Recent Economic Developments
Growth slowed down in 2016 to an estimated 2.1% after a growth of 3.2% in 2015, due to delays in highway construction, struggling industry, and only moderate levels of tourism. The labor market stagnated in 2016, despite the growth. Starting in 2016, amendments to the Law on Social Care and Child Protection provided a lifetime benefit to mothers with three or more children, who can qualify based on 15 years of registered unem-ployment or 15 or 25 years of employment. Since then, the number of registered unemployed has increased by more than 10,000, and around 4,000 women have left formal jobs to receive the benefit.
At the same time, led by public sector wage growth, real wages grew by 3.4% in 2016, well above productivity growth, indicating a rise in unit labor cost by over 7% in 2016. Some poor households have seen increased income due to the mother benefit, even though as designed, it is not poverty targeted, discourages work, and represents a fiscal burden (close to 2% of GDP). With these developments and an economic recovery starting in 2012, poverty (measured at US$5/day in 2005 purchasing power parity [PPP]) declined from its peak of 19.6% in 2012 to an es-timated 12.8% in 2016. The general government deficit declined to 4% of GDP in 2016 from 8% in 2015, mostly on the back of capital spending cuts. Public debt grew to 68% of GDP.
Lending activity recovered slightly, while nonperforming loans (NPLs) declined to 10.3% in 2016. Credits to households grew substantially by close to 11%, thanks to the low base effect, and after reaching a yearly low in September, corporate lending recovered as well, growing by 1.9% in December 2016. Deposits grew by above 9%.
The current account deficit (CAD) further widened to 19.2% on a four-quarter basis in 2016, on the back of the rising construction-related imports and the large dividend payout. Net foreign direct investment (FDI) also declined to 10% of GDP, covering around half of the CAD financing
The economy is expected to grow by an average of 2.8% in 2017–19 on large public investments and personal consumption. Yet, once the large public investment impetus to growth slows down, the overall growth rate will decline too, further exposing existing weaknesses in fiscal and external balances. External imbalances are set to widen again to close to 21% of GDP, which, together with a further rise in the fiscal deficit and debt, would add to the already high vulner-ability to external shocks. Inflation is projected at 2% in the period 2017–19.
The fiscal deficit is projected to expand to above 6% in 2017–18 and then come down to around 4% of GDP by 2019. Poverty (measured at US$5/ day in 2005 PPP) is estimated to decline slowly to 11.5% in 2017, subject to an employment rebound, including in construction and tourism.
The economic outlook is positive, but downside risks have increased. Unsustainable fiscal deficits call for ambitious fiscal consolidation to cre-ate the space for an orderly servicing of large refinancing needs of above 16% of GDP in the 2019–2021 period. Reducing the deficit will not be easy but is of utmost urgency, given the need to reassure markets and allow for a successful rollover of existing obligations under a credit rat-ing of B+ with a negative outlook.
Large external imbalances are still widening, adding to the already high external vulnerabil-ity. Domestic policy uncertainty and the slow pace of structural reforms are compounded by a complicated political environment. Although fiscal consolidation is a step forward, additional measures on both the spending and revenue sides would be needed to reach a sustainable trajectory for public finances. These measures would have to be distributional, and any short-term social impacts would need to be taken into account when designing policy reforms
Last Updated: Apr 20, 2017