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Analysis/ The double-edged sword of the economy in 2023, will there be a construction boom?!

2023-01-15 20:20:27Biznes SHKRUAR NGA REDAKSIA VOX

Analysis/ The double-edged sword of the economy in 2023, will there be a

Europe is expected to experience recession in the first half of 2023, just as the trend is predicted for a third of the globe. International institutions expect the Albanian economy to slow down to around 2% this year.

Still high inflation, risks of a construction bubble, interest rate movements reflecting the tightening of monetary policy, weak consumption influenced by immigration and rising prices will put pressure on weak economic growth.

However, the experience of the last years has shown that the reality has always been more optimistic than the predictions, as the local enterprise always shows high resilience to recover from surprises and difficulties. However, a strong obstacle, which is not easily overcome, is expected to "undermine" the year 2023: the lack of manpower...

The last three years have taught us only one thing: that the most accurate prediction is that nothing can be predicted!

No one expected Covid-19, which in 2020 and the first part of 2021 sent the entire globe into recession, as countries struggled to contain the consequences of the deadly virus. In 2022, the recovery was rapid, Russia's attack on Ukraine caused a strong wave of price increases, curbing the recovery.

Now in 2023, everyone has become more cautious, as a form of self-defense mechanism against the unexpected. The International Monetary Fund (IMF) recently predicted that a third of the world's countries will enter recession by 2023.

The European Commission expects the European Union to enter recession in the first quarter of this year. For Albania, the IMF expects growth to slow to 2%, from the 3.7% estimated in 2022.

The head of the IMF Mission for Albania, Yan Sun, says in an interview for "Monitor" that this expectation reflects tighter financial conditions, the slowdown in Europe and the withdrawal of support policies, along with expensive prices.

"Total inflation is expected to peak in the coming months and should begin to decline in 2023," said the head of the IMF.

In 2022, inflation peaked at 8.3% in October, the highest level in 24 years since the pyramid crisis, driven mainly by fuel and food, but still lower than in the EU and other countries in the region, where exceeded 10% (the non-increase in prices for family consumers had a positive effect).

Price tightening eased in November, halting a 12-month upward trajectory, and eased further in December to 7.4%.

From March 2023, inflation is expected to decrease significantly, after the strong jump in the same month a year ago, when the consequences of the war appeared.

Unlike 2022, when imports of greens rose by over 40%, – offsetting domestic production that shrank from high costs, which added to the impact of imported inflation, – this year farmers are more optimistic about field products and greenhouses.

The Bank of Albania expects inflation to decrease progressively in 2023 and approach the 3% target in the first half of 2024.

Even in the global markets, a new demand-supply balance is being achieved in the main products such as energy, gas, basic food products, easing inflationary pressures, but prices are still expected to remain higher than before the crisis.

Energy is expected to be the next factor that will continue to influence performance in 2023, but the news is better this year.

The liberalization process, which would bring about 7,400 20 kv line businesses to the free market, as of June 2022, has been postponed again, and medium voltage 20, 10 and 6 kv businesses will be kept at preferential prices.

They will continue to buy energy at regulated rates of 18.2-19.6 ALL/kv until the country will not be considered in an energy supply emergency.

For businesses with a voltage of 35 kilovolts, which buy energy on the free market and in 2022 faced extremely high prices of 50-60 lek/kvh, the Ministry of Energy has promised to protect them indirectly, making KESH an intermediary in the free market, which will result in lower than market prices.

In 2022, several large producers such as "Kurum", "Albchrome" and cement factories temporarily stopped production, as the cost of energy reached unaffordable levels.

The situation is expected to continue to be difficult for the state energy operators, both for the distribution operator and for the production operator, which may force the government to guarantee this sector, in case the same situation will be repeated, when it will be necessary to buy expensive energy from imports.

Ekaterina Solovova, head of the office of the European Bank for Reconstruction and Development (EBRD) in Albania, affirms in an interview for "Monitor" that the crisis highlights the need to address weaknesses in local electricity production, as the cost of not doing so Its high.

Despite the difficulties, the experience of the last years has shown that the reality has turned out to be more optimistic than the forecasts, as the local enterprise always shows high resilience to recover from surprises and difficulties.

In 2020, when the country suffered the consequences of the pandemic, the decline of the economy was much lower than the forecasts of international institutions (at -3.5%, from -8-9% that were the initial estimates). The country also withstood the price crisis better than expected, accelerating growth rates in the third quarter, after slowing down in the second.

"I am always very impressed when I look at the performance of Albania's Gross Domestic Product (GDP).

