Share the article
twitter-iconcopy-link-iconprint-icon
share-icon

Cautious optimism prevails in Europe's youngest nation

A diversified economy of micro-businesses has shielded Kosovo from the worst effects of the financial crisis, but its unresolved national status and uncertain legal environment continue to pose challenges. Writer Nick Saywell
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Cautious optimism prevails in Europe's youngest nation

The Republic of Kosovo, which declared independence from Serbia two years ago, is a small but rapidly growing young nation in many respects: namely its economy, population and banking sector. Not even the global crisis seems to have had much of an impact - Kosovo perhaps felt a bump on the road, but certainly not a crash or anything approaching recession.

Gross domestic product (GDP) growth did have a stutter, falling from 5.4% in 2008 to 3.9%, according to a 2009 projection from the International Monetary Fund (IMF). The same report reveals that GDP is still low at €3.8bn or €1,731 per capita for 2009.

"Kosovo is rather a remittances-dependent economy and also dependent on FDI. It is a high-import nation at the same time, which shows there is plenty of room for structural reforms at home in order to replace a portion of current imports and also increase the export base," says Gani Gerguri, deputy governor of the Central Bank of the Republic of Kosovo (CBK).

Mr Gerguri puts the slowdown in GDP growth mainly to a decrease in both remittances and FDI in 2009, and explains that in response the Kosovo government stepped up its investment in infrastructure and other projects. "There was a shift because previously the private sector was the driver of GDP growth, but in 2009 the public sector took over the driving seat," he says.

Mr Gerguri asserts that the CBK's biggest success in the 10 years of its existence was the adoption of the euro as Kosovo's official currency. Albert Lumezi, CEO of NLB Bank Prishtina, agrees this was significant: "The euro is quite important due to the fact that it eliminates the risk that comes out of currency and exchange rates, whilst transactions costs are lower as well. However, for Kosovo, as a new state, the most important fact is that the euro offers financial and macroeconomic stability."

Robert Wright, CEO of Raiffeisen Bank Kosovo, the country's second largest bank with assets of €649m, mentions another reason that Kosovo's business sector has withstood the crisis well - its profile. "Industry is micro," he explains, "so you do not have dependency on a handful of large corporates, and the risk is diversified across thousands of small micro-businesses."

Perhaps fittingly for a country whose economy is dominated by small companies, the largest bank in Kosovo, with total assets of €733m at the end of 2009 and €21m profit for the year, is ProCredit Bank, part of the German-based group specialising in lending to small and medium-sized enterprises (SMEs).

Philip Sigwart, ProCredit's CEO, is bullish on Kosovo's long-term prospects: "My guess is that it will continue to develop over the next 10 to 20 years and grow on average something like 6% a year, gradually catching up with other countries in the region. I would not exclude growth being even higher than that."

Resilient banking sector

Rapid expansion is also being highlighted by Kosovo's young population, which is increasing at an annual rate of 1.5% according to the IMF. With high predicted GDP growth, this adds to the long-term attractiveness of Kosovo's banking market.

"The demographic profile is very young so there is definitely potential," says Mr Wright. "When you look at 40% official unemployment with a young population, much of it still at school or university [the market is not so attractive in] the short-term in the current crisis. But the long-term potential is definitely there when this young population starts becoming homeowners."

Kosovo's banking sector is small, with some €1.7bn of assets and eight commercial banks licensed by the CBK, of which Serbia's Komercijalna Banka is not a player on a countrywide level. However, the sector has proved to be resilient and has continued to grow, even through the financial crisis.

"The banking sector has been very stable during this past couple of years," says Mr Sigwart. "The banks have been doing very basic business on the credit side, mostly providing loans to SMEs based in Kosovo and non-performing loans are not very high, below 5% of the banking sector."

