Risk management in International Business 2010/2011

MANAGING EXPOSURE TO COUNTRY SPECIFIC RISK:

THE CASE OD FDI PRO1ECT OF ENERGOPLAN IN
ALBANIA





















Ljubljana, April 2011


TABLE OF CONTENCE
INTRODUCTION ............................................................................................................
1 ENERGOPLAN HOLDING D.O.O. ........................................................................ 1
2 ARGUMENTS FOR SELECTING ALBANIA AS A HOST COUNTRY ................ 2
3 POLITICAL RISK ................................................................................................... 3
3.1 ALBANIA AND THE EUROPEAN UNION .................................................................. 4
3.2 ECONOMIC RELATIONSHIP WITH THE UNITED STATES ..................................... 4
3.3 GOJERNMENT STABILITY ....................................................................................... 5
3.4 SOCIOECONOMICS CONDITIONS ........................................................................... 6
3.5 INJESTMENT PROFILE ............................................................................................ 6
3.6 INTERNAL CONFLICT .............................................................................................. 6
3.7 EXTERNAL CONFLICT .............................................................................................. 7
3.8 CORRUPTION............................................................................................................ 7
3.9 RELIGIOUS TENSIONS ............................................................................................. 8
3.10 LAW AND ORDER ...................................................................................................... 8
3.11 DEMOCRATIC ACCOUNTABILITY ........................................................................... 9
3.12 BUREAUCRYCY QUALITY ........................................................................................ 9
FINANCIAL RISK ................................................................................................ 10
5 ECONOMIC RISK ................................................................................................ 1
ASSESMENT OF ECONOMIC RISK (ICRG METHOD) ..................................... 18
7 CURRENCY RISK ................................................................................................ 22
8 ESTIMATION OF EXPOSURE IN CONCRETE INVESTMENT PROJECT
MICRO RISK ANALYSIS ........................................................................................... 2
8.1 STRATEGIC DIMENSION OF INJESTMENT ...........................................................24
8.2 BARGANING POWER OF ENERGOPLAN ................................................................24
8.3 ENERGOPLAN RELATIONS WITH ALBANIA ...........................................................25
PLAN PROPOSAL FOR MANAGING EXPOSURE TO IDENTIFIED RISKS .... 25
10 CONCLUDING REMARKS AND RECOMMENDATIONS............................. 27
11 RESOURCES ..................................................................................................... 28

TABLE OF TABLES
Table 1: Assessment oI political risk ...............................................................................
Table 2 Foreign debt ( of GDP) ................................................................................ 10
Table 3 Debt Service as a of Exports of Goods and Services .................................... 11
Table International liquidity ratio (as months of Import cover) ................................. 11
Table 5 Exchange rate stability .................................................................................... 12
Table Current account as a of total exports ........................................................... 13


Table 7 Summary of financial risk components ............................................................ 13
Table 8 Financial risk rating forecast .......................................................................... 1
Table Doing business in Albania ................................................................................ 17
Table 10 GDP per capita US $, current prices, in Albania and average Ior 10 countries
monitored by ICRG, 2005-2011 .................................................................................... 18
Table 11 Real GDP growth ........................................................................................... 1
Table 12 Annual inIlation rate ....................................................................................... 20
Table 13 Government budget balance ........................................................................... 20
Table 14 Current Account balance as a of GDP ........................................................ 21
Table 15 Gross capital formation ( of GDP), gross savings ( of GDP), resource gap
in Albania and EU 2000-2009 ....................................................................................... 21
Table 1 : Foreign direct investment, net inIlows (BoP, current US$) in Albania .......... 22
Table 17: Overall economic risk rating Ior Albania ....................................................... 22
Table 18 Exchange rates ALL/EUR from 2006 to 2012 (forecast) ................................ 23

TABLE OF PICTURES
Picture 1 Energoplan's products and services ................................................................ 1
Picture 2 Net profit in 2008 and 2009 in EUR
Picture 3 Total revenues by market in EUR .................................................................... 3
Picture Doing business ratings in 2010 ..................................................................... 17
Picture 5: Real GDP growth, constant prices in Albania, Central and Eastern European
region and EU, change, 200-2015 projections ......................................................... 1
Picture 100 bill lek .................................................................................................... 22




















INTRODUCTION

The risks companies Iace in today`s` environment are complex and quite oIten hard to
assess, especially Ior companies, that do business in international markets. II the
companies want to successIully engage in FDI or other ventures, assessing the risks
associated with the environment are oI vital importance. Risks can be broadly categorized
into economic, Iinancial, political and currency risks. For our analysis, we have chosen
the company Energoplan entering into the Albanian market. Energoplan is already
present in this region, and their vision is to become one oI the leading construction and
real estate company in the Eastern Europe. Energoplan holding business group has
always conIronted risks, as they operate internationally with comprehensive
constructionreal estate services. With the risk assessment, we want to evaluate iI the
Albanian economy and environment are attractive and iI Energoplan could conduct
business and expand its` operations. The Iinancial crisis in 2008 showed Energoplan how
important systematic risk management is Ior their longterm successIul operations.
Energoplan holding business group has always conIronted risks, as they operate
internationally with comprehensive constructionreal estate services. They have been
implementing important changes, such as greater Iormalisation oI procedures and the
assurance oI risk recording. Energoplan has quite successIully dealt with diIIerent types
oI risks.

The seminar paper is includes introduction with a brieI analysis. In this part, we present
the company Energoplan and reasons Ior selecting Albania as the FDI project. The next
chapters provide an overview oI the analysis oI all risks in Albania. We conclude with a
plan proposal Ior managing exposure to identiIied risks and concluding remarks and
recommendations.












1

1 ENERGOPLAN HOLDING D.O.O.

The company Energoplan constructs residential and oIIice buildings, shopping centres
and industrial Iacilities, as well as other real estate both Ior speciIic investors and the
market in general. Company was established by the team oI well-experienced people who
under the changed market conditions wished to provide Ior high quality and price
competitive construction services. It is one oI the largest and most successIul
construction companies in Slovenia. Established in 10, it managed to create a Iriendly
and recognised brand name in its nearly two decades oI existence, synonymous with
quality, dedicated and consistently implemented work. The Energoplan holding business
group consists oI Energoplan holding d.o.o., Energoplan d.d., Slovenija projekt d.o.o., EP
Invest d.o.o. and Energoplan d.o.o. Zagreb.

Picture 1: Energoplans products and services


Source 1: Consolidated annual report, 28

All activities are based on the Group`s vision which is to become one oI the top providers
oI comprehensive construction services in the broader environment. The Group relies on
the inclusion and participation oI all participants in the construction process. Together
with its business partners, the Group expands its horizons, connecting people and
organizations and creating new work approaches. Operations are being expanded at home
and abroad on a continuous basis, with the Iocus on market segments displaying the
greatest growth potential. The company did not limit its operations solely to Slovenia, but
Iollowed an internationalization plan, also seeking business opportunities on Ioreign
markets. It has established close relations with its clients on all the markets on which it
ConsLrucLlon
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develpmenL
-Energoplan holding d.o.o.
-Energoplan d.d.
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- EP INVEST d.o.o.
EP Invest d.o.o.
Energoplan d.d.

2

operates and in this manner has won their trust and longterm cooperation. On the
Croatian market, Energoplan d.d. operates via its subsidiary in Umag, and in Russia,
business is conducted by its Moscow subsidiary. Energoplan holding operates on the
markets oI Slovenia, Croatia, Bosnia and Herzegovina, Montenegro, Russia and Bulgaria.

