From: Lilyana Pavlova
Fostering Regional Cooperation, Connectivity in Western Balkans

Amidst the global economic slowdown reflected in decreased consumer spending and delayed investment plans among companies, economic forecasts suggest it is likely that uncertainty will persist throughout the next year, according to Lilyana Pavlova.

Lilyana Pavlova is the European Investment Bank vice-president for the Western Balkans.

According to our Bank Lending Survey for Central, Eastern and South-Eastern Europe, some economies are among the most exposed due to higher inflation and energy dependence on Russia, as energy and food weigh heavily in consumption. Rising debt may become prohibitively expensive, and countries’ access to capital markets may be curtailed. As the crisis intensifies, governments seek to integrate energy security into climate action goals. This is a situation where urgent measures are required alongside massive financial resources.

As the recent European Union-Western Balkans Summit demonstrated, strategic partnerships between the region and the European Union are key to economic growth. Challenges stemming from the war in Ukraine must be addressed with common strategies leading to energy security and decarbonisation of the local economies. In that regard, the European Union plans to deliver a substantial €1 billion energy support package for the Western Balkans in cooperation with EIB Global and fellow Team Europe partners. The EU funds aim to address the most immediate energy needs and build energy resilience and security in the longer term.

As a key financing arm of EU external policy, EIB Global is ready to undertake a key role in the rollout of this package by scaling up its financial and technical support for renewables, energy efficiency and electric grid infrastructure. By the same token, under the EU guarantee provided by the European Fund for Sustainable Development Plus (EFSD+), we are working on deploying innovative financial instruments, guarantees and advisory services for investments in the green and digital transition, especially for the private sector.

The challenge: Uncertainty hampers firms’ investment plans

EIB Global financing aims to create impetus for companies to implement more energy-efficient practices and address the rising pressure to decrease their carbon footprint. However, the most recent EIB Investment Survey indicates that the investment climate among EU companies has deteriorated starkly, driven by the energy crisis, uncertainty and decelerating global growth.

Firms in the Western Balkans had already lagged in green investments and management practices (specifically in setting targets for energy use and emissions), primarily due to financial constraints. Although 10% report losses from extreme weather events, awareness of environmental issues is somewhat limited, as only 21% invest in energy efficiency.

To accelerate the green transformation of the private sector, we have developed an innovative credit line for climate action and environmental sustainability that is already available to companies in the region.

In South-Eastern Europe, the industrial sector is being hit harder than expected by high inflation and the pressure of further borrowing price increases. As a result, banks operating in the Western Balkans are signalling that although credit demand is still strong, they will be confronted with tighter supply conditions and a possible deterioration of credit quality, according to the EIB CESEE Bank Lending Survey. In the longer run, the region’s potential economic growth faces risks and could also be threatened by population decline, which can severely impact the labour market.

The response: Adapting to the new economic landscape

Set against these challenges, progress on reforms essential for the EU accession process is the right way forward to improve the region’s investment, climate and economic prospects. The process can drive many reforms, which is crucial for faster progress. It is essential to identify the competitive advantages of the Western Balkans’ common regional market and accelerate the energy and digital transition in line with the EU agenda.

For firms and countries, remaining competitive means quickly adapting to new challenges. This means progressive upscaling in the global value chains model, human capital development and green and digital transformation. These processes will enable the region to reap the benefits of nearshoring and traditionally solid economic ties with the European Union and position itself as a reliable partner within global value chains.

Building resilience to new shocks also calls for tackling the energy crisis through a combination of energy efficiency and energy security measures.

EIB Global is ready to continue providing targeted financial and advisory support that can reduce constraints and increase firms’ investment opportunities. Since 2009, the EU bank has provided €9.5 billion for the Western Balkans to support better connectivity and digital, water and energy networks, encouraging reforms in other vital sectors such as education, healthcare, small and medium business development and job creation.

For the private sector, we have introduced an impact incentive loan through blended finance with EU resources to encourage the long-term employment of people from vulnerable social groups. More recently, the European Investment Fund (EIF), a subsidiary of the EIB Group, has launched the Western Balkans Enterprise Development and Innovation Facility guarantee for the resilience of small and medium businesses, which aims to increase access to finance for some 4 000 small businesses in the region.

In close partnership with the European Commission, we are already developing innovative financial instruments and guarantees to directly support the green and digital transition and to help catalyse the private sector to support these projects. The establishment of EIB Global is a clear signal for the region that the EU bank aims to enhance its focus on enlargement countries in line with the EU accession process and accelerate the necessary reforms.

With increased teams of experts on the ground, we will continue to work closely under Team Europe and local partners in implementing the Economic Investment Plan and other EU initiatives, which are crucial for a more prosperous future for people in the region.