Macroeconomic Developments of the Economy
South East European (SEE) economy is one of the fastest growing regions that has faced a significant amount of growth in its various macroeconomic factors during the last one decade. During the recent years, the SEE roared its growth with the robust global demand and adequate amount of stimuli towards its fiscal program through the enhanced funding from the EU (Cheshire and Hay 2017). According to the latest statistics the regional economy has grown at 8.2% rate during the third quarter 2017 depicting high growth rate of the region (Gillespie and Goddard 2017). Cannonballing of the SEE growth rate has been mainly germinated through the growth in the Turkey, Romania, and Albania to a large extent and additionally, other nations have also grown substantially to promote the outstanding growth figure. Ample amount of Foreign Direct Investment (FDI) inflow to this region and strong global demand prospect, primarily sourced from the Asian economy has buttered the economic performance of this region (Katzenstein 2015). Among all the nations, Albania has been highly remarkable due to its rapid growth rate during 2016 to 2017. Additionally, it has been observed that the economy has fetched the moderate amount of FDI in the different sectors of its economy, especially the banking sector and rise in the performance of the secondary and tertiary industries has aided the growth of this economy (Timmer et al. 2015). Being a rapidly growing and transforming economy in the SEE region that has a high amount of natural resource and possess a significant amount of skilled labours, Albania has high potential to become the optimal destination of the future foreign investments. Moreover, the presence of ports like Vlora and Durres as well as a favourable geographical position with a well-developed banking sector the nation is all set to attract the foreign investors (Cheshire and hay 2017).
Though the SSE has grown at a rapid rate during the recent years depending upon the banking sector performance and enactment of the tertiary sector, a recent report suggests that the cope of the inflation has also reduced some economic variables in this region leading to falling in the standard of living as well as deteriorating the other macroeconomic variables (Almonf and Coleman 2015). Under this situation, this report is meant to analyse the performance of the Albanian economy and trace whether it is suitable for the investment or not. As the angel investor who wants to invest in an SEE economy, this report will be constructed in such a way that it can evaluate the relevant macroeconomic and microeconomic environment of the Alabamian economy and additionally recommend amendment in the investment program.
To study the feasibility and reasonability of the investment in the Alabamian economy, it is essential to review the economic performance of the state during the last years in order to have detailed idea and trend regarding the performance of the economy.
Albania is an SSE country, which is located across the Adriatic Sea and 72 km away from Italy, which is known for their agricultural goods and services (Bennett et al. 2015). Albania in present date is an open market economy, and during the last two decades, the state has slowly marched to become where it is now. From the centralised economic history during the 1980s the economy is adhering the free market economy to provide a higher amount of development and scope to attain sustainability. It is a lower middle-income nation and the part of the North Atlantic Treaty Organisation (NATO) as well as the World Trade Organisation (WTO) to entice its economy with better growth prospect (Shingjergji and Hyseni 2015). This developing nation has 2,831,741 population, and the population density is as high as 98.5 per square kilometre (Cantillo and Zepeda 2016). Among the significant cities, Tirana is counted for most of the population in the state, and the growth of the population has been rising in this city during the last two decades.
Macroeconomic Performance of the State
As the economy has been endorsing the free marketing overcoming from the century-long communism and dictatorship regime a significant amount of demographic change in the area can be observed. The education system of the state is considered as one of the essential factors for the growth of the economy, and since 1990, there has been rapid growth in the educational standard of the state. Not only the urban area, in addition to this, rural areas have also facing enhanced scope for higher studies, and throughout the nation, more than 5000 schools are ranging from public financed education centre to private schools. Employment level of the state is moderate, and most of the employment comes from the service sector with 46.8% employment share (Agenor and Montiel 2015). A second most substantial portion of the employment with 41.8% share is generated through the agriculture, and lastly, the industrial sector is accounted for the 11.4% employment generation (Mankiw 2014). As the chief industry the state depends upon its perfume and cosmetic sector; additionally, there is textile, lumber, and tobacco, food processing and mining industry that has been aiding the economy of the state since decades.
Considering the figure 1, it can be seen that the state has been facing moderate amount of growth rate in the recent years. However, during 2014 it had encountered the highest growth rate out of the last five years when it grew at a rate of 5.8% (Tradingeconomics.com 2018). According to the diagram, presently the growth rate of the state is slightly lower than the 2% annual change, however, showing the trend of growth rate in overall SSE area it can be depicted that the economy is yet to face higher growth rate in the coming years. During the last five years GDP of the state has been moderately describing the temperate growth of the economy. According to the 2016 data the state has GDP of 11.92 billion USD that makes it one of the largest economies in the SSE region (Kola et al. 2015).
