The GOA's Overly Optimistic 2010 Budget

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SENSITIVE
SIPDIS
STATE FOR EEB/IFD/OMA
STATE FOR EUR/SCE

E.O. 12958: N/A
TAGS: ECON EFIN PRIL PGOV AL
SUBJECT: The GOA's Overly Optimistic 2010 Budget

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1. (SBU)Summary: Last month, Parliament approved the 2010 budget.
The budget anticipates a growth rate of 6.5 percent (vs 2009 revised
budget),revenue growth of 11 percent, a budget deficit of 3.9
percent of GDP and inflation stable at three percent. Even though
Albania is one of the few countries with positive economic growth in
the region for 2009, the 2010 budget remains overly optimistic both
in terms of projected revenues and GDP growth, and will be difficult
to accomplish. Based on this budget, unless revenues recover at a
record pace in the first half of 2010, the GOA could face severe
budget shortfalls by mid-2010. End Summary.

A Mixed Story --------------

2. (SBU) The Albanian economy is rare in the region in that it is
expected to have positive economic growth this year. In October,
the IMF revised upwards its earlier growth forecast of 0.7 percent
GDP to 2 percent for 2009 growth, which, despite falling short of
the GOA's estimates of 4.5-5 percent, remains an achievement. The
strong fiscal stimulus throughout the year, particularly before the
June election, is seen as a major contributing factor for the
increase.

3. (SBU) However, the domestic economy is experiencing a slowdown,
mainly due to low trade volume, which has hit public revenues. In
September, the government was forced to revise downward the 2009
budget and reduced both revenues and public spending. It appears
that even with the revision downward the GOA may be as much as 30
billion lek (315 million USD)short and ministries are being
pressured to immediately put off projects until 2010. A large
portion of non-entitlement government spending comes at the end of
the fiscal year (Jan-Dec 2009.

A Faulty Crystal Ball for Revenues
--------------

4. (SBU) The 2010 budget projects a growth rate of 6.5 percent, an
increase in GDP per capita of 10 percent, and a slight drop in
unemployment. Additionally, public revenues are expected to
increase by 11 percent. The revenue increase is justified by the
GOA through a deepening of structural reforms, mainly in the tax
system administration. However, in the 2009 budget revenues were
forecast to rise 15 percent (original budget),then 12
percent(revised budget)and may in fact only rise 2-3 percent when
actual 2009 revenue figures are published. This means that the GOA
would need a revenue growth rate of 20 percent or more compared to
actual 2009 receipts to meet their current 2010 targets. In the
past ten years the average revenue growth rate has been ten percent,
and never exceeded 15 percent.

2010: Roads, Salaries and Pensions
--------------

5. (SBU) The total budget for 2010 is 4.45 billion USD, which is a
2.5% increase in total spending compared to 2009, but a 15% decrease
in capital investment. The fall in capital investment is mainly due
to the projected completion of the Durres-Kukes road. (Note: The
recent partial collapse of one of the tunnels will likely cause this
to be, at least in part, revised. End Note). The GOA's budget
continues to focus on modernization of infrastructure (namely a
network of roads). In addition, a graduated (four to 15 percent
range)increase in pensions and government salaries and a 20 percent
increase in social assistance is planned.

A Budget That Faces Many Challenges
--------------

6. (SBU) Despite GOA's attempt to convey optimism, there are several
challenges that the Albanian economy is expected to face in 2010.
The GOA believes that global economic recovery will serve as a boost
both for imports and exports. However, the IMF has projected a GDP
growth rate of three percent vs GOA's estimate of 6.5 percent.
Insecurity over the domestic currency exchange rate and any
reduction of consumer demand will not help restore business
confidence. The private sector will also face an increase in
production costs with electricity prices set to rise 13 percent or
more. Finally, the ongoing political strain continues to impact
government efficiency and reduce confidence. The opposition, while
boycotting Parliament, has harshly criticized the budget as
unrealistic in the face of the economic crises.



A Budget in Need of Financing
--------------


7. (SBU) Financing the budget deficit is another key issue. If 2009
revenue continue to track low there could be a revenue deficit of 30
billion lek for just the last quarter of 2009 (315 million USD) that
needs to be covered. The GOA has made a strong push to reduce
spending in the last quarter of 2009 and many projects and payments
are reportedly being put off in order to make up the potential
shortfall. The GOA is near its debt ceiling and other options for
covering the anticipated 2009 shortfall and future deficit are;
issuing local currency debt, raising international debt,
privatizations, or increasing grants from International Financial

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Institutions (IFIs).


8. (SBU) The 2010 budget anticipates raising 14 billion lek (152
million USD) locally on the domestic debt market, but this will be
difficult as bank deposits are still rebounding from previous lows
and the interest rate is relatively high, around 9.2 percent, for
government issued debt. The budget also plans on a 25 billion lek
(equivalent) Eurobond (272 million USD)bringing the total level of
financing sought to 39 billion lek (430.5 million USD). The
Eurobond will not finance the budget however but is , informally
earmarked for paying off the high interest rate 200 million euro
syndicated loan that matures in 2012,. Only two major
privatizations are left; INSIG (life and non-life insurance) and the
GOA's 17 percent share in Albtelecom. (Note: Both privatizations,
but particularly INSIG's, have had a serious of starts and stops
over the past few years and to privatize both within a year is
ambitious. End Note). Grants and loans from IFIs remain a viable
option and the Minister of Finance (MOF) has announced that it is in
consultations with EBRD, EIB, and the World Bank for additional
project financing.


9. (SBU)The MOF has also been in talks with international banks
about possibly doubling the size of the Eurobond to 50 billion lek
(equivalent)(543 million USD). This would allow the government to
both pay off the syndicated loan and to use the additional 25
billion lek (272 million USD)to pay for 2010 budget programming.
One international bank has passed on the bond as being too large but
the MOF is continuing talks with another international bank that has
been more receptive.



10. (SBU) Comment: The Minister of Finance declared recently that
that the worst is over and he expects the economy to rebound next
year. This is an ambitious statement that follows an even more
ambitious budget. The effects from the crises are still felt in the
region, most recently in Greece. The 2009 budget had a similarly
ambitious growth and revenue forecast - projections which were not
met in the wake of the global economic crisis and aggressive
pre-election spending. However, the GOA was able to make up much of
the shortfall through a number of big-ticket privatizations, which
altogether brought in nearly 293 million USD. The GOA is cutting
2009 spending deeply to try to reduce the expected shortfall, but it
remains to be seen what portion they are able to cover through a mix
of delayed spending and outright cuts. At this point, the bigger
concern remains the 2010 budget. Projected revenues for 2010 are
unrealistically high, and there are relatively few viable or simple
privatizations left to make to cover any shortfall. The GOA has put
itself in a difficult position of setting expectations unreasonably
high, which could force future budget revisions and potential
political backlash if it is not able to realize its budget
projections.



JONES