This report covers the main macroeconomic releases from January 7 to February 5, 2014 as well as the financial and political events that took place in Albania during this period. It is predicted that in 2014, Albania’s economy will grow faster than Bosnia and Herzegovina (2%) and Serbia (1%) but will lag behind Kosovo (4%), Macedonia (3%) and Montenegro (2.5%). The report further includes industry news for companies including Norway’s Statkraft and Vodafone Albania.

Albania’s economy contracted by 2.3% on the year in Q3 2013, registering its first annual decrease since Q1 2012 as all main economic sectors except for the agricultural sector shrank over the period. The government expects economic growth this year to speed up to 2.1%, up from the 0.7% estimated for 2013. The government’s projection is line with the World Bank’s estimate but higher than the forecast of the EBRD, which predicts Albania’s GDP growth to be 1.7% in 2014. Austria’s Raiffeisen International forecasts the country’s 2014 economic growth at 2%. According to the EBRD, Albania faces challenges from rising public debt and financial sector vulnerabilities; EBRD believes that the fiscal tightening under a new IMF program will dampen the positive growth contributions from the continued recovery in both domestic and external demand.

Albania’s general budget deficit widened by 72% in January to November, reaching 4.5% of the full-year GDP forecast, as revenue fell while spending increased. In our view, higher spending on public investments could be partly explained by the pre-election expenditures, as Albania held parliamentary elections on June 23. The government expects the budget deficit to increase to 6.5% of GDP in 2014, up from the 6.1% expected for all of 2013.

Key Points:

• Albania scored 66.9 points and ranked 54th out of 178 countries in the 2014 economic freedom index of US Heritage Foundation and the Wall Street Journal. Albania outperformed Montenegro at 68th, Croatia at 87th, Serbia at 95th and Bosnia and Herzegovina at 101st.

• Norway’s Statkraft announced plans to invest some EUR 100mn in 2014 into a project for the construction of a hydropower cascade on the Devoll River in southeastern Albania. Vodafone Albania was recently cleared by the competition authority of abusing its dominant position in the market.

• The foreign trade gap narrowed by 16% in 2013 and accounted for 19.8% of the full-year GDP forecast, down from 24% in the previous year. The lower deficit came as exports increased by 15.6% y/y, while imports declined by 3% y/y.

• Consumer price inflation in the country accelerated to 1.9% in December from 1% in November. The overall trend was again determined by food prices, which grew 3.5% y/y, faster than November’s hike of 2.1%.