Their vision is to become the top provider oI comprehensive construction and real estate
services in Slovenia and a recognized construction company in the entire region oI
Central and Eastern Europe. The business group will integrate global and local
perspectives, presenting a balanced sustainable management and contribute to the
improved quality oI liIe oI its employees and users. The Energoplan holding business
group Iocuses on three basic elements in its strategy which are customers, costs and
competence. Their strategy Ior many years has been to Iollow their permanent partners,
i.e. investors to new markets. They enter new business environments together with them,
bilaterally beneIiting Irom the Iact that they have already established a relationship in the
past based on trust, good cooperation and common interests (Consolidated Annual Report
2008).

2 ARGUMENTS FOR SELECTING ALBANIA AS A HOST
COUNTRY

As we can see Irom their vision the Energoplan Group wants` to become an excellent
provider oI comprehensive construction and real estate services in Slovenia and also
serious construction competitor on the whole area oI Central and Eastern Europe. Since
they already operate in Eastern Europe on the markets oI Slovenia, Croatia, Bosnia and
Herzegovina, Montenegro, and Bulgaria it is only logical to expand Iurther and we
deIinitely see them entering Albanias market in the near Iuture. Our Iirst choice Ior the
market was Macedonia but aIter we contacted the company we Iound out that they just
started operating at the Macedonian market this year and they haven`t include yet on their
web page. So we think that Albania is the obvious next step Ior Energoplan Group also
since they have been successIul in all the Eastern European markets so Iar.

As we can see Irom the graph Y the amount oI total revenues decreased Iorm year 2008
to 200, mostly because oI the Iinancial crisis in year 2008. Although, as we can see Irom
the graph, the contribution oI the South-Eastern European countries actually increased in
the year 200. That is also a good indicator that the potential oI South-Eastern European
markets is still quite big as Iar as the construction industry is concern. Although we can
see the decrease in the Graph Y, we can also see Irom the graph X that they have
3

succeeded to increase the overall net proIit in year 200 which was actually bigger than
in year 2008 despite the Iinancial crises.

Picture 2: Aet profit in 28 and 29 in EUR Picture 3: 1otal revenues by market in EUR

Source 2: Consolidated Annual Report 29

As Iar as the net sales revenue contributed by Ioreign markets is concerned they have
increased Irom 13.030.00 Euro in 2008 to 23.70.30 Euro in year 200, while the net
sales revenues contributed by the home market decreased Ior around 12 million Euros. So
Irom both graphs we can see that the Ioreign markets are becoming more and more
important Ior Energoplans business specially because they have been Iairly successIul at
all the Ioreign markets they have entered (Consolidated Annual Report 200). They have
stated in their Annual report Ior 2008 that their strategy Ior entering Ioreign markets has
been Iollowing their permanent partners/ investors to new market. Since they have
opened subsidiaries in Moscow, Rijeka, and also SoIia in Bulgaria so we Ieel they should
also open one subsidiary in Albania which could cover also the southern region oI
Eastern Europe. Accordingly trough our seminar project we will asses all the possible
risks connected with entering a Ioreign market and also risks connected to the
construction industry. AIter the evaluation oI the risks we will be able to decide which is
the best way Ior Energoplan group to enter the Albanian market.

3 POLITICAL RISK

AIter 5 years oI oppressive communism, Albania embarked on the road to democracy at
the end oI 10 (Economic Study, 2007). The transition has proven diIIicult as corrupt
governments have tried to deal with severe unemployment, the collapse oI a Iraudulent
nationwide investment scheme, widespread gangsterism, and massive reIugee inIluxes
Irom neighbouring Kosovo (CIA, 2002). Albania has increased public order and
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Iurthered structural and institutional reIorms and is a parliamentary democracy. The head
oI state is the President, elected by the Parliament (Economic Study, 2007). Albania held
a parliamentary election on June 28th 200, next election due in mid-2013 (EIU
ViewsWire, 2011).

3.1 ALBANIA AND THE EUROPEAN UNION

Albania continues to play a constructive role in the western Balkans and has established
good relations with all her neighbouring countries. In this respect it has played a positive
role in promoting the EU vision oI economic and political integration in the Balkans.
However, the absence oI tangible beneIits Ior Albanian citizens Irom the process oI
integration with the EU remains a problem that the latter should approach with a
constructive attitude, Ior it has undermined the eIIorts oI moderate politicians to make the
EU integration process a vote-winning platIorm both in intra-party and general elections.
Furthermore, there is evidence indicating that part oI Albanian public opinion is
becoming sceptical about the EU`s willingness to Iully support Albania`s eIIorts Ior
integration into the EU. The Union should do more to inIorm Albanian citizens about
Albania`s responsibilities in meeting her obligations (Ilirjani, Altin, 200). On May 2010,
the European Commission adopted a proposal to enable citizens oI Albania and Bosnia
and Herzegovina to travel with biometric passports to the Schengen countries without
needing a visa. The proposal aims at simpliIying travel to EU countries (except the UK
and Ireland, which do not take part in the common visa policy) and those associated to
the Schengen area (Switzerland, Norway and Iceland) Ior the citizens oI Albania and
Bosnia and Herzegovina, abolishing the obligation to apply Ior a short-term visa (Press
Release, 2010).

3.2 ECONOMIC RELATIONSHIP WITH THE UNITED STATES

The United States (U.S.) and Albania enjoy a strong and growing bilateral relationship.
The United States provides technical and Iinancial assistance to the government oI
Albania in numerous areas including military, police and judicial reIorm, economic
development, privatization, and strengthening oI civil society. Albanians have
traditionally held the United States in high esteem. Pro-U.S. sentiment, however, reached
new heights Iollowing the successIul NATO intervention in Kosovo. The Albanian
government positioned itselI on the side oI the US-led coalition against international
terrorism and dispatched troops to Iraq as part oI Operation Iraqi Freedom (Economic
Study, 2007).

5

3.3 GOVERNMENT STABILITY

Government Unity: The national government has three branches. The legislative branch
consists oI the unicameral, 10-seat People's Assembly, the members oI which are
elected to Iour-year terms. The executive branch, Iollowing the European model, includes
a chieI oI state, the president, elected to Iive-year-terms by the People's Assembly; and a
head oI government, the prime minister. The prime minister proposes a Council oI
Ministers who are then nominated by the president and approved by the Assembly
(Parrish Ann, 2010). There are two major political parties in Albania: the Socialist Party
and the Democratic Party. In addition to these two parties, nine smaller parties sit in
Parliament. Despite its name, the Socialist Party spearheaded the drive to privatize state-
owned industries and has pursued a policy oI economic liberalism in strong cooperation
with the IMF. The socialist-led coalition has also brought Albania into the World Trade
Organization and is actively pursuing Iree trade agreements with its neighbours
(Economic Study, 2007).

Legislative Strength: The judicial branch consists oI a Constitutional Court and a
Supreme Court whose chairman is elected by the People's Assembly to a Iour-year term.
There are many district courts and courts oI appeals. Albanian citizens are subject to the
jurisdiction oI the International Criminal Court (Parrish Ann, 2010). Domestic political
instability in Albania had a major negative eIIect on the progress oI Albania`s relations
with the EU in 2003 (Ilirjani, Altin, 200). The European Commission criticizes the
Iunctioning oI all Albanian state institutions. While Albania suIIers Irom weak
administration and widespread corruption, the country`s top political leaders continue
their high-stakes political battle. As the deadlock and the inadequate responses to the
problems continue the public discontent grows (TransConIlict, 2010).

Popular Support: Political Stability is measured by the World Bank Policy Research
Working Paper Series. It measures the likelihood oI credible threats to, or changes in, the
government in power. Credible threats include coups, domestic violence, terrorism, etc.
This index denotes the idea that the quality oI a nation's government can be compromised
by threats against it. Such threats impede the ability to govern, and they also undermine
peaceIul changes oI government. EST, or point estimate, is measured on a scale oI -2.5 to
2.5, with the higher scores indicating better governance and lower scores indicated poor
governance in the countries observed. Political Stability in Albania is still low; it is
estimated on -0.7 point (Albania Country Review, 2008).




