ECONOMY STILL GROWING, BUT CAUTION IS KEY

C O N F I D E N T I A L SECTION 01 OF 02 TIRANA 000585

SIPDIS

E.O. 12958: DECL: 08/28/2019
TAGS: ECON EFIN EINV PGOV AL
SUBJECT: ECONOMY STILL GROWING, BUT CAUTION IS KEY

Classified By: Charge d'Affaires Deborah A. Jones, reasons 1.4 (b) and
(d)


1. (SBU) SUMMARY: Against all odds, the consensus view
among economists is that the Albanian economy will post
positive growth for 2009. Although the GOA's projection of
4.8 percent growth for 2009 is almost certainly too high,
Ministry of Finance economists privately say that the economy
will nevertheless grow by 3 percent this year. The IMF
recently upped its forecast to .08 percent. Albanian Bank
Governor Ardian Fullani told journalists August 26 that
Albania had withstood the worst of the financial crisis but
the GOA's expansionary policies are a serious potential risk
to economic stability. Economists are concerned about the
anticipated 2009 budget shortfall of $150 million and how
Albania will fare without IMF oversight. The GOA publicly
projects overly optimistic budget and spending targets which
may create long-term difficulties. END SUMMARY.

ALBANIA BUCKS THE TREND
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2. (SBU) In a recent conversation with the Ambassador,
Central Bank Governor Ardian Fullani characterized Albania's
economy as "steady but shaky." In July the IMF raised its
projection for Albania's 2009 GDP growth from 0.4 percent to
0.8 and has told Post it may raise its projection even
further if excessive summer rain
results in strong agricultural output in the autumn.
Speaking to journalists on August 22, Finance Minister Bode
said that Albania had "weathered the test" of the financial
crisis, and reiterated the GOA' projection of 4.8% growth in

2009. However, economists in the Ministry of Finance believe
that three percent is a more realistic target. Fullani has
publicly noted a recent increase in bank deposits and bank
credits, but has warned that unemployment will likely
continue to rise. Fullani also held a press conference
August 26 and said that Albania had seen the worst of the
financial crisis, but cautioned that the GOA needs to respect
budget deficit targets and must draft a 2010 budget that
reflects a commitment to maintaining macroeconomic stability.
He also noted the World Bank's warning that remittances will
continue to fall globally during 2009, and he cautioned that
the rise in unemployment in Italy and Greece will likely make
remittances from those countries less stable. (Note:
Remittances account for
roughly 9.5 percent of Albania's GDP. End Note).

THE INCREASING DEFICIT
--------------


3. (SBU) A major concern for Fullani is the GOA's ability to
raise financing to cover its deficit and the size of the
deficit it plans to run in 2010. According to sources at the
Ministry of Finance, state revenues in 2009 are projected to
rise by only 8%
(significantly less than the projected 15 percent rise in
revenues),potentially resulting in a budget shortfall of
approximately USD 215 million. While it is likely that the
GOA will be able to cover its 2009 revenue shortfall with
revenue from privatizations, privatization is not a long-term
solution for financing the deficit. Fullani
warned that in 2010 the government may have to seek
alternative sources to finance the deficit. Slowed GDP
growth in 2009 and 2010 will result an increase in certain
key ratios, such as Debt/GDP and Deficit/GDP. This could
effect Albania's credit rating from Moody's, which could make
it more difficult for Albania to secure
financing in 2010. There may be additional privatization
opportunities that could boost revenue, such as granting
various concessions, but development spending
and capital expenditures may have to be cut.


GOA HALTS TENDERS; ADMITS LACK OF CASH RESERVES
-------------- --


4. (SBU) At the request of Minister of Finance Ridvan Bode,
in July the Government announced that it will freeze
all future tenders for 2009 and that only the
Council of Ministers will have authority to launch new
tenders. While the official purpose of this decision is
"to increase the effectiveness of current contracts in
public projects," many critics read this as the government's
first acknowledgment of Albania's economic difficulties and

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the state's overspending. For the foreseeable future, the GOA
is likely to use concession agreements in place of tenders.
The GOA also admitted privately this week that it lacks
emergency reserves to deal with the H1N1 virus and other
potential crises.


5. (C) COMMENT: While the GOA will certainly face a budget
shortfall between now and the end of 2009, most observers
believe that the shortfall is manageable and can be overcome
through a mix of delayed spending and targeted budget cuts.
More worrisome is the 2010 budget. Without IMF oversight,
the Ministry of Finance will be more susceptible to pressure
from the Prime Minister and others to put out an unrealistic
budget for 2010, with overly optimistic growth and revenue
forecasts that will leave the government with little wiggle
room in the event revenues and growth fall short. Although
the GOA should have the cash needed to make it through the
end of the year, the lack of emergency cash reserves shows
that the GOA is only one crisis away from a serious budget
crunch. It is imperative that the GOA base its 2010 budget
on reasonable growth and revenue projections in light of the
uncertain economy.


JONES