UPDATE 1-World