3.4 SOCIOECONOMICS CONDITIONS

The rate oI unemployment declined to 13.5 in the third quarter, Irom 13.8 in the
previous quarter, with 1,20 Iewer registered unemployed. The rate rose Irom 12.8 a
year earlier, with another 1,150 registered as unemployed (EIU ViewsWire, 2011).
Population in Poverty: 25.00 (http://www.phrasebase.com/countries/albania/). Most oI
the changes in the labour Iorce recorded in July-September 2010 arose Irom structural
breaks in the data series relating to people employed in agriculture. Starting Irom the
third quarter oI 2010, the number oI employed in the sector is reported at around 507,000,
based on the 200 labour Iorce survey, up Irom around ,000 in the previous quarter, a
Iigure that was based on the 2008 labour Iorce survey. In the private urban sector there
were ,200 new jobs in the third quarter oI 2010 compared with a year earlier, and 557
more jobs than in the second quarter. Changes in the public sector were minimal (EIU
ViewsWire, 2011).

3.5 INVESTMENT PROFILE

Industry was the Iastest-growing sector in the third quarter, with output increasing by
18 year on year, Iuelled by a strong perIormance in electricity production, mineral
extraction and in the manuIacture oI Albania's leading export product, textiles. The
transport sector posted 13 growth in the third quarter, and a good tourist season helped
to increase activity in retail trade, hotels and restaurants by 12 compared with the third
quarter oI 200. Construction activity continued to shrink, by 22 year on year, albeit
Irom a high base, because oI the large public investment works recorded in 200. Post
and communication services shrank by 7., owing to the base eIIect oI the regulator
imposing lower tariIIs Irom September 200. Growth in other services was 12, mostly
driven by a robust perIormance in real estate sales and rental activities. Growth in
agriculture was 7. year on year. Quarter-on-quarter growth rates ranged Irom 0.8 in
agriculture to .2 in transport, with the exception oI construction output, which shrank
by 2.5 (EIU ViewsWire, 2011).

3.6 INTERNAL CONFLICT

Albania stands united with the nations oI the world that have voiced a strong
condemnation oI terrorism and has taken an active role in combating it. Neither the
Albanian government nor its people have been the speciIic targets oI a terrorist campaign.
However, terrorist organizations, including al-Qaida, have been known to operate in the
region. They have sought recruits and even threatened speciIic targets oI interest there,
including the American Embassy. Islamic Iundamentalism in particular has not generally
7

Iound a captive audience in Albania. The Albanian government has been extremely
cooperative with the global community in combating terrorism. It has Irozen terrorist
assets, apprehended known terrorists, denied them access into the country, and even
extradited them, sending a clear message that Albania will not tolerate their presence on
Albanian soil. Albania's support Ior Operation Enduring Freedom included sending
commando troops to AIghanistan, a particularly magnanimous gesture in light oI the
limited resources at the disposal oI its military. In return, in 200, President Bush
authorized the use oI the Nunn-Lugar Cooperative Threat Reduction program outside the
Iormer Soviet Union. Under Nunn-Lugar the United States plans to assist Albania with
the destruction oI a stockpile oI chemical agents leIt over Irom the communist regime.
This is in an eIIort to help reduce the possibility oI these agents getting into the hands oI
terrorists or other criminals in Albania (Albania Country Review, 2008).

3.7 EXTERNAL CONFLICT

There are no immediate threats to Albania's national security stemming Irom Ioreign
nations. In the past, equitable relations with neighbouring countries in the region have
been pushed to the brink oI collapse. Albania's national government, as well as its general
population, has a history oI advocating the protection oI the many ethnic Albanians living
outside oI Albania, especially those in Kosovo and Macedonia. Albanians were
particularly critical oI Serbian designs to expel ethnic Albanians Irom Kosovo. By 18,
relations between Serbia and Albania were severely strained over the matter. The
international community was able to stave oII an armed conIlict between the two nations,
however, largely by moving to protect ethnic Albanians in the region. Albania did receive
an inIlux oI over 00,000 reIugees Irom Kosovo during the height oI the crisis, but most
have since returned to Kosovo. Albania continues to act as a watchdog Ior ethnic
Albanians in the region. Relations between Albania and Greece have been strained in the
past over issues pertaining to Albania's ethnic Greek population and Greece's ethnic
Albanian community. Both governments have sought to protect and Iurther the interests
oI their ethnic communities residing abroad. This tendency has precipitated tension
between the two nations, but not to the degree that an armed conIlict is imminent.
Overall, relations are good between the two nations, as Greece is even a strong advocate
oI Albania's eventual integration into both NATO and the European Union (EU) (Albania
Country Review, 2008).

3.8 CORRUPTION

Transparency and corruption have eclipsed public order as the key issues aIIecting the
business climate. AIter the collapse oI the pyramid schemes in 17, Albania descended
8

into anarchy with citizens looting weapons depots and destroying Iactories and
businesses. The country was again thrown into turmoil in September 18, when political
violence Iorced the Prime Minister to Ilee the country. The government oI Albania,
however, has made signiIicant progress in restoring public order throughout the country
(Economic Study, 2007).Since 15; Transparency International (TI) has published an
annual Corruption Perceptions Index (CPI) ordering the countries oI the world according
to "the degree to which corruption is perceived to exist among public oIIicials and
politicians". The organization deIines corruption as "the abuse oI entrusted power Ior
private gain". The 2010 poll covered 178 countries. A higher score means less
(perceived) corruption. The results show seven out oI every ten countries (and nine out oI
every ten developing countries) with an index oI less than 5 points out oI 10. CPI Ior
Albania: 3,3 (Corruption perceptions index results, 2010).

3.9 RELIGIOUS TENSIONS

Muslim 70, Albanian Orthodox 20, Roman Catholic 10 (CIA. The World
Factbook). Albania has never experienced serious violent religious conIlict. The re-
emergence oI pluralistic religious practice appears to constitute one oI the most important
achievements oI the emerging Albanian democracy. Despite diIIicult transitions aIter the
Iall oI communism and the religious and societal challenges Iollowing the events oI
September 11, 2001, inter-religious relations in Albania have remained strong. The
generally amicable relationship among religious groups has contributed to religious
Ireedom. Albanian society is largely secular, intermarriage among members oI diIIerent
religions is common and religious communities take pride in the tolerance and
understanding that prevail among them (USAID, 200).

3.10 LAW AND ORDER

Today, rather than complain about crime and a general lack oI public order, businesses
complain about governmental corruption, particularly in the tendering and licensing
processes, and uncertainty regarding government actions. Although bank lending has
increased throughout the country, many small to medium-sized businesses also complain
about the unavailability or high cost oI credit. Additional issues aIIecting business
include substandard energy and transportation inIrastructures that inIlate production and
distribution costs, an ineIIective and unresponsive judiciary, and high taxes relative to the
level oI services provided by the government (Economic Study, 2007).




3.11 DEMOCRATIC ACCOUNTABILITY

Voice and Accountability is measured by the World Bank Policy Research Working
Paper Series. It is a measure oI the level oI political, civil, and human rights in each
country. These indicators serve to gauge the extent citizens have the ability to participate
in the political, social and economic processes in their respective lands. EST, or point
estimate, is measured on a scale oI -2.5 to 2.5, with the higher scores indicating to better
governance in the countries observed. Voice and Accountability Ior Albania is estimated
only with -0,03 scores, which still indicates low democratic accountability (Albania
Country Review, 2008).

3.12 BUREAUCRYCY QUALITY

Government EIIectiveness is measured by the World Bank Policy Research Working
Paper Series. It is a measure oI the competency oI the bureaucracy and the quality oI
public service delivery. This index Iocuses on the inputs required Ior those in power to be
able to produce and implement eIIective policies, and to deliver public goods and
services. It gauges the government's real commitment to its policies. EST, or point
estimate, is measured on a scale oI -2.5 to 2.5, with the higher scores indicating to better
governance and lower scores indicating poor governance in the countries observed.
Government EIIectiveness Ior Albania is estimated with -0.3 scores, which still
indicates poor governance (Albania Country Review, 2008).