Mr Gerguri is happy with the banking sector's performance: "Despite the crisis in other countries, we had a 21% increase in deposits in 2009, even though we do not have a deposit insurance scheme." Overall bank lending also grew in 2009, but at 10%, down from 37% in 2008. "Here in Kosovo, we did not have a crisis," concludes Mr Gerguri.

cp/76/Kosovo - Philip Sigwart, CEO.jpg

Philip Sigwart, ProCredit's CEO

Excess liquidity

However, the global crisis has influenced banks' policies in Kosovo, as Mr Sigwart explains. "Over the past couple of years all the banks have been very cautious with their lending operations. The lesson learned from the financial crisis was that there was a credit bubble and too-lax lending policies in some eastern European countries," he says.

NLB's Mr Lumezi is also satisfied with the results of 2009, describing his bank's net profit of €3.7m as "admirable". NLB Prishtina is Kosovo's third largest bank and 2009 saw both its deposit and loan portfolios increase by more than the sector average - 29% and 19%, respectively.

The contrasting growth in deposits and loans has resulted in excess liquidity in the banking sector, and this acts as an additional shield against any cold winds blowing from global banking quarters, as all the banks' funding is local.

To date, no companies in Kosovo have tapped the debt markets, which would be welcomed by the banks looking for productive ways to place their liquidity. However, the government is unlikely to lead the way for now. Mr Gerguri states that despite a new Public Debt Law enacted in December 2009, no need for government borrowing is currently foreseen.

Kosovo's two largest banks, ProCredit and Raiffeisen, have some 70% of the market between them and are facing competition from smaller players. "Inevitably there are aggressive firms trying to buy market share, which is the case on loans in particular," says Mr Wright. "I think there is an unnecessary fight for this because there is room for everyone. If you can have Albania with 17 banks fighting for 3 million people, and here we have seven banks vying for 2 million people, there is plenty of space for us all."

Kosovo's independent status is still not universally recognised. In total, 65 UN members have recognised the country to date and non-recognisers include five EU member states. Kosovo was admitted to membership of The World Bank and IMF in June 2009, but membership of other international bodies such as the UN remains closed for now.

"Membership of the World Bank and IMF is one of the biggest successes of the country and the central bank," explains Mr Gerguri. "It was a very important international recognition of the progress made by Kosovan institutions. Like many other countries, the IMF will have a catalytic role and increase the credibility of Kosovo's economic policies."

On the other side of the coin, non-membership of the UN has some practical disadvantages for Kosovo's financial system and currently means that the country is unable to join the Society for Worldwide Interbank Financial Telecommunication (Swift) financial messaging system, or the Green Card system for motor insurance.

Meanwhile, Serbia's campaign against Kosovo independence continues and the International Court of Justice is set to rule later this year on Serbia's request for a ruling on the legality under international law of Kosovo's declaration of independence. While any ruling has only advisory weight, Mr Gerguri believes that a positive outcome for Kosovo will lead to a new wave of recognitions, encourage more FDI and help pave the way to UN membership.

Political uncertainty

Kosovo's problems are not only on the international front. On its failure to attract greater amounts of FDI, Mr Wright comments: "Corruption is by far the biggest stumbling block. It is rife and rampant everywhere at the highest levels and throughout the legal system." Mr Wright also cites issues related to loan collateral, title and foreclosure process as areas of concern but says that the CBK "is lobbying hard on our behalf with the government".

Mr Sigwart takes a broader view: "The problem [of clean property title] is not as big as one imagines; certain properties might be disputed but others are not. Regarding corruption, it is a serious concern but I would say it's very much a pan-Balkan issue, and not even specific just to the Balkans."

Mr Gerguri says that Kosovo is working hard to solve the question of property title, mentioning problems such as registers being destroyed in the war in the Balkans. In some areas concerning the rule of law, Kosovo is ahead of its neighbours. "The World Bank's Doing Business project reports that to enforce a simple debt contract in Kosovo takes 420 days, compared to an average in south-eastern Europe of 500 days," says Mr Gerguri.

However, the same report ranked Kosovo 113th overall for doing business, out of 183 countries worldwide. This is ten places behind Croatia and just three better than Bosnia-Herzegovina, showing that, for all its stability and potential for growth, Kosovo, like other countries in the region, still has much work ahead of it.

Was this article helpful?

Thank you for your feedback!

Read more about:  Central & Eastern Europe , Kosovo