First, the impact of the pandemic on the economy was significantly lower than that of other countries in the region, and then, the recovery has been very strong", says Emanuel Salinas, manager of the World Bank office for Albania, in an interview for "Monitor".

He adds that there is an impressive sustainability of the private sector, which is related to the entrepreneurial spirit of Albanians.

While the impact of inflation and energy may be a little more softened this year, demographic developments, immigration and labor shortages are turning into a systemic problem of the economy: For the third year in a row, entrepreneurs show as one of the main problems not only the lack of labor force, but also the impact that immigration is having on consumption.

For three decades, the main competitive advantage of the domestic economy has been the cheap cost of labor, which has encouraged low-value-added and minimum-wage sectors. Now, this model is no longer working.

Emigration has created a real bottleneck in the labor market. All sectors report that they are struggling to find employees and are being forced to increase wages, for the most part without improving productivity, affecting the reduction of competitiveness in relation to their neighbors.

Diana Leka, Director of the Secretariat of the Investment Council (KI), says that from the continuous surveys that the KI has done with enterprises, the lack of labor force and especially the departure of trained employees (lack of skills) will continue to negatively affect maximizing the potential of the economy.

In a positive development, she adds that this situation "will accelerate the orientation of the business towards the automation or even the consolidation of the labor force search in new countries, which of course comes with its costs. The increase of the minimum wage and the real wage will affect the balance between the supply and demand for work in the country.

But, unlike prices and other short-term problems that demand-supply adjusts quickly, finding balance in the labor market will be a long-term process and will require time and will be more painful, becoming a hindering factor in the economy for a long time.

The high-stakes environment is not expected to be very supportive. The Bank of Albania increased the base rate 4 times in 2022, bringing it to 2.75%, the highest level since 2014, in view of its main objective of maintaining price stability.

The tightening of monetary policy has been transmitted more to the cost of government debt and interest on loans, slowing borrowing by businesses and individuals in the final months of the year.

Although monetary policy is expected to be more moderate in 2023, due to price stabilization, interest rates are expected to be high, curbing lending. Another risk is the increase in non-performing loans, as a reflection of the increase in the cost of installments, as well as the slowdown of the economy.

Monetary policy is expected to continue to be tight, although the intensity of the base rate increase may be minimal, if inflation is kept under control. Fiscal policies will prioritize debt consolidation and reduction, but again the first 6 months may see an increase in incentives, on the eve of the local elections, which will be held in May.

Climate change is another long-term limiting factor. Global warming is triggering a series of abnormal events that, although expected, were abstract until they reached a point where they began to be seen from agriculture, which is being negatively affected by floods to energy.

Other sectors are also feeling the consequences, such as fashion (due to the warm weather, the demand for clothing has changed, creating stock for winter clothing), wine production, etc. The country is not yet prepared to face this process.

"Albania is one of the most vulnerable countries in Europe to climate change, but the extent of the impact on the entire economy is still undetermined," says Mr. Salinas of the World Bank.

Where will the growth come from?

Construction and especially tourism were the two sectors that led the growth in 2022. Agriculture was the only one with a negative performance, as the increase in costs negatively affected the sector that contributes to about 19% of the Gross Domestic Product (GDP).

All international institutions and the government itself expect a slowdown in economic growth this year, to around 2-3%, reflecting the unstable global situation, still high prices leading to curbing demand, increasing costs for businesses, uncertainty in the power supply.

The speed of growth is expected to be different, depending on the sectors and specific factors that may influence positively or negatively.

-Agriculture, which continues to have the main weight in the economic activity, will continue to face many unexpected events, such as the vagaries of the weather, or the increase of costs.

Unlike last year, farmers are more optimistic this year, due to the change in the subsidy policies of the Ministry of Agriculture, which are directly subsidizing planting in greenhouses. For livestock, the situation is quite the opposite.

The livestock sector will follow the downward trend in the number of heads, if a higher price for farmers' milk is not ensured, says Ervin Resuli, who owns a cattle farm and is also a good connoisseur of the sector.

- Trade, tourism: Trade and services are expected to continue to be the main sectors that will drive growth. The retail trade is optimistic, despite the pressure that high prices are exerting on consumption.

"The expectations for 2023 are also positive. New international brands are expected to enter the retail market, such as the long-awaited 'H&M', says Stela Dhami, executive manager of "Colliers International Albania".

"The beginning of the year is predicted with permanent difficulties, but then I believe in a satisfactory pace of sales, due to the end of the cold months and the possible reduction in the price of electricity and oil", says Julian Mane, vice president of the BALFIN Group, the largest operator of the minority market in the country.

In contrast, there is less optimism for tourism this year. Its potentials are fading due to the inability of the government to follow the pace of business investments, in terms of improving infrastructure, but also curbing spending by tourists, as a result of the global crisis.

