(достапно само на англиски јазик)

Dear colleagues, dear friends

The discussion on macroeconomic risks has never been as uncertain and difficult as in the past year and a half. As economists, we are trapped in “uncharted waters” that require extreme efforts to tailor our approaches and policy responses, while factoring in potential risks and their possible impact. The emergence of the pandemic at the beginning of last year, brought most of the economies to a “standstill”, both through the government coronavirus containment measures and through the lost confidence of consumers and investors. Intrinsic for almost all of the economies, including those in the Western Balkans, was the massive policy support through the fiscal impulse and the monetary stimuli, which precluded a more devastating impact of the crisis.

At the current stance, economies are expected to strongly rebound in 2021, assuming no premature withdrawal of the policy stimulus and substantial flattening of the epidemiological curve. However, there is a consensus that downside risks around this scenario do exist and are shaped by the health crisis.  The confluence of all risks to be discussed further is global. However, given that some of them relate to a common global shock - the pandemic, and given the trade and financial openness of the countries in the region, spill over effects might be felt. According to the latest IMF assessment, if the potential risks materialise, the global economy could fall below the baseline recovery scenario by 1.5 pp in 2021 and by 1pp in 2022. Yet if compared to the adverse scenario from October last year, the impact is halved. This illustrates the importance of the vaccine rollout on boosting confidence and economic prospects, and alleviating pressures on the risk map. 

How does the global risk map in terms of the envisaged economic recovery look like? At the moment, the major concern is the possibility of pandemic resurgence. It originates from the fear that new virus strains and mutations might be vaccine resistant, or that operational risks in the production and the distribution of vaccines might come on the surface. Even more, the threat of the vaccines lagging behind the new mutations of the virus might – to quote the IMF - “transform the COVID pandemic into endemic disease of unknown severity”. Under this scenario, confidence and expectations might recede, social distancing measures might be strengthened and the world might face the necessity to redefine completely our modus operandi.

The second threat relates to the state of the international financial markets and the possibility for a sudden and unexpected tightening of the global financial conditions. After the initial tightening at the beginning of the crisis, global financial conditions improved markedly and remained favourable across the board, being conducive for the financial flows in the region as well. It indicates that the international investors have not perceived the economic fundamentals as eroded, with the massive monetary stimulus of the large central banks enabling these market perceptions to remain positive throughout the recession curve. Sudden sentiment shift and reassessment of economic fundamentals by international investors related to the signs of possible uneven recovery among world largest economies might increase risk premium and make the refinancing of the elevated debt more difficult. This holds for the region as well given the external financing and the elevated public debt level after the pandemic (by close to 13p.p, up to 70% of GDP). The other source of concern is the possible divergence in the recovery between the developed and the emerging markets. This might call for faster withdrawal of the policy stimulus in developed economies, euro area and US for instance, than in the region. An unexpected signal of higher future policy rates of the large central banks that is not driven by changes in economic conditions will tighten the financial conditions in emerging markets. On the other hand, this would mean that the tightening in the region might come too soon, if the economic recovery process does not stand on a strong footing. Third, tightening of the global conditions might endanger the access to international finance for the governments, affecting their ability to support the economy. From policy perspective, countries can shield themselves from possible unexpected surprises by pursuing credible macro policies, managing financial stability risks through macro-prudential measures and strong financial supervision, and ensuring adequate buffers to contain possible vulnerabilities.  On the other hand, if these shifts on the financial markets are driven by better than expected economic outcomes in the developed economies, this might reduce the risk aversion of international investors, and along with the trade channel could in fact prove to be beneficial for the economic recovery of the region.  

Protracted scarring of the economy is another source of risk. The permanent impact of the health crisis is still a missing piece of the puzzle. There is a risk for permanent damage on the labour market through declining participation rates – which are currently on a downward path in the region, and increasing skills mismatches. These could impair labour potential and inhibit growth potential. Another aspect that gains attention are the potential feedback loops between the real and the banking sector. The banking system in the region exhibits strong performance, with some of the indicators even strengthening during the pandemic 2020, such as the solvency ratio that reached around 20% and the ratio of non-performing loans which dropped to around 5% of the overall exposure. Yet, as the pandemic proceeds, it will gradually bring to the fore the issue of viability or no viability of the corporate sector. This might weigh somewhat on banks’ balance sheets, requiring prudence and preserving buffers in the banking system, in order to absorb any adverse shock. 

At the end, what is remaining on the risk map is the legacy of the pre–pandemic threats, such as the geopolitical risks and rising protectionism. Before the COVID crisis, the issue of trade tensions and higher tariffs on bilateral trade was heavily discussed, concluding that it might come at significant economic cost. These effects are greatly amplified by global supply chains the region is embedded in. Intensification of trade tensions could trigger repercussions for the global growth and risk aversion. This would affect other economies that are highly dependent on foreign demand and external financing, such as those in the region. The trade openness was increasing steadily throughout the years reaching almost 80% of GDP. Over the medium term, in absence of corrective policies, trade tensions could become entrenched.

To conclude, as one proverb says, in difficult times we should not seek for lighter burden, but for broader shoulders. In other words, the region should bear in mind the importance of building strong and resilient economies, based on sound macroeconomic fundamentals. The region should use the current opportunity to restructure and lower the existing imbalances thus building economies that could withstand the risks steaming from current and future shocks.

Thank you.