3.11 ASSESMENT OF POLITICAL RISK COMPONENTS

Table 1: Assessment of political risk
Component Points
Government Stability / 12
Socioeconomic Conditions / 12
Investment ProIile / 12
Internal ConIlict 7 / 12
External ConIlict 8 / 12
Corruption 3 /
Military in Politics /*
Religious Tensions /
Law and Order 2 /
Ethnic Tensions /*
Democratic Accountability 2 /
Bureaucracy Quality 1 /
Total 45 / 88
10

Assessment oI the 'Military in Politics and 'Ethnic Order Components is, on the basis
at the available secondary data, impossible to give. To indicate the presence oI Military in
Politics and the assessment oI the degree oI tension within a country attributable to racial,
nationality, or language divisions, is necessary to perIorm analysis and consequently get
primary source oI data. To calculate the score, we used 88 as 100, and thus the overall
political risk is 51.

4 FINANCIAL RISK

We can deIine country Iinancial risk as the ability oI the national economy to generate
enough Ioreign exchange to meet payments oI interest and principal on its Ioreign debt.
For assessing this risk there are many indicators and also many Iinancial benchmarks that
we can use Ior comparison. We decided that we will evaluate the Iinancial risk using
ICRG Rating System that is based upon Iive diIIerent components. Each component is
based on accepted ratios between measured data within the national economic/Iinancial
structure and the risk points assigned to each component (ratio) are taken Irom a Iixed
scale. So this Iramework will allow us to determine how high is the Iinancial risk Ior our
investment in the selected country and also how high is the overall risk Ior doing business
in Albania.

We will assess Iinancial risk oI Albania by assigning risk points to a pre-set group oI
Iactors, known also as Iinancial risk components. The minimum number oI points that
can be assigned to each component is zero, while the maximum number oI points
depends on the Iixed weight that component is given in the overall Iinancial risk
assessment. In every case the lower the risk point total, the higher the risk, and the higher
the risk point total the lower the risk.

Table 2: Foreign debt (" of CDP)
This table shows the estimated total foreign debt for the current year and for the preceding four
years as of the estimated GDP for the year in question. Risk points are awarded in proportion
to the foreign debt as outlined in the Guide to ICRG. The final column in the table shows the
risk points assessed for the foreign debt.
Year 2006 2007 2008 2009 2010/2011 Risk points-
10/11
Albania 17.8 17.7 17. 1.3 27.3 7.5 out of 10
Source 3: PRS group, 211

Countries external debt is deIined as the part oI the total debt oI a country owed to
Ioreign creditors. These creditors may include other banks, governments, corporations
11

and private individuals. As seen Irom the table X the level oI Ioreign debt is rising very
slowly but still remains sustainable based on current projections. The degree oI
indebtedness oI a country is measured by the ratio oI the external debt and the GDP. In
2010 the external debt represented approximately 27,3 oI the GDP. According to the
scale we rated it with 7,5 points which means that Albania is a country with relatively
low indebtedness. Under the assumption that growth will gradually return to its potential
level with stabilizing global conditions, and borrowing will moderate with FDI inIlows
strengthening, external debt is projected to peak at 37 oI GDP in 2012 and then decline
to 30 oI GDP by year 2015 (IMF Country report No. 10/205, 2010).

Table 3: Debt Service as a " of Exports of Coods and Services
This table shows the estimated foreign debt servicing costs for the current year and for the
preceding four years as of the estimated total value of exports of goods and services for the
year in question. Risk points are awarded in proportion to the debt service as outlined in the
Guide to ICRG. The final columns in the table show the risk points assessed for the debt
service.
Year 2006 2007 2008 2009 2010/2011 Risk points-
10/11
Albania ,5 5,5 5,3 .2 6.2 9.5 out of 10
Source 4: PRS group, 211

Total debt service is the sum oI principal repayments and interest actually paid in Ioreign
currency, goods, or services on long-term debt, interest paid on short-term debt, and
repayments (repurchases and charges) to the IMF, expressed as a oI exports oI goods,
services and income. Since the international benchmark Ior debt service ratio is
positioned at 20 oI total exports we can say that Albania with its .2 has more than
enough Ioreign exchange earnings to service its Ioreign debt obligations. That is also
show by the high number oI risk points achieved which is .5 out oI 10 and that tells us
that this component can be considered as very low risk.

Table 4: International liquidity ratio (as months of Import cover)
This table lists estimated annual net liquidity, expressed as months of import cover, for the
current year and the preceding four years. Risk points are assigned to the number of months of
import cover as outlined in the Guide to ICRG. The final columns in the table show the risk
points assessed for the current year of import cover.
Year 2006 2007 2008 2009 2010/2011 Risk points-
10/11
Albania 7, . .2 7, 5.4 3.0 out of 5
Source 5: PRS group,211

12

Net liquidity is calculated as the oIIicial reserves oI the individual countries, including
their oIIicial gold reserves calculated at current Iree market prices, but excluding the use
oI IMF credits and the Ioreign liabilities oI the monetary authorities. From the chart
above we can see that Albania`s liquidity ratio is around 5. months which means that the
suitable risk points achieved is 3 Irom maximum 5 points, so this component is
considered as moderate risk. According to the chart given we can conclude and assess
that this component can be seen as a bit risky since the benchmark Ior international
reserves states that every country should have more than 3 months import coverage. The
higher the level oI liquidity in an economy, the more eIIiciently it Iunctions and expands.
In other words, the greater the availability oI extent cash resources and easily soluble
assets the more quickly goods and services can be bought and sold. This principle also
holds true in the international economy, since the size and scope oI countries' currency
reserves have a direct eIIect on how expediently import transactions can be executed.

Table 5: Exchange rate stability
(LkUS$) This table lists the annual change in exchange rate of the national currency against
the US dollar for the current year and for the preceding four years. Risk points are assigned to
the current change as outlined in the Guide to ICRG. The final column in the table shows the
risk points assessed for the current change in the exchange rate.
Year 2006 2007 2008 2009 2010/2011 Risk points-
10/11
Albania 2.7 12.2 -7. 8.2 -13.4 8.0 out of 10
Source 6: PRS Croup, 211

Exchange rates express the value oI one country's currency in relation to the value oI
another country's currency. The rates play an important part in economics, aIIecting the
balance oI trade between nations and inIluencing investment strategies. Also exchange
rate stability and price stability continue to be closely related, suggesting that the
exchange rate remains also a key indicator Ior inIlationary expectations. As we can see
Irom the table above we can see some volatility in past Iew years. Lek depreciated
towards US dollar quite sharply in year 2010/2011. Overall the risk points achieved at
this component is 8 out oI 10, so we can say that the risk at this component is low. The
volatility oI Lek exchange rate mainly reIlects their perIormance in international markets.
Although mentioned in Financial stability report 2010, the depreciating pressure against
the Lek has dropped, due to the contracted trade and budget deIicits. Since early 2010,
the Leks exchange rate has been stabilized. And the exchange rates greater stability in
2010/2011 is also highlighted by the perIormance oI the nominal eIIective exchange rate,
which is built on the basis oI weights oI the country`s main partners to Ioreign trade. So
13

in the Iuture we can expect smaller volatility oI exchange rate and that also means less
currency risk. But we have to take into account that it also depends on the inIlation rate
since the two indicators are strongly connected (Bank oI Albania: Financial stability
report, 2010)

Table 6: Current account as a " of total exports
This table lists the estimated balance of the current account of balance of payments, for the
current year and for the preceding four years, as of the estimated total value of exports of
goods and services for the year in question. Risk points are awarded in proportion to the
current account balance as outlined in the Guide to ICRG. The final columns in the table show
the risk points assessed for the current account balance.
Year 2006 2007 2008 2009 2010/2011 Risk points-
10/11
Albania -25.2 -22.5 -1.8 -23.8 -29.4 9.5 out of 15
Source 7: PRS Croup, 211

During the last 15 years Albania`s current account has wandered in deIicits, which in
most cases have reached well beyond the 5 oI GDP, a broadly accepted measure oI
sustainability. It is also stated that current account deIicits in the case oI Albania are Ior
the most part a Iunction oI large trade deIicits. Comparing theoretical and especially
practical criteria oI the current account balance status in Albania, they concluded that the
current account deIicit, in Albanias case, can be considered relatively sustainable.
However such stability can be Iragile and can be seriously threatened by the persistent
deterioration oI trade (Albanian current account deIicit, 2007). According to the table
above we can see that the points accounted to this component are ,5 out oI 15, which
means that this component can be considered as moderate Iinancial risk.