Added to these are the problems with finding the workforce, which are negatively affecting the quality of the service.

"From what we see, there is a drop in reviews (impressions) that has come from the lack of service or the drop in its quality in the accommodation structures.


I think that infrastructure is another element that has had an impact", - affirms Rrahman Kasa, president of the Albanian Tourist Union. For example, the Nordics, who have been with prepaid contracts for several years, in 2023, for the first time, will not give guarantees, but will pay for as many tourists as they bring.

The operators of bars and restaurants are not too optimistic either, an important sector with about 15% of enterprises in total. Emigration, which has reduced consumption, rising costs and labor shortages are expected to have a negative impact.

- The industry is expected to suffer the consequences of rising costs of raw materials and energy, which on the one hand may make the industry uncompetitive and, on the other hand, may encourage imports. The cement industry, metal processing, dairy processing, and fashion all report that they are suffering from both rising costs and labor shortages.

- Construction is one of the sectors that has had the best performance in recent years and is expected to continue growing, although this is a double-edged sword (see the following subsection).

-Real Estate. Like construction, this is one of the fastest growing activities in the country.

-Professional activities are expected to have positive progress, driven by the increase in consumption and demand for services. The postponement of the income tax law, which provided for the increase in taxation for this category, is expected to give breathing space to professionals, at least for this year.

- Information and Communication: The telecommunications market is concentrated, after the entry of the Hungarians 4iG, who have united ONE and ALBtelecom into a single one, in operation from January 1.

Information technology is expected to continue growing, becoming a source of employment for young people, following the high interest of foreign enterprises to perform a part of the services in Albania.

- Arts, entertainment will continue the positive trend, but affected by the inhibition of consumption after the increase in prices.

- Financial activities grew rapidly in 2021 and in the first part of 2022, but in the second half they were affected by the tightening monetary policy of the Bank of Albania, becoming more cautious in terms of lending.

"The banking sector is closely following the progress of the loan portfolio. We do not want a second post-2010, where non-performing loans reached almost 25%. Now, care must be taken not to allow individuals, or commercial companies, to become insolvent.

Therefore, efforts are being made to better understand the borrowers' situation and, if it worsens, a backup plan must be planned", says Spiro Brumbulli, Secretary General of the Albanian Association of Banks.

Will the construction be deflated?

In recent years, construction, especially residential construction, is taking a primary role in the economy, as the areas of permits have increased significantly and the real estate market has expanded, especially in the capital.

According to INSTAT, in 2021, the area granted construction permits in the capital was 1.6 million square meters, a record level at least since 2010, when the data is reported, of which nearly 80% was for residential construction.

The same trend continued in the 9th month of 2022, when almost 1.5 million m² of construction permission was granted in the capital, with a 17% increase compared to the same period a year ago.

Tirana received 70% of all permit areas granted in the country in the corresponding period.

Although the supply has increased rapidly, the prices have followed the same line, reflecting both the increase in construction costs and the high supply that has been driven by both credit (for average apartments purchased by the middle class) and informal money, which are mainly channeled into expensive apartments that are sold mainly in cash.

The Bank of Albania announced that in 2022 alone, real estate prices increased at a record pace of almost 40% compared to the previous year. On average, an apartment in Tirana costs from 800-900 euros/m² in the suburbs, 1500-2500 in the areas near the center, up to 5000 euros in the elite areas and the towers that are rising in the center of Tirana.

The IMF, in the last statement on Albania, paid special attention to this sector for the first time and advised to be careful about the impact that the momentum of constructions and the expansion of the real estate market can have on the stability of the financial sector.

"We call for close monitoring and management of potential risks from high credit growth in recent years, including increased foreign currency lending," the IMF said.

The data of the Bank of Albania show that the loan for housing has slowed down in recent months after the increase in interest rates, which are approaching the level of 5%, or 1.5 percentage points more than a year ago.

In October, new credit for the purchase of real estate was worth 2.95 billion lek, the lowest value since January 2022 and 8.6% less than the same period a year ago.

Real estate agents expect that there will be less demand for apartments from young families, as a result of inflation, rising interest rates and the high level that apartment prices have reached.

Although builders have been hit by rising costs and supply is high, their hope is that a Fiscal Amnesty will keep demand high.

Ylli Sula, the head of the "Keydata" index, predicts that if the Fiscal Amnesty is not approved in 2023, the construction bubble will deflate and property prices will fall, as that part of the buyers who pay in cash will withdraw." .

Stela Dhami, from "Colliers International", claims that the indications received from the market currently lead to think about a possible bubble in the medium term.

