FACTBOX-Key political risks to watch in Western Balkans

BELGRADE, June 1 (Reuters) - Ethnic tensions and the legacy of the 1990s wars still weigh on Western Balkan countries and complicate their common goal of joining the European Union.

The following are some of the main obstacles in countries keen to attract foreign investors but which have much to do to improve the business climate.

ALBANIA

Once the most isolated country in Europe, Albania joined NATO in 2008 and applied for membership of the EU last year but has not yet been granted candidate status.

POLITICAL STABILITY

A controversy over national elections last summer continues to reverberate, bogging down progress on reforms. Opposition demands for a full investigation into the vote have not swayed Prime Minister Sali Berisha's centre-right Democratic Party, which has 75 votes in the 140-seat chamber.

What to watch:

-- After ending a hunger strike of supporters, the opposition is keeping up pressure to demand the opening of disputed election boxes. Local elections are due in 2011 and parliamentary vote in 2013.

GDP/BUDGET

The International Monetary Fund estimates GDP grew at 3 percent last year and expects further growth of 2-2.5 percent in 2010. Albania is one of the few countries in Europe that did not go into recession, although the economy saw a 2009 decline in retail sales, fiscal revenues and remittances.

The IMF has urged Albania to cut its budget deficit to 3 percent from around 7 percent and reduce public debt, which amounts to 60 percent of GDP. But Prime Minister Berisha has promised a 10 percent wage and pension raises. [ID:nLDE6281AM]

TREASURY

Albania has delayed plans to raise up to 400 million euros in a euro-denominated bond to pay a year-old expensive commercial loan and fund budget-backed projects. [ID:nLDE64N167]

What to watch:

-- What impact the Greek crisis will have on the eurobond plans.

BOSNIA

Bosnia holds presidential and parliamentary elections in October that the West hopes will change the political landscape dominated by leaders who focus on ethnic divisions rather than on the reforms needed to take Bosnia closer to the EU.

Bosnia's two rival autonomous regions -- the Serb Republic and the Muslim-Croat federation -- must implement tough public sector reforms under a 1.2 billion euro stand-by loan agreed with the International Monetary Fund. A loss of IMF cash would jeopardise fiscal stability, payment of wages and pensions and could cause social unrest.

POLITICAL STABILITY

The least stable country in the Balkans following its 1992-95 war, Bosnia is still overseen by an international peace envoy and patrolled by EU-led peacekeepers. The closure of an international protectorate is a key condition for its application for the EU membership.

What to watch:

-- Progress in fulfilling conditions for the transition of the office of an international High Representative into an office of an EU Special Representative. The two regions must agree on the distribution of state property to free the country of its international protectorate status.

-- Ethnic tensions. Nationalist rhetoric is set to overshadow the economic and EU agenda in the campaign, diminishing prospects for a more functional central state and faster reform this year. [ID:nLDE63K0E2]

FISCAL STABILITY

Bosnian regions must cut spending and reform payments to groups such as demobilised soldiers and families of fallen soldiers. Violent protests in Sarajevo over the reforms by veterans, who account for a large part of voters, wounded about 70 people at the end of April. The Muslim-Croat federation government has said it will not make new concessions. [ID:nLDE63K213]

What to watch:

-- If the government agrees on further concessions to veterans, the IMF and the World Bank may suspend budget support loans, bringing the country to the edge of financial collapse. [ID:nLDE64H178]

CROATIA

The popular tourist destination with a long coastline along the Adriatic Sea has advanced furthest in EU entry talks among current Balkan hopefuls. Croatia would like to complete talks this year and join the bloc in 2012.

However, the toughest areas in the talks have yet to be tackled. Those include competition policy because of excessive subsidies to the loss-making and socially sensitive shipbuilding industry, and the judiciary, because of widespread corruption and slow court procedures.

ECONOMY

Croatia's economy, relying on tourism, state investments and personal consumption, contracted 5.8 percent in 2009 and most observers fear another recession year, while unemployment stands at a four-year high and is showing no signs of abating.

Despite continuously high public spending, Croatia managed to bring its budget deficit to around 3 percent last year, while public debt stands at 36 percent of GDP by EU standards and the kuna currency is stable.

Prime Minister Jadranka Kosor unveiled a comprehensive reform package in April, which foresees public spending cuts and reforms in administration, tax, pension and health. It also envisages a fresh privatisation drive to sell the remaining government stakes in companies. [ID:nLDE63R1SK]

What to watch:

-- Public sector unions complain the reform package was "unfair" and hit the poorest the most. Kosor vowed to press on with or without public support but wide or violent national strikes are unlikely.

POLITICS

The ruling conservative coalition led by Kosor's Croatian Democratic Union (HDZ) appears stable, but once it starts implementing reforms, particularly cuts in subsidies, it may come under strain.

What to watch:

-- A delay in EU talks or a major economic downturn resulting in higher unemployment could create pressure for early polls. [ID:nLDE63I1EU]

-- A parliamentary election is due in November 2011, but analysts say Kosor may decide to call the elections before the summer of 2011 after her government wraps up the EU talks.

KOSOVO

Kosovo's bad relations with Serbia, from which it declared independence two years ago, remains a obstacle to integration into the EU. Kosovo is not a member of the United Nations and is recognized only by 69 countries including the United States.

CRIME AND CORRUPTION

Organised crime, corruption and ethnic tensions as well as legal uncertainties have kept foreign investors away [ID:nBYT954452].

About 10,000 NATO troops and 2,000 EU prosecutors, judges, police and customs officers, known as the EULEX mission, help oversee security. NATO helped restore order on May 30 after the worst ethnic unrest in two years. [ID:nLDE64T06W]

SERB MINORITY

Kosovo has a 90-percent Albanian majority, but the ethnic Serb region in the north of the country, around the ethnically divided city of Mitrovica, is beyond government control and it receives subsidies from Belgrade.

What to watch:

-- Belgrade-backed local opposition to plans establish central control of Mitrovica could lead to renewed clashes. [ID:nLDE628152]

ECONOMY

Kosovo's economy, based on exports of metals and minerals, cannot generate enough revenue to sustain the government, which is dependent on Western aid. Poverty is widespread and unemployment is more than 40 percent. World Bank said 15 percent of Kosovo's two million population live in extreme poverty, making less than 93 cents a day.

What to watch:

-- Government efforts to secure funds for key projects including the motorway to Albania.

-- Sales of state-run enterprises and energy-related projects. [ID:nLDE6240UF]

-- A 106 million euro deal with the IMF. [ID:nBYT738160] (Editing by Sonya Hepinstall)