When it comes to the unemployment rate of the state, then it can be seen that the state has been reducing its historically higher unemployment rate. As the figure 2 highlights, the unemployment rate has been much higher in the state traditionally, and presently it is falling with the stimuli from the fiscal expenditure of the government. Trend highlights that, if the fall in the unemployment rate continues, then the state will become the economy which has the lowest unemployment in the SSE region by the end of 2022 (Konica and Filler 2015).
As the employment is rising with the rise in the scope of employment, disposable income is also increasing that enhancing the consumption spending of the Albanian people too. From the figure 3, it can clearly be seen that there has been drastic fluctuation in the consumer spending pattern of the state. Since, 2014, there has been a rising trend in the consumer spending with the fall in the unemployment rate, and it shows the growing pattern of the socio-economic pattern of the state (Merollari and Mosko 2015).
From the figure 4, it can be seen that the government spending of Albania has been rising at a substantial rate since 2014 and comparing it with the figure 1, it can be seen that the economic growth of the state has also been rising since the same year. Not only this, but figure 3 also showcase that as the economy has grown with the higher government expenditure it has facing reduced unemployment level depicting economy has been performing well during the recent years (Turan and Bala 2014).
With the expansion of the economy, it has attracted lots of foreign investment too. As the figure 5 depicts, there has been upward swinging FDI trend in the case of the Albania that makes it an ideal place for the further investment. Post-2014, there has been marginal fall in the foreign investment, however, during 2016 it started to rise again and reached to its peak during 2018 (Shore et al. 2016). Considering the 2018 data it can be seen that the foreign investment has been falling, however, according to the estimation, it is all set to rise higher than the 2017’s level with its higher growth prospect in the recent days and enhanced business environment for the foreign multinationals.
This report is aimed to assess the credibility of investing in the banking industry of Albania. Thus, this section will focus on the performance of the industry and analyse whether it is the ideal option for investment or not.
The banking system of Albania is comprised of Bank of Albania, which is the central bank of the state and the only tier one bank in the economy. All the other banks incorporated within the second tier are operational under the jurisdiction and control of the central bank of the economy. The second tier bank of Albania Is made of the commercial banks and Deposit Insurance Agency (DIA), which are a state-owned organisation that highlights the reliable control of the state over the money market (Shingjergjj and Hyseni 2015). However, in this regard, it is important to remember that the DIA is accountable for the foreign currency and deposit more than 2.5 million in Albanian currency of 17,730 euro is beyond the scope of insurance.
Considering the Albanian market structure, it can be seen that the industry has been gone through significant change in the recent years. During the 1990s, there was deregulation in the Albanian economy and market was being penetrated by the foreign banks with their massive investment (Iqbal and Molyneux 2016). Since then accelerated the process of consolidation scheme and competition in the banking sector has been introduced in the state and post 1997 the situation become worse with the pyramid scheme of the state that reduced the market confidence to a large extent (Shehu 2016). Under this situation, the government of the state was forced to take regulatory actions through strengthening monitoring, incorporating risk-based supervision and restoring the confidence of the customers. During the end of the year 1999, banking sector of Albania become stable and has started to aid the growth of the economy, and according to the assessment of 2011, it has been found that the banking industry has become stable and sustainable with the government policies (Mittal and Suneja 2017). Profit indicators of the banks have been increased, and considering the case of the bank’s balance sheet, it can be seen that it has grown to a large extent during the recent years.
Now it has been seen that the overall macroeconomic performance of the state has been excellent. However, as the report is meant to contest whether it is good to invest in the Albanian banking sector or not, it is essential to check the performance of the banking balance sheet of the state.
From the above figure, it can be seen that the bank balance of the state has been rising at a rapid rate over the year, which showcase the strong position of the banking sector of the state. In addition to this, the upward trend also highlights that with the rise in the balance sheet of the Albanian banking sector, it is the optimal place for the investment, however, to check the reasonability of the same, it is essential to check the microeconomic effect of the state and then check the institutional and economic environment of the selected country (Mohammed et al. 2015). Thus, moving forward, this report will provide light on these sections of the economy.
