs in existing and planned
infrastructure programs. However, to do so he would have to
admit that perhaps all is not so rosy on Albania's economic
front. In fact, a real nightmare scenario for Berisha would
be a run on the banks coupled with electricity blackouts just
before the elections. He would have no one to blame.
WITHERS