RECENT ECONOMIC DEVELOPMENTS
Political uncertainty took a toll on growth in 2016 and early 2017, but a recovery is expected as confidence is being restored. Growth fell to 2.4% in 2016 (from 3.8% in 2015), supported mainly by household consumption linked to rising employment, wages, pensions, and credit. Concerns about the political situation had begun to affect investment, which subtracted 1.3 percentage points (pp) from growth in 2016. Net-exports added 0.7 pp, supported by foreign directive investment (FDI)-related and services exports propelled by the euro area recovery.
The economy contracted by 0.9% in the first half of 2017, as investment declined by double digits. Private consumption growth remained positive, while net exports had a marginal negative contribution. Construction and services, traditional drivers of growth, contributed negatively in the first half of 2017, while other sectors had small positive contributions. The establishment of a new government in June is helping restore investor confidence, which is likely to support growth in the second half of the year.
Unemployment continued to fall, helped by fiscal interventions to encourage job creation. Employment grew 2.5% year-on-year (y-o-y) in 2016 and 2.7% in the first half of 2017. A large share of the newly created jobs are linked to employment programs in trade, transport services, and manufacturing. Labor force participation stood at around 57% in 2016 and early 2017, the lowest rate since 2012. The unemployment rate fell to 22.8% in the first half of 2017, a historic low. Despite government efforts, youth unemployment and long-term unemployment remain high at 46 and 81%, respectively.
The current account deficit (CAD) widened from 2.1% of GDP in 2015 to 3.1% in 2016 but remains manageable. The solid increase of exports was not enough to compensate for higher dividends and profit repatriation, pushing up the CAD, which narrowed back to 2.1% of GDP in the first half of 2017, helped by strong exports. Net FDI, which performed well until May (amounting to 1.5% of GDP), declined significantly in June but was partially compensated by other financial investments. Foreign reserves stood at 4.7 months of imports in July 2017. Pensions, subsidies, social assistance, and health are expected to increase, partially offsetting the savings in other items. The new budget considers lower revenues from most taxes but higher revenues from excise taxes and contributions. Public and publicly guaranteed debt increased from 46.4% of GDP in 2015 to 47.7% in 2016 and remained stable in nominal terms in the first half of 2017.
Poverty is estimated to have declined in 2016. Using the poverty line for upper-middle-income countries (US$5.5/day at 2011 purchasing power parity [PPP]), poverty is projected to have fallen to 22.8% in 2016, continuing a decreasing trend present since 2009. Employment growth and increases in salaries, especially in the labor-intensive sectors, are expected to have contributed to poverty reduction in 2016 and early 2017.
Affected by the political uncertainty in the first half of the year, growth is expected to decline to 1.5% in 2017 but expand to 3.2 and 3.9% in 2018 and 2019, respectively. The main drivers are expected to be consumption (fueled by growing employment) and investments, both public (as the two highways under construction should be finished by 2019) and private (which is expected to pick up as confidence is restored).
The fiscal deficit is expected to reach 3% of GDP in 2017 but then gradually decline to 2.2% by 2019. Public and publicly guaranteed debt is expected to increase to 55% by 2019. Poverty is expected to continue its downward trend in the next several years.
Public investment in infrastructure should sustain employment creation. Inclement weather in the summer of 2017 may have led to a slight increase in poverty among households depending mainly on agriculture income.
Last Updated: Oct 05, 2017