21 June 2021
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Like the rest of the world, the Western Balkans in 2020 were marked by the COVID-19 pandemic in all its manifestations – the crisis of the health care system, the imposition of various state measures, and probably the biggest economic crisis since World War II.

Author: Sergej Simoniti, CEO, Coface PKZ

The region survived the first wave of the pandemic relatively well, relaxing the measures during the summer tourist season. During the second wave, the region experienced severe consequences that are still ongoing. Governments in the region, as elsewhere in the world, have introduced various measures to help the economy and mitigate the effects of the crisis. The pandemic highlighted all the existing features of the region’s economic environment, and consequently increased the risks arising from it.

The question of how to increase added value is also a challenge for practically the whole region.

The region’s economic dependence on exports, especially to the EU, the importance of some activities, such as the automotive industry, and the dependence on tourism remain problematic. A large part of the region suffers from the departure of skilled, mostly young, labour abroad. The question of how to increase added value is also a challenge for practically the whole region. Another drawback is the lack of an efficient public administration in most countries in the Balkans. The one positive is that the aspiring EU members are continuing accession negotiations. Much of the region is still marked by latent interethnic conflicts, corruption, and clientelism. The problem also remains poorly developed infrastructure. The region remains at the crossroads of interests of major powers – the EU, Russia, China, and, to a lesser extent, the United States.

The worst Affected sectors

The crisis emphasised the region’s dependence on certain activities and its exposure to certain risks. By far is certainly the obvious exposure to dependence on tourism sector. Despite the summer opening of borders and enabling most tourist activities, the region has suffered losses whose consequences will be felt for a long time to come. Of course, the impact of COVID-19 in tourism are not just direct losses. The entire service sector, which is powered by tourism, also suffered, from catering, small crafts, tourism-related shops and the like. Tourism is largely linked to the transport industry, which has also suffered losses in the freight sector, as the entire logistics process has stalled or been sharply reduced during the crisis. Thus, the consequences will be felt for a long time by airlines, rail and road carriers, and to a lesser extent by sea carriers. Transport is also linked to the region’s dependence on European and global supply chains. A large part of the region’s economy is export-oriented and focused mainly on semi-finished products. In 2020, these supply chains were interrupted for a certain period of time or their operation was significantly hampered, which was particularly damaging for the manufacturing sector. Impact of crisis in production was quite varied. The largest declines were recorded in April and May. Due to the almost catastrophic experience, individual countries decided to not close their economies completely. By far the most affected was the production of semi-finished products, which on one hand depended on customers severely affected by the crisis while on the other hand, they were faced with difficulties in logistics and the formal closure of borders. Production related to the automotive, furniture and textile industries and the production of agricultural raw materials were badly affected. In some production activities, the outcome depended mainly on the flexibility or ingenuity of the management. For example, paper producers immediately switched from the production of office supplies to packaging, thus not only mitigating the effects of the crisis but emerging victorious. The production area also has other winners. The pharmaceutical business operated well, although at the onset of the crisis there were bottlenecks in the supply of raw materials and semi-finished products, mainly from China. The relatively unexpected winners of the crisis were some manufacturers of white goods, home electronics and home DIY equipment. The construction sector is also surviving the crisis relatively well. Of course, the biggest success was experienced by the food sector, e-retailers, and IT companies.

Photo: Archive Coface

Future prospects

And what are the prospects for the future? Despite the crisis, the accession process has not stopped, although it may have slowed down. Fortunately, transnational and interstate tensions in the region are still declining. Also, the region remains at the crossroads of interests between the great powers and, at the moment, it remains unknown how the US will position itself. The vaccine’s positive impact on the world economy will soon be felt in the region, too. But the crisis’ consequences will linger for a while in some areas and open up some structural issues. Tourism and related activities will certainly feel the consequences for a while yet. Regardless, long-term changes are not expected in the sector. The geographical location in the relative proximity of consumers of tourist services as well as natural resources will return tourism to its previous levels in the future. Structurally, the paradigm shift of the economy tied to long supply chains and foreign customers is more important. Industrial production is highly dependent on buyers of semifinished products in the automotive industry from the EU, which represents one of the most significant risks. Economic policies in the countries of the region will have to strive for both geographical diversification and diversification by type of activity. Dependence on supply chains of materials and semi-finished products from geographically distant suppliers has also been exposed. Like Europe, the region should strive for some degree of self-sufficiency. As this is probably the worst economic crisis since the World War II, the governments have extensively intervened in the economy with various measures. One of the key factors in the future development of the economy will be to answer the question of how long the state measures will last and in what way will the state withdraw from the economy. The actual state of the economy will become clear only after the cessation of state intervention. What the outcome of state aid will be depends to a large extent on the dynamics and manner of eliminating the measures. The key here is the long-term view and not the daily political agenda, which all too often prevails among political decision-makers in the region.   

Adriatic Journal


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