Table 7 Summary of financial risk components
Country
Foreign
Debt as
of GDP
Foreign Debt
Service as of
Exports of
Goods and
Services

Current
Account as
of Exports of
Goods and
Services
International
Liquidity as
Months of
Import Cover
Exchange
Rate Stability
as change



Financial
risk rating
10/11
Albania 27,3 6,2 -29,4 5,4 -13,4 37,5
Croatia 107,2 13,5 -10, ,5 -8, 3,5
Slovenia 107, 17,2 -,2 5,5 -,8 3,5
Serbia 70,1 5,2 -7,2 7,5 -23,5 28,0
1


Source 8: PRS Croup, 211

Overall Albania`s Iinancial risk rating is estimated on 37,5 points. According to the scale
this indicates low Iinancial risk. In the table above there are also some other countries in
which our company is already doing business, so we can compare. And as we can see
Albania has the highest Iinancial risk rating oI all the countries stated above, which
means that it has the lowest Iinancial risk Irom all the countries in the table. Still we have
to be careIul any pay attention to the components such as current account as a oI total
exports and also international liquidity ratio which are now at the moderate Iinancial risk
level, but can easily become more risky.

Table 8 Financial risk rating forecast
In general terms if the points awarded are from 0.0 to 24.5, this indicates a very high risk,
25.0 to 29.9 high risk, 30.0 to 34.9 moderate risk, 35.0 to 39.9 low risk, and 40.0
or more very low risk.
Current One-Year Forecast Five-Year Forecast
Country
Rating
10/11
Worst
Case
Best
Case
Risk
Stability
Worst
Case
Best
Case
Risk
Stability
Albania 37,5 33,5 38,0 ,5 30,5 1,0 10,5
Source 9: PRS Croup, 211

And iI we look at the Iorecast Ior one year we can see that that even in worst case
scenario Albania will be in the range oI moderate Iinancial risk. But iI we look at the
Five-Year Iorecast there is even chance in best case scenario that Albanias Iinancial risk
will be in the lower part oI the 0.0 - 50 which indicates very low Iinancial risk. So
Irom the aspect oI Iinancial risk there are almost no indicators which we could see as
critical Ior entering the Albanian market.

5 ECONOMIC RISK

Since 11, the economy has struggled to recover Irom Iall oI Europe`s harshest
communist regime, the impact oI the move to a market economy and the 17 collapse oI
pyramid investment schemes (FCO, 2011). Albania was the last country in the region that
started to implement reIorms and transition process. The Iirst democratically elected
government started oIIice in April 12, with introduction oI economic reIorm program
that would mend dismal economic policies enIorced by previous dictator and leader oI
Albania, Enver Hoxha. AIter the pyramid schemes there was severe downturn and
instability, Irom which Albania's economy is still recovering Irom. Albania`s economy
has improved substantially over recent years, and was one oI the Iew European countries
15

that had positive growth rates aIter the global economic crisis. Nevertheless, organized
crime and corruption are among the main issues in Albania. Despite the progress and
reIorms in inIrastructure development, tax collection, property law, and business
administration, Albania has still some indicators that show it is still economy in
transition. The privatisation was completed in most SME`s, and key drivers oI economy,
according to GDP composition, are services (57.) and industry (23.5), while
agriculture represents 18.. (CIA, 2010 est.).

In June 200, the government signed The Stabilization and Association Agreement
(SAA) with the European Union (EU), and the Interim Trade Agreement was
implemented on December the same year. In December 200, Albania signed the Central
European Free Trade Agreement (CEFTA) and in April 200 applied Ior EU
membership. The Albanian economy has some problems due to stagnation, crime and
corruption, and this prevents the Ilow oI FDI, expansion and eIIicient use oI their natural
resources. The country is still one oI the poorest in the world, according to economic
indicators. Nevertheless, several macroeconomic reIorms have inIluenced on economic
improvement in the last years. Albania was previously centrally-planned and rather
closed economy state and the reIorms are aiming at making it into an open market
economy. The government has recently introduced a Iiscal reIorm package with the
incentive to reduce grey economy and attract Ioreign investors. By GDP purchasing
power parity, Albania ranks 118 ($23.33 billion in 2010) and by GDP per capita in
current prices it ranks as 125 ($7,00 2010 est.) in the world (CIA, 2011).
Macroeconomic GDP real growth was around on average between 200-08, but
started to decline in 200 and reached 3.1 in 2010 (CIA, 2011). Albania has an
inIormal and unreported, sector that may be as large as 50 oI oIIicial GDP, which
hampers Albania's ability to Iully prosper (CIA, 2011).

The economy in Albania has witnessed important improvements, and has been one oI the
best perIorming countries in the region according to economic indicators such as GDP
growth and inIlation rate. GDP growth rate was among the highest compared to the
countries in this region and according to projections by IMF is going to reach around 5
in 2015. InIlation rate was 3, in 2010 and remains stable. The per capita GPD is still
one oI the lowest in the region, reaching $7381 in purchasing-power-parity and $ 31 in
current prices in 2010 (IMF, 2011), while 12,5 oI the population was below poverty
line (CIA, 2011). However the poverty rate was reduced Irom 25 to 12 between
2002 and 2008, one oI the highest rates oI poverty reduction in this region. Albania has to
Iocus on several important Iactors to Iurther improve its economy, reduce the negative
impacts and accelerate the process oI joining the European Union. The main agenda is in
strategy Ior development, improving governance and strengthening institutions.
1

Furthermore, Albania has to maintain stable macroeconomic environment, improve
business environment, Ioster trade, and encourage domestic and Ioreign investment.
Important issues are also job creation, upgrading public inIrastructure, raising
productivity and strengthening regional cooperation.

Most oI Albania`s labour Iorce is employed in agriculture (7.8), while services
(2.2) and industry (23) represent a smaller share and the unemployment rate is still
quite high, reaching 13.5. The main drivers oI service sector is tourism, however there
is present reduction in remittances Irom workers abroad, which constrains economic
activity. Nevertheless, the distribution oI Iamily income is very even, with GINI index
2.7 in 2005. Main industries in Albania include Iood processing, textiles and clothing;
lumber, oil, cement, chemicals, mining, basic metals, hydropower. The industrial
production growth rate was 3 in 2010. Main exports include textiles and Iootwear;
asphalt, metals and metallic ores, crude oil; vegetables, Iruits, tobacco, while their main
exports partners are Italy 50.8, Kosovo .2, Turkey 5., Greece 5., China 5.5
(2010 est.). Albania main imports are machinery and equipment, IoodstuIIs, textiles,
chemicals, while their main imports partners are Italy 28, Greece 13, China .3,
Turkey 5., and Germany 5. (2010 est.). Due to combination oI limited Iinancial
exposure to international markets and expansionary Iiscal policy have helped Albania to
limit the eIIects oI the crisis. Over the last Iew years, Albania has been successIul in
implementing reIorms, avoiding economic slowdown and entered the ranking oI upper-
middle income countries. The unemployment rate has been high, reaching 12,50 in
2010, but nevertheless, it has declined Ior 2 points Irom 2005. The growth was
accounted to mainly structural transIormation Irom Iocusing on agriculture to services
and construction, which represent more than 0 oI GDP. Albania has to Iocus on
several important Iactors to Iurther improve its economy, reduce the negative impacts and
accelerate the process oI joining the European Union. The main agenda is in the strategy
Ior development, improving governance and strengthening institutions. Furthermore,
Albania has to maintain stable macroeconomic environment, improve business
environment, Ioster trade, and encourage FDI. Important issues are also job creation,
upgrading public inIrastructure, raising productivity and strengthening regional
cooperation.