"However, if the Albanian economy will continue to be affected by factors, which are not calculated in the national statistics, then the bubble effect can be pushed to an 'external shock' that the economy can receive from external factors, as part of the economy gray".

A very influential factor, if and when there will be a real estate bubble, plays the "bag of dirty money" and on this it seems that everyone agrees. But no one can say how big it is and whether it will ever be emptied. If it empties, one thing is certain: The bubble will happen instantly!

The houses are sold, but they are not being furnished?!

Construction-related industries are less optimistic, in an indication that the sale of apartments is not happening as a result of real demand, but more as a deployment of money that has been earned from informal activities (parking money).

For example, imports of the chapter "Furniture, beds, mattresses, lamps and lighting equipment, etc." decreased in quantity by 5% for the 11th month of 2022, in relation to the same period of the previous year. Even furniture manufacturers report a drop in demand, as a large proportion of apartments are being kept empty.

Exporters, under pressure from costs and labor shortages

Exports grew rapidly in the first half of 2022, but slowed down significantly in the second half of the year, as businesses were hit by rising costs, especially the rise in energy prices, which led to the temporary closure of some exporters. big.

For the 11th month of 2022, sales abroad increased by 32% compared to January-November 2021. The expansion was led by the three main groups "Textiles and footwear", "Construction materials, metals" and "Minerals, fuels, energy ".

"Textiles and shoes", the largest group of exports in the country, with about 28% of the total. The fashion industry is not enthusiastic about 2023, because the economic crisis will hold back consumption and orders, and the warm weather this winter has created stocks in warehouses, which will affect lower demands for the coming winter.

The sector, in addition to rising costs, is suffering from labor shortages, preventing it from benefiting from increased demand from Ukraine, following the displacement of production from the war.

The devaluation of the euro reduces revenues and profits, as less is collected in lek. Gjergj Leqejza, who owns the textile production factory "Madish" in Shkodër, says that production costs have increased unanimously, ranging from 25 to over 100%.

"Construction materials and metals", the second largest group, with 22% of the total, are pessimistic.

"Furthermore, stock exchanges and metal markets are expected to decline, while energy prices are expected to remain high, leaving very little space for the local industry to bear costs and enter the markets", says Arif Shkalla, economic director of "Kurum". ”, which is the largest exporter in the country and the fourth enterprise in terms of revenue.

The company, which temporarily closed production at the steel and rolling mill in 2022 due to expensive energy, predicts that in 2023 there will be a decrease of at least 10-15%, both in volume and turnover.

Forecasts are also bleak for the building materials industry. "In 2023, the high costs of construction with the unstable prices of raw materials, electricity, fuels, etc., are predicted to reduce market liquidity and slow down investments", - claim from "Antea Cement".

Out of about 15 active factories, only four of them, the largest and most consolidated in the market, are functional.

The third largest group of exports "minerals, fuels and energy", with 22% of the total, fluctuates between optimism and pessimism. "Bankers Petroleum", the second largest exporter in the country, after "Kurum", expects constant growth of activity as long as oil prices will continue to be high.

The mining sector is more pessimistic. "Albchrome" ceased activity in the second half of 2022, as a result of expensive energy and the drop in the price of minerals on the stock market. While the performance of energy, as always, is dependent on rainfall.

"Food, beverages and tobacco", which contribute to 10% of exports, have recorded steady growth year after year. The sector is optimistic for the year 2023, for expansion by at least 10%.

It is expected to have a positive effect on the increase in the surface area of ​​greenhouses, but also the increase in the production of some fruit trees, especially the clementine mandarin, which is becoming an interesting fruit, which is being demanded by the European markets, according to Ruzhdi Kon, exporter.

For medicinal plants, a product that has an important weight in agricultural exports, the President of the Association, Filip Gjoka, says that the demand has increased for many items. For example, for black juniper, from which gin is produced, orders have increased by 30%.

In contrast, fish processing operators predict the continuation of the collapse of the sector in 2023 due to the end of quotas since August last year.

"Machinery, equipment and spare parts" was one of the groups with the fastest growth in recent years, after the opening of several factories that assembled parts for the automotive industry.

Companies such as "Forschner Albania", "Delmon Group Albania", "PSZ Albania", "Yura Corporation" and "SEWS Cabind Albania" are active in Albania, which produce wires, cables, tires or simple parts for international companies such as " Mercedes Benz", KIA, "Hyundai", "Peugeot", "Renault", "Fiat Group", or others such as "Sumitomo Electric Industries".

The representatives of these companies are optimistic for the year 2023, as a result of the relocation of production in Albanian factories from those located in the Russia-Ukraine conflict zone./ Monitor


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