Identifier
Created
Classification
Origin
09TIRANA742
2009-11-18 09:48:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Embassy Tirana
Cable title:  

Albania: Weak Lek Makes Headlines

Tags:  ECON EFIN EINV ZL AL 
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VZCZCXRO1267
PP RUEHIK
DE RUEHTI #0742/01 3220948
ZNR UUUUU ZZH
P 180948Z NOV 09
FM AMEMBASSY TIRANA
TO RUEHC/SECSTATE WASHDC PRIORITY 8595
INFO RUEHZL/EUROPEAN POLITICAL COLLECTIVE
UNCLAS SECTION 01 OF 02 TIRANA 000742 

SENSITIVE

SIPDIS

DEPT FOR EUR/SCE

E.O. 12958: N/A
TAGS: ECON EFIN EINV ZL AL
SUBJECT: Albania: Weak Lek Makes Headlines

TIRANA 00000742 001.2 OF 002


SENSITIVE BUT UNCLASSIFED - PLEASE TREAT ACCORDINGLY
UNCLAS SECTION 01 OF 02 TIRANA 000742

SENSITIVE

SIPDIS

DEPT FOR EUR/SCE

E.O. 12958: N/A
TAGS: ECON EFIN EINV ZL AL
SUBJECT: Albania: Weak Lek Makes Headlines

TIRANA 00000742 001.2 OF 002


SENSITIVE BUT UNCLASSIFED - PLEASE TREAT ACCORDINGLY

1. (SBU) SUMMARY: The recent period of high volatility of the
Albanian lek versus the euro has made headlines and shaken market
confidence. The contributing factors are short-term and more
psychological and speculative such as reactions to the Prime
Minister's comments on adopting the euro. Long term factors,
including the current account and budget deficits have put weak but
steady downward pressure on the lek throughout the year. As the new
2010 budget is approved and growth continues to lag, the situation
is not expected to improve in the near term, and the lek has
steadily remained near its all time low of 137 lek to the euro.
Although a weak lek might boost Albanian exports to the euro zone,
it also drives up imports, including food imports which account for
nearly half of Albania's food requirements. Moreover a weak lek
could dramatically increase repayment costs for consumers holding
euro-denominated loans, which is nearly 70 percent of all loans
outstanding in Albania. End Summary


2. (U) On September 24, the lek reached an all-time low of 137.83
lek to the euro. The national currency had tumbled 2.6 percent in a
matter of days. As the currency market panicked and the buy/sell
spread widened, both the Central Bank (Bank Of Albania) Governor and
the Minister of Finance appealed for calm and tried to convey
confidence. Their intervention stabilized the high fluctuations,
but not for long. Over the following weeks and to date, the exchange
rate has mildly fluctuated and the historically strong lek continues
to have an average rate of 137.64 to the euro.

"Deadlines and Headlines Push Lek Down"
--------------


3. (SBU) Two unique factors occurred that could explain the high
volatility. The Albanian exchange market historically trades at a
low volume which does not regularly exceed 20 million euros.
Massive purchases of euros in late September in order to pay stock
dividends, particularly from Vodafone, caused a sharp decline in the
lek/euro exchange rate and touched off the initial panic in the
market. On the political front the Prime Minister also announced in
early October that Albania must start the process of adopting the

euro, independent of the status of its candidate application for the
EU. Some observers blamed Berisha's comments for further weakening
the already wobbly lek.

"GOA Spending Makes it a Tough Year for the Lek"
-------------- --

4. (SBU) Following years of relative stability and steady
appreciation the lek has been under continuous pressure for all of

2009. In the first nine months of the year, the lek has fallen 10
percent. Some experts have blamed government spending, particularly
in the pre-June election run-up, as a main cause of downward
currency pressure. The political opposition has continuously blamed
the government for the fall of the lek. Higher spending combined
with lower levels of remittances, lower exports and lower than
expected public revenues have significantly increased the current
account deficit to 15 percent, resulting in more demand inside
Albania for euros, and less demand for lek.
"A Continuing Headache" --------------

5. (SBU) Lek depreciation will continue to strain corporate bank
customers who have euro denominated loans and lek revenues. The euro
has become the main currency for large transactions in Albania, and
most consumers have taken advantage of preferential euro loan rates
for mortgages and personal loans. The average interest rate for
euro denominated loans has been 5 points lower than loans
denominated in lek. As of August 2008 31 percent of outstanding
loans were in lek and 61.7 percent in euro. The gap widens in the
real estate sector, where 22.5 percent of loans are denominated in
lek.

6. (SBU) The devaluation of the lek is not expected to have a
direct impact on the other Balkan economies. It will, however, put
more strain on the commercial banks operating in Albania as more
consumers are forecasted to have difficulty making loan payments.
This could further increase the amount of bad (over 31 days late)
loans past their current peak level of 9.8 percent. In an attempt
to balance the outstanding loan stock, BOA has repeatedly called on
consumers to obtain their loans in the currency of their revenues to
mitigate foreign exchange risk.

7. (SBU) Comment: Most observers believe that the current exchange
rate of 137 lek to the euro is sustainable and no cause to panic.
Most economists, however, view 140 lek to the euro as the point
where the Albanian economy could begin to suffer, including serious
hardship for consumers with euro denominated loans. While the
Government has sought to reassure the public about the support for
the lek, there has been a continued insistence that the lek will
find a new, lower equilibrium and that there is full support for the
free floating regime though it may be painful at times. The true
cause of the lek devaluation is a combination of factors, and lower
remittances and lower growth have removed the cushion that
traditionally protected the economy from sharp currency
fluctuations. The sharp one day decrease of 2.9 percent startled

TIRANA 00000742 002.2 OF 002


the public and encouraged speculation, but was in line with the
general downward trend of the lek. Looking to the end of the year
it appears that even with the revised 2009 budget, the government
will fall short on revenues and will need to use currency reserves
or lending to make up the shortfall, which could apply further
downward pressure to the lek.