According to IFC and World Bank, Albania ranks as 82
nd
in overall (out oI 183
economies) "Ease oI Doing Business" in 2011. The table below summarizes the key
indicators Ior each topic and benchmark against regional and high-income economy
(OECD) averages. The data show, that in Albania, acquiring a credit is quite easy, while
the investors are well protected, which is an important indicator Ior a company entering
17

the market. Starting a business is not so problematic, but dealing with construction
permits and closing a business is extremely hard.

Table 9 Doing business in Albania
Topic Rankings DB 2011 Rank DB 2010 Rank Change in Rank
Starting a Business 5 up -1
Dealing with Construction Permits 170 172 up 2
Registering Property 72 up -3
Getting Credit 15 1 up -1
Protecting Investors 15 15 No change
Paying Taxes 1 152 up 3
Trading Across Borders 75 70 up -5
EnIorcing Contracts 8 1 up 2
Closing a Business 183 183 No change
Source 10: http://www.doingbusiness.org/data/exploreeconomies/albania/

This Iigure shows the distribution oI cumulative change across the indicators and time
between Doing Business 200 and Doing Business 2011. Albania is improving in ranks,
and Ior new companies entering the market, doing business is becoming easier.

Picture 4: Doing business ratings in 21

Source 11 http://www.doingbusiness.org/~/media/FPDKM/Doing"2Business/Documents/Annual-
Reports/English/DB1-FullReport.pdf
18

6 ASSESMENT OF ECONOMIC RISK (ICRG METHOD)

Economic risk analysis involves an assessment oI the countries ongoing and prospective
economic situation, and standard economic risk assessment consists oI combining two set
oI variables domestic economy and balance oI payment (Clark & Marois, 1, p. 133).
The principal economic variables are (Clark & Marois, 1, p. 13): GDP by sector,
gross domestic investment, gross domestic Iixed investment, private and public
consumption, gross domestic savings, the resource gap, the money supply, government
budget deIicit, GNP deIlator, consumer price index. The variables, associated with
balance oI payment are (Clark & Marois, 1, p. 13): exports and imports oI goods and
services, trade balance, current account balance, export price index, import price index,
exchange rate and Ioreign reserves. The country economic risk can be assessed and
measured according to the volatility oI real GDP or GNP and volatility oI the
macroeconomic rate oI return. It`s an important element in international risk, because
volatile macroeconomic environment is likely to generate the volatility in proIits oI
companies in that country (Clark & Marois, 1, p. 5). According to the PRS group,
the ICRG methodology the ratings Ior overall Economic Risk assessment are designed to
provide means oI assessing a country`s current economic strengths and weaknesses. Low
economic risk is present when strengths outweigh its weaknesses and vice versa, while
these strengths and weaknesses are assessed by assigning risk points to a pre-set group oI
Iactors or economic risk components. The minimum number oI points is 0 and the
maximum number oI points depends on the Iixed weight that component is given in the
overall economic risk assessment (the lower the risk point total, the higher the risk). The
table shows nominal GDP per capita in US dollars, expressed as a oI the average oI the
estimated total GDP oI all the countries covered by ICRG. The Iinal column in the table
shows the risk points assessed Ior GDP per capita. The ICRG currently monitors 11
countries, and the average nominal GDP per capita Ior monitored countries was 1.0
US $ in 2010, while in Albania GDP per capita was 31 US $, which represents 25 oI
average Ior Albania.

Table 10 GDP per capita US $, current prices, in Albania and average for 140 countries monitored
by ICRG, 2005-2011
Year 2005 200 2007 2008 200 2010 Risk points
2010
GDP (per capita
US $) average
11.373 12.08 1.233 15.731 13.821 14.460
1.0 out oI 5.0
GDP (per capita
U.S. $) Albania
2.02 2.858 3.33 .07 3.837 3.616
Source 12 http://www.imf.org, own calculations

1

Albania has had the smallest decline in real GDP growth compared to EU and Central
and Eastern Europe average. The volatility was highest between 2008 and 2010, due to
eIIects oI the economic crisis. The projected volatility in the Iuture will not be high, and
growth rates are projected to steadily increase, although not at a high rate. The table
below shows the real GDP growth, expressed as a increase or decrease and risk points
awarded.

Table 11 Real GDP growth
Year 2005 200 2007 2008 200 2010 Risk points
2010
Real GDP growth
,constant prices,
change
5,7 5,3 5,0 7, 3,30 2,60 8.0 out oI 10.0
Source 13: http://www.imf.org

Picture 5: Real GDP growth, constant prices in Albania, Central and Eastern European region and
EU, change, 2006-2015 projections

Source 14 http://www.imf.org http://www.imf.org/

The table below shows annual inIlation rate as a change oI the unweighted average oI
the consumer price index and risk points Ior 2010. The business environment in Albania
is very stable, according to inIlation rates. Over the years, the inIlation has remained
6
4
2
0
2
4
6
8
10
2003 2006 2007 2008 2009 2010 2011 2012 2013 2014 2013
Luropean unlon CenLral and easLern Lurope Albanla
20

quite stable and low. This will enable Iurther growth and encourage investors to enter the
market.
Table 12 Annual inflation rate
Year 2005 200 2007 2008 200 2010 Risk points
2010
InIlation, average
consumer prices,
change
2,33 2,371 2,37 3,35 2,223 3,4 9.0 out oI 10.0
Source 15 http://www.imf.org

The table below shows the estimated central government budget balance Ior a given year
in the national currency is expressed as a oI the estimated GDP Ior that year in the
national currency. According to OECD, the net borrowing or net lending oI the general
government is the balancing item oI the non-Iinancial account and equal to the diIIerence
between total revenue and total expenditure, including capital expenditure. The balance
measures the extent to which general government is either putting Iinancial resources at
the disposal oI other sectors in the economy and non-residents (net lending), or utilizing
the Iinancial resources generated by other sectors and non-residents (net borrowing). In
Albania, the deIicit has been increasing over the years which raised concerns among
investors. In 2010 it decreased in comparison to 200 Irom -7 to - oI GDP, as the
government is implementing certain measures to stabilize the budget.

1able 13 Covernment budget balance
Year 2005 200 2007 2008 200 2010 Risk
points
2010
Government budget
balance oI GDP
-3,58 -3,281 -3,55 -5,075 -7,383 -4,061 5.5 out
oI 10.0
Source 16 http://www.imf.org

The current account is a section in a country's balance oI payments (BOP) that records its
current transactions and is divided into Iour sections: goods, services, income (such as
salaries and investment income) and unilateral transIers (Investopedia, 2011). The deIicit
occurs, when a country has an excess oI one or more oI the Iour Iactors making up the
account or, when more money is being paid out than brought into a country
(Investopedia, 2011). The table below shows the estimated balance on the current account
oI the balance oI payments expressed as a oI the estimated GDP in Albania. The
deIicit has been increasing until 200, but has decreased in 2010 to - oI GDP. The
main objectives oI Albanian government are the consolidation oI public Iinances,
stabilization oI overall price level, as well as the reduction oI current account`s deIicit.
21

The main medium-term objective oI Iiscal policy is the reduction oI public debt at level
5 oI GDP, by year 2013 and the annual objective Ior year 2011 is the reduction oI
public debt at level 5 oI GDP, Irom 5.5 oI GDP it has been estimated in 2010.

