Russia’s invasion of Ukraine and its economic fallout come just as firms in the Western Balkans are recovering from the COVID-19 shock. Today’s presentation “Business resilience in the Western Balkans at times of repeated shocks”, presented by the EIB’s Chief Economist Debora Revoltella at the Western Balkans Investment Framework Strategic Board in Rome, examines how firms in the region weathered the sharp downturn caused by the pandemic and how prepared they are to face future challenges. The results are derived from the report entitled Business Resilience in the Pandemic and Beyond, recently launched and jointly published by the EIB, the EBRD and the IMF, which covers a broader region of Eastern Europe and Central Asia.
“The war in Ukraine is testing again the resilience of the Western Balkan economies as they recover from the pandemic,” said Debora Revoltella. “New risks and heightened uncertainty are putting cross-border flows and trade under pressure. This matters as our analysis shows that firms’ resilience and innovation capacity are linked to their participation in global value chains and trade. In this phase of potential deglobalisation trends, the Western Balkans should build on its competitive advantage of strong ties with the European Union and reinforce it further, as a springboard for faster development.”
Western Balkans — the impact of COVID-19
To date, firms have come through the pandemic better than initially feared. They lost 29 percent of turnover and shed 9 percent of their labour force, with the pandemic hitting contact-intensive services and smaller and medium-sized businesses especially hard. Nevertheless, massive policy support helped to prevent large-scale bankruptcies, with only 3 percent of firms in the region filing for insolvency or closing permanently.
The report shows that firms that were integrated into global value chains, those that had been more innovative in the past, those that were more digitalised and those with better quality management adapted better during the pandemic. They expanded their online presence, switched to remote work, adjusted production or took advantage of the available policy support more effectively.
Government programmes played a stabilising role by mitigating the stress of vulnerable firms, such as smaller businesses, standalone firms and those lacking overdraft facilities.
Openness to trade in the Western Balkans drives resilience, innovation and competitiveness
The report finds that the economies of the Western Balkans generally invest more in innovation than benchmark economies, although the process is led by adapting new technologies developed elsewhere. Opening up the global economy has been key to enable these countries to improve their comparative advantages and increase their competitiveness. The industrial composition of regions more integrated in global value chains is clearly focused on higher value-added products, while those that are less integrated are trading mainly manufacturing products with lower value added or raw materials.
The evidence in the report indicates that trade integration with developed economies, in particular the European Union, access to information and know-how through participation in global value chains, foreign licensed technology and modern management practices are among the most important ingredients for boosting innovation in the Western Balkans.
The financial systems in the Western Balkans have held up well so far. Firms continue to rely largely on bank credit for external finance. Capital markets are underdeveloped, and the availability of venture capital, private equity and leasing is very limited. The share of credit-constrained firms in the Western Balkans is significantly higher among small firms compared to large ones (16 percent versus 7 percent). These credit constraints result from insufficient transparency of SMEs, as well as limitations in the risk assessment capacity of intermediaries. Going forward, the legacy of the COVID-19 pandemic and the impact of the Russian invasion of Ukraine are likely to further impede firm financial access. Over time, higher policy rates will translate into tighter financing conditions, with the credit demand-credit supply gap even greater for SMEs. This is a concern, as having access to finance, including overdrafts, was a source of resilience for firms during the pandemic.
The region is slowly shifting from a dependence on coal and oil to nuclear power and renewable energy, strengthening its energy security. However, until 2018, the region relied heavily on fossil fuels to generate three-quarters of its electricity. Several countries continue to provide generous subsidies that lower the price of gas and other fossil fuels for consumers, slowing down the motivation to cut emissions.
SMEs in the Western Balkans typically lack the incentives for greening their business models. Physical climate risk is already affecting SMEs in the Western Balkans, with 10 percent of Enterprise Survey respondents reporting losses from extreme weather events in the three years preceding the interview. Nevertheless, the study documents a limited awareness among SMEs of environmental issues since only 21 percent of SMEs are investing in energy efficiency, and among those not adopting any climate measures 59 percent of firms consider that such investment is not a priority. More specifically, the report shows that climate investments depend on both managerial capacity and access to finance. Effective intervention will address both financing constraints and bottlenecks in managerial awareness and capacity.
Source: European Investment Bank