Boston, MA -- (SBWIRE) -- 01/28/2014 -- The domestic political environment remains heavily divided along ethnic lines, stunting structural reform and weighing on the country's EU membership ambitions. Increased international pressure may push the government to approve some long-delayed reforms, but progress is set to remain slow.

The economy is set to return to positive growth after an estimated 0.9% contraction in 2012, led by falling household spending and external demand. A recovery in both these areas - especially ex -ports - will help drive modest growth of 0.6% in 2013, with this set to rise to 2.1% the following year.

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The government's Stand-By Arrangement with the IMF will continue to anchor fiscal policy and is likely to ensure that a budget for 2014 is approved at both the entity and state levels before the end of the year.

Major Forecast changes

Latest inflation figures have prompted us to lower our estimate for annual average inflation in 2013, to 0.8%, from a previous 1.8%. We have also lowered our average forecast for 2014 to 2.0%, from a previous 3.0%, though our core view for accelerating price growth as the economic recovery gathers momentum remains in place.
Key risks to outlook

The country's first post-war census was finally carried out in October 2013, an important achievement that nonetheless generates new risks given the potential effect the results could have on the country's complex power-sharing agreements.

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