Over the time GDP share of the banking industry of the state has mainly increased and according to the 2011 data, it can be seen that the banking share contributes 85% of the national GDP. Assets of the bank are as high as 1,120 billion in Albanian currency (Weiblen 2018). The growth rate of the loan in the Albanian banking sector is as high as 15.35% during the year 2011 and out of this 10.4% goes to the business sector that depicts how the banking sector has been stimulating the economy of the state and its growth too (Atiku et al. 2017). Out of total asset of the bank 29.9% asset is present in the liquid form and rest is stored in the central banking that highlights the stability of the baking sector of the economy (Mondal 2016).
Considering these factors, it can be stated that the investing in the Albanian banking sector is one of the best choices for the investor because it will gain higher return in future and provide good prospect to enhance the asset balance of the investor too (Shehu 2016). However, it will be ideal to judge the institutional and economic environment of the selected industry to ensure the investment decision.
This section is aimed to portray the Institutional and economic situation of the chosen industry, which will represent whether it is right or not to invest in the Albanian banking industry.
Comparing the banking sector of the Albanian banking sector with the other states of SEE, it can be seen that the no one is closer to the performance of the Albanian banking sector. Stability of the Italian banking sector is on the verge of deterioration and the economy of Turkey, Romania has faced fall in their growth rate in the recent years (Scully 2014). In addition to this, the stability of their banking system is also lower than the Albanian banking system. Lack of the government control over the economy and fall in the performance of the banking sector in the other countries of the SEE region has made the Albanian banking sector superior to other (Abid 2017). It has well-developed observation system and with the higher scope to develop further with the proper utilisation potential of the foreign investment in the sector it has high chance to fetch higher return to the investors. As it has been seen that annualised return on the equity was 0.76% during the year 2011 and the banking sector has been earning a positive profit since the decades it can arguably the best place for investment (Mora et al. 2015).
The Albanian Financial Supervisory Authority (AFSA) is the independent public organisation that looks after the banking related issues of the Albanian economy (Hauser et al. 2016). Ranging from insurance market to the securities market it operates in various sectors and revises the plans to control the same on short frequency to let the banking system of the state perform smoothly. Adaptation of IFRS in the market of insurance and incorporation of the Solvency II norms into the banking sector of the state has made it a potentially secure and growing region of the economy that is all set to attract higher amount investment in coming days in turn of the higher return (Malaj et al. 2015). In addition to this, on financial leasing enactment in 2005 has been introduced by the central bank of the economy to look into the financial transactions by the bank making it a secure channel for the transfer payment (Moore 2017).
When it comes to growing business, Albania is one of the growing economies, and the banking sector has been facing right amount of growth during the last few years with the aid of the firm governmental control and supervision of the central bank. The state has been raked up to the 32nd position during 2017 as compared to the 58th position of during 2016 in the context of ease of doing business (Ruiz et al. 2017). This extraordinary leap forward of the rank showcase the growth of the business environment and the reliance of the consumers as well as the investors on the Albanian economy. As the initiative to fetch more investment in the economy of the state the government has introduced the following steps (Burhan et al. 2017):
- The government has authorised the local government to sanction the new business or investment program in the different parts of the state without prior authorisation of the central government to enhance the flow of the FDI.
- Upper cap has literally vanished, meaning, there is no limit to invest in the industries of the Albanian economy.
- When it comes to investing in the banking sector of the economy, then it charges only 10% tax on the return, where there is cost productive or flexible taxation applies to the other industries that provide much amount of volatility in the market (Sherifi and Turan 2018).
At par with the EU’s FDI protection law, Albanian government provides exceptional protection for foreign investment that exceeds the value of 10 million euro making it a secure place to invest. Additional Albania 1 Euro initiative is aimed to grant greater scope to enter the market to the newer investment scheme which is mainly directed towards the banking sector making it one of the lucrative places for the foreign investment.
Conclusion:
The report has studied the macroeconomic developments of the economy, and next to this it has analysed the microeconomic effects of the state. Through analysis of the institutional and economic environment of the selected industry, this report has found that economy of Albania is a stable one and its banking sector has high growth prospect. One of the main reason for the change in the growth pattern of the Albanian economy lies within the rising government spending of the state. Through the analysis of the banking sector of the economy, it has been found that the country has a strong governmental control over the money market and the well-defined banking sector of the state is potential enough to fetch higher return on the equities in the coming days. As the trend of the state ensures, it will have higher growth prospect in future, and banking sector with the strong supervision has a good amount of stability that makes the ideal solution for the investment.
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