Albania

Being in Tirana, the strength of the current economic cycle is hard to miss. Construction is visible across the city, the streets are busy, and the tourism boom is clearly feeding into broader economic activity. That aligns with the data: growth is running close to 4%, driven by services, construction, and real estate, while inflation has eased back toward target. Fiscal dynamics have also improved, with debt falling into the mid-50% of GDP range, supported by consolidation and favorable macro conditions. External balances are strengthening as well, underpinned by tourism receipts, remittances, and FDI, which has also led to appreciation of the local currency, the lek. Concerns about energy prices amidst unrest in the Middle East are more muted, given a high share of renewables in the overall energy mix.

Across meetings, European Union (EU) accession consistently came through as the central anchor. Authorities are moving quickly and remain focused on a 2030 target, and Albania is widely viewed as one of the frontrunners in the region (figure 1). At the same time, there was clear recognition that the next phase will be more demanding. Progress will increasingly depend on implementation—particularly around rule of law, corruption, and organized crime—rather than the pace of formal alignment.

That tension speaks to a broader theme. Growth is increasingly concentrated in tourism, construction, and real estate, with limited diversification beyond these areas. This has supported strong headline performance, but it also leaves the economy more exposed and complicates the development of export-oriented sectors, which are also hampered by the strong local currency. Potential growth is also suffering due to demographics, as emigration and an aging population are tightening the labor market and creating skill shortages.

Governance and informality remain central constraints. High-profile corruption cases are being closely watched as a test of institutional credibility, particularly in the context of EU accession, and have recently led to protests in the country’s capital. While a local political analyst downplayed the importance of the protests, an unsatisfactory outcome would be seen as unacceptable by Brussels.

Overall, Albania presents a strong near-term credit story, supported by solid fundamentals and a clear reform anchor. The key question is whether this momentum can be used to address deeper structural challenges and broaden the growth model.

Montenegro

Montenegro is approaching a critical juncture. Following meetings on the ground in Podgorica, we come away cautiously constructive. The country has a genuine opportunity to advance toward EU membership over the next 12–18 months, supported by strong political and public backing and steady progress on accession chapters. However, the macro backdrop has softened, and structural constraints—particularly around capacity, labor, and an undiversified growth model—will shape how much of that opportunity can be realized.

What comes through most clearly in discussions across ministries, multilaterals, and local economists is how central EU accession has become to the policy framework. There is broad political alignment and strong public support (over 70%), and authorities are working toward an ambitious timeline ahead of the 2027 elections. Several counterparts emphasized that “there is no room for delay” this year, reflecting how compressed the timeline has become. Progress on chapter closures has been tangible, placing Montenegro among the more advanced candidates (figure 1). The challenge is increasingly one of implementation rather than legislation, with administrative capacity—particularly in the judiciary and regulatory bodies—remaining limited, even as EU support helps bridge some of these gaps. The governing coalition is broad and at times internally strained, but EU integration remains one of the few areas of consistent alignment across parties; the national airline even features pro-EU livery on its airplanes (figure 2).

At the same time, macro momentum has clearly moderated. Growth has slowed toward ~3% following a strong post-pandemic rebound, with tourism continuing to underpin activity. In conversations with local economists, there was a consistent view that the surge in tourism has likely peaked, with softer flows and more visible competition from neighboring countries. This is beginning to show up in the data, alongside a still-wide current account deficit and continued reliance on imports, particularly in energy. Montenegro has unilaterally adopted the euro, so inflation is largely imported, limiting the scope for policy response.

These dynamics reflect a broader issue around the structure of the economy. Tourism continues to dominate output, while manufacturing and agriculture have played second fiddle. Investment flows remain concentrated in tourism and real estate, with limited diversification into higher-productivity sectors. Several interlocutors noted that past opportunities to diversify have not been fully capitalized on, reinforcing the sense that the growth model has not materially evolved. Labor constraints are becoming more visible, with emigration and depopulation reducing the available workforce and creating skill shortages, particularly in tourism.

From a fiscal perspective, conditions are broadly stable but still require attention. Debt has moderated to around 60% of GDP. In discussions with officials, there was a clear focus on linking future borrowing to specific infrastructure and energy projects, though the feasibility of this approach will depend on execution and access to financing.

Overall, Montenegro presents a steady but execution-dependent credit story. The EU accession process provides a clear anchor and a meaningful opportunity to advance the country’s economic trajectory, but softer growth and limited diversification suggest that there are downside risks to the economy as well.

Serbia

Serbia offers a solid near-term macro story, but with a more complex political and geopolitical backdrop. Following meetings on the ground in Belgrade, we came away broadly constructive on fundamentals. Economic growth remains resilient, fiscal metrics are strong, and external buffers are sizeable. The medium-term trajectory is less clear, however, particularly around EU accession and foreign policy alignment.

Being in Belgrade, the contrast between official confidence and more cautious private-sector views is notable. Policymakers emphasized stability: growth is expected around ~3% this year with a pickup into 2027 driven by the upcoming world Expo ‘27, fiscal deficits remain contained (~2.5–3%), inflation has returned within the target range (~2–3%), and public debt is low at roughly 40–45% of GDP. External buffers are also strong, with FX reserves near EUR 30bn and a stable currency. The labor market is tight, with low unemployment and rising wages, reflecting the success of the FDI-led growth model over the past decade.

At the same time, there are signs the growth model is shifting. FDI inflows have moderated from prior peaks, and there is greater reliance on domestic demand and public investment, particularly infrastructure and Expo-related spending. While this supports near-term growth, it is import-intensive and contributes to a structurally wider current account deficit. The external position remains manageable given strong buffers, but it is becoming more binding, especially if FDI were to weaken further.

Views diverge more clearly on politics and EU accession. Officials pointed to renewed momentum and legislative alignment, framing the EU path as central to investor confidence. However, outside government, the tone was more cautious, with several interlocutors describing the process as effectively in limbo and dependent on broader issues around governance and foreign policy alignment.

This uncertainty is reflected in the domestic political environment. While protests have eased, attention is shifting toward elections likely in 2026–27. The political landscape remains fragmented, with a dominant ruling party, a weak but evolving opposition, and an energetic student-led movements. Near-term stability remains intact, but the electoral cycle could introduce volatility.

Geopolitically, Serbia continues to balance relationships between the EU, US, China, and Russia. While economic ties with Russia have narrowed outside of energy, the relationship remains sensitive, particularly around sanctions. At the same time, Chinese investment has been an important, if uneven, source of financing. This multi-vector approach provides flexibility but complicates the EU trajectory.

Overall, Serbia’s credit profile is supported by strong macro fundamentals and credible policy management. However, the medium-term outlook is more complex, with external imbalances, evolving growth drivers, and political uncertainty likely to shape the path forward.

Investment Implications

The investment thesis for the region depends largely on successful EU accession, which should lead to sovereign spread compression versus regional EU peers over the medium term. As a result, following our trip to the Western Balkans, we maintained our portfolio exposure to both Albania and Montenegro – both sovereigns with realistic chances of becoming EU members in the coming years – while continuing to avoid Serbia, where prospects of EU membership appear much more distant. Our current bias is to add further exposure to the region on potential weakness.

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