1able 14 Current Account balance as a " of CDP
Year 2005 200 2007 2008 200 2010 Risk points 2010
Current account
balance
-,1 -5, -10,371 -15,20 -13,81 -,17 9.0 out oI 15.0
Source 17 http://www.imf.org

Gross capital Iormation (Iormerly gross domestic investment), consists oI outlays on
additions to the Iixed assets (land improvements, plant, machinery) oI the economy plus
net changes in the level oI inventories (World Bank, 2011). The ratio oI gross domestic
Iixed investment/GDP measures the economy`s propensity to invest and usually a higher
rate oI investment will lead to increased output and higher rates oI growth oI GDP (Clark
& Marois, 1, p. 135). The investments in Albania have been increasing until 2008,
and due to economic crisis slightly decreased to 2 in 200, but are still higher than the
EU average, as it is seen Irom the table below. The table below shows gross domestic
savings that are calculated as gross national income less total consumption, plus net
transIers (World Bank, 2011). Combining the two Iactors, the lower the domestic savings
to domestic investment, more dependent is the economy and this is seen as the resource
gap (savings - investment). The resource gap in Albania has been increasing until 2008
and then decreased in 200 to -12. The gap is still negative, which indicates the
reliance on Ioreign resources in Albania.

Table 15 Gross capital formation ( of GDP), gross savings ( of GDP), resource gap in Albania and EU
2000-2009
Year 2000 2001 2002 2003 200 2005 200 2007 2008 200
Gross domestic savings ( of
GDP)

Albania 2 27 15 1 1 17 17 15 1 17
EU 20,2 20 1, 1,8 20,5 20,1 20, 21,7 20,5 17,
Gross capital formation ( of
GDP)

Albania 25 28 2 23 2 2 25 2 32 2
EU average 21,3 20, 1,5 1, 1,7 1, 20,7 21, 20,8 17,
Resource gap
Albania -1 -1 - -7 -5 -7 -8 -1 -18 -12
EU average -1,1 -0, 0, 0, 0,8 0,2 0,2 0,3 -0,3 0
22

Source 5 http://data.worldbank.org/indicator/NE.GDI.TOTL.ZS Source 4
http://data.worldbank.org/indicator/NE.GDI.TOTL.ZS
Foreign direct investment are the net inIlows oI investment to acquire a lasting
management interest in an enterprise operating in an economy other than that oI the
investor or the sum oI equity capital, reinvestment oI earnings, other long-term capital,
and short-term capital as shown in the balance oI payments (WorldBank, 2011). FDI Ilow
in Albania has been increasing in value, although the growth rate has been decreasing
Irom 2007 on.

Table 16 : Foreign direct investment, net inflows (BoP, current US$) in Albania
2005 200 2007 2008 200
FDI Ilow 22,7,013 325,258,317 2,280,000 37,08,3 77,7,280
change Irom the
previous year
(base200) -23,0 23,2 103,2 1, ,37
Source 18http://data.worldbank.org/indicator/BX.KLT.DINV.CD.WD

Overall, an economic risk rating oI 0.0 to 2.5 indicates a very high risk; 25.0 to
2. high risk; 30.0 to 3. moderate risk; 35.0 to 3. low risk; and 0.0 or
more very low risk. For the overall economic risk rating, the maximum number oI points
is 50, and Albania scored 32,5, which is represents moderate risk.

Table 17: Overall economic risk rating for Albania
Category GDP per
capita
Real GDP
growth
Annual
inIlation rate
Government
budget balance
Current
Account
balance
Overall economic
risk rating 2010
Points 1 8 9 5,5 9 32,5

7 CURRENCY RISK

Picture 6: 1 bill lek





Source 19: Wikipedia

The Albanian lek (ALL) is the oIIicial currency oI Albania. Lek is made up oI 100
qindarka and is oIten represented with a symbol "lek". The Albanian qindarka is no
longer issued but is still accepted as currency. 100 lek in the picture. Since Soviet Union
23

Iell apart, Albania has experienced a transition Irom socialist political system to Iree
market open economy. Although Albania has a lot oI energy resources, it is considered
one oI the poorest countries in Europe, since around 30 oI people live below poverty
line. At the moment Albania is trying to catch up with the economic growth. But political
instability and large black market economy represents a major threat to countries
progress(Wikipedia). AIter 15 the GDP increased enormously and Albania experienced
high economic growth, that was a consequence oI several economic reIorms,
privatisation and stabilization policies. In 1 lek experienced sharp appreciation to the
euro, due to economic boom with an inIlux oI Ioreign exchange monies that was a result
oI the war in Kosovo, when thousands oI Kosovar Albanians reIugees escaped into
Albania (Banking Introduction, 2010). Since currency risk can be deIined as a volatility
oI exchange rate, our explanation oI the currency risk depends on the Iluctuation oI
exchange rate. Historically, exchange rate valuations Ior the lek was in year 2005 at
12,7, in 200 at 12,7, in 2003 at 133,5, in 2002 at 137,25, in 2001 at 13,82 and in
2000 at 130,7 (Bank oI Albania). According to Census Forecast, was exchange rate in
200 137, l ALL/EUR and in may 2010 13,5 ALL/EUR. Forecast Ior may 2011 is
132, and 12,70 Ior may 2012. On 31 March 2011, the Albanian lek had an exchange
value oI 11.2 ALL to 1 euro (EUR). Data oI exchange rates ALL/EUR Irom 200 to
2012 in the table below.

Table 18: Exchange rates ALL/EUR from 2 to 212 (forecast)
Year 2006 2007 2008 2009 may 2010 may 2011 may 2012
ALL/EUR 12,00 122,10 123,70 137,0 13,50 132,0 12,70
Source 20: Consensus Forecast

Given the political instability, Albanian lek has perIormed very well in the last years.
Looking at the data Irom table and graph below, we can see how the exchange rate
progressed with time. Given time zone Irom 200 to 2012, there was a biggest
appreciation oI lek versus euro in 2007, when exchange rate was 122,10 and a lek was at
its highest value in comparison with euro. Lek had this high value because oI high
economic growth, in 2007 GDP was 5, and next year 7,. AIter that it began to
depreciate together with GDP growth decline. Depreciation reached its peak in 200,
which was a result oI global economic crisis. Value oI lek started slowly increase in
2010. Forecast Ior 2011 and 2012 are predicting a value oI lek will increase with GDP
growth (Census Forecast, 2010). For example, we assume that our company made FDI oI
100 million euro in Albania. II we take a exchange rate oI ALL/EUR 11.2, as it was on
31 March 2011, that would be 11,2 million lek. We are predicting, based on Iorecasts
made by Census Forecast and based on expected economic growth, that lek will
appreciate against euro. Predictions are Iorecasting exchange rate oI 12,70 Ior may
2

2012. In that case at the end oI the year 2012 the consolidation value oI our investment
would be:
April 2011:
100 million EUR * 11,2 ALL/EUR 1.120 million ALL

End oI 2012:
1.120 million ALL / 12,70 ALL/EUR 108,87 million EUR

We can see that even though the economic crisis and political instability in Albania, the
appreciation oI lek against euro is good Ior our FDI. Our investment would be on the end
oI 2012 worth 8,87 million euro more than now when we invest. But iI unexpected
depreciation oI lek would happen, our FDI would have lower value. This example shows
a risk that a company could have when investing in Albania in lek in short period.

8 ESTIMATION OF EXPOSURE IN CONCRETE INVESTMENT
PRO1ECT - MICRO RISK ANALYSIS

8.1 STRATEGIC DIMENSION OF INVESTMENT

Albania has one iI the smallest percent oI FDI in the region. Even though its GDP
growth, stabile currency and stable inIlation rate, it is not attractive Ior Ioreign
investment because oI the political instability, corruption, poor inIrastructure, high level
oI taxes and more. But the government is trying to make a company more attractive Ior
investments with several reIorms. Real estate investment and tourism are becoming one
oI the leading sectors oI Ioreign investment. The construction industry was one oI the
most rapidly expanding sectors in the last years. Buildings are growing as mushrooms
aIter the rain, especially in tourist places. Comparing with 200 construction decreased a
bit in 2010, because oI large investments in 200 (Economy oI Albania). Even though
Energoplan is a big company, having its joint ventures and subsidiaries in Croatia,
Bosnia, Serbia, Montenegro and Russian, we would proposed them to start with a small
subsidiary, that could later expanded. Since there are some big companies in the Albanian
market, a joint venture with a local company could also be a good start.

8.2 BARGANING POWER OF ENERGOPLAN

According to Izvozno okno, construction company with biggest proIit is Trema
Engineering, that has a proIit oI 22 million euro in 200, next is the biggest company by
number oI employees (180) Volalba with 17 million and Diekat Ndertim &
25

Konstruksione with 12 million. Most companies in sector are middle size, expect those
three with the highest proIit. We could cay the bargaining power oI Energoplan will not
be big, since this three companies are dealing with the most oI the market.

8.3 ENERGOPLAN RELATIONS WITH ALBANIA

Slovenia and Albania are both working on developing relations. The opening oI
Slovenian Embassy in Tirana in the Iuture will certainly contribute to this development.
Slovenian also gave an open support to Albanias eIIorts to join Euro Atlantic
structures, visa liberalisation and EU membership in every aspect. In spite oI economic
crisis, the trade exchange between Slovenia and Albania grew by in the Iirst halI oI
200. Good political relations can provide an excellent basis Ior development oI
economic cooperation, since Energoplan will invest into Albania Ior the Iirst time.
Regular airline connection between Ljubljana and Tirana is also very useIul Ior those two
countries to be in constant relation. The two countries could also join in candidature Ior
European Iunds (Albanian President on oIIicial visit to Slovenia). Political risk in
Albania is Ialling. The country is classed as medium risky. The corruption perception
index Ior 2010 was 3,3 as already mentioned in chapter Political risk.

9 PLAN PROPOSAL FOR MANAGING EXPOSURE TO
IDENTIFIED RISKS

According to our assessment oI all risks identiIied, we can design the composite risk
rating Ior political, Iinancial, and economic risk. The political risk rating contributes
50 oI the composite rating, while the Iinancial and economic risk ratings each
contribute 25. The Iollowing Iormula is used to calculate the aggregate political,
Iinancial and economic risk (ICRG, 2011):

CPFER (Albania) .5 (PR + FR + ER),5(51+37,5+32,5),5
where
CPFER Composite political, financial and economic risk ratings
PR Total political risk indicators
FR Total financial risk indicators
ER Total economic risk indicators

The highest overall rating (theoretically 100) indicates the lowest risk, and the lowest
rating (theoretically zero) indicates the highest risk. Overall ratings are: very high risk
00.0 to . points, high risk 50.0 to 5. points moderate risk 0.0 to . points low
risk 70.0 to 7. points very low risk 80.0 to 100 points. The overall risk Ior Albania is
2

moderate, according to ICRG method. There are several techniques that are managing
currency risk. External techniques are: money market hedge, Iorward contracts, swaps,
Iinancial Iutures and currency options. We consider our investment oI 100 million ALL.
Lets assume our company made an investment in year 200 with US dollars exchanged
to lek at rate oI 8.38 ALL/$. That is .838, million $ or 12,00 million euro (12,0
ALL/EUR). Today, aIter 5 years, on 31 March 2011, we have 5 return oI our
investment. We want to know what kind oI return rate we got iI we exchange that proIit
in EUR or in $.

Exchange rate in 2010:
O 100,1 ALL/$
O 11,20 ALL/EUR

Equation:
(1Rb)(1AS)(1Rall)

Rb rate in base currency oI return on the investment
Rall lek rate oI return on the investment

Dollars:
AS (8,38-100,1)/8,38 -0,01785 depreciation oI lek against $
(1R$)(1-0,01785)(10,05) 1,0312 rate oI 3,12

Euros:
AS (12,0 -11,20)/ 12,0 -0,13871 depreciation oI lek against euro
(1Rt)(1-0, 13871)(10,05) 0,82028 rate oI 82,03

Calculation shows, that it is better Ior Energoplan to exchange proIit in dollars, because it
has less negative outcome oI investment. II Energoplan would exchange into euro, it
would suIIer much bigger loss. But this risk management is not proper, since company
would experience loss, even though it is small. The other way oI how Energoplan could
manage currency risk is by looking what is best Ior them at that time. They can also make
a Iorward contract or currency option between dollar and euro, and sell dollars at
prearranged exchange rate. That would be much better way oI handling currency risk,
since it is hedging them against depreciation oI lek.

Albania has 80 privatized economy and belongs to the pool oI non-OECD economies.
Consequently this means, that the relationship between economic nationalism and
Foreign Direct Investments (FDI) is a very important Iactor. The assumption is that the
27

more Iavourable view the public holds oI prominent domestic Iirms, the less Iavourable
view it holds oI Ioreign companies. The good points are by cost eIIectiveness. Labour
costs are lower than in other comparable economies and also gross payroll costs are
undoubtedly lower than in Romania or Bulgaria, and also the social contributions are
levied at only 30.7 oI gross salary. It is also prospectively, that all the major Slovenian
banks oIIer to pay and receive payments through Albania and the Albanian banks.
Involve the use oI correspondent banks. Most linked to banks in Slovenia, NLB and
branches oI Ioreign banks (Austria, Banka Koper), which also oIIer Iinancing oI export
transactions. Payment terms are usually longer - 0 days and 0 days is a rarity - and
depend on the agreement. Group SID bank Ljubljana, oIIers to Slovenia's economy
Iinancing and insurance services and support services, like credit inIormation, debt
recovery, etc. Customs legislation oI Albania is since 1, in accordance with the laws
oI the European Union. All procedures are in line with international practices, which
allow single and transparent trading conditions. Import control in Albania is regulated by
the General Secretariat Ior Customs, which is part oI the Albanian Ministry oI Finance.
Albania has a strong orientation toward the U.S., Europe (Stabilization & Association
Agreement between Albania and the European Union) and NATO. The European Union
is the main trade partner oI Albania; Albania creates with the EU . oI its Ioreign
trade, which means, that Albania is quite popular trading area also Ior EU members.

10 CONCLUDING REMARKS AND RECOMMENDATIONS

Energoplan Iaces several risks, such as project and contractual risks, which stem Irom the
Iact, that every project is unique Irom the perspective oI the size, design, surroundings.
These characteristics distinguish construction Irom other activities, such as industry
production at permanent locations. At Energoplan, these type oI risks represent the
greatest share in the entire risk structure, because projects are the basic source oI revenue,
while the proIits are directly connected to the success oI individual projects. Energoplan
business has had at least ten projects in progress at the same time and each posed
diIIerent problems and challenges. That is why it is extremely important to correctly
asses the FDI project in Albania Irom the perspective oI risks. We recommend, that
Energoplan enters the Albanian market, as it shows quite a potential and the overall risk
is moderate. They have to careIully monitor indicators, such as crime and corruption, and
eIIectively supervise the projects they will conduct in the Albanian market. The political
risk is the most expressed, but we predict that the situation will improve in the Iuture.
Further, beIore signing any contracts, they should inspect agreed deadlines and stay in
close contact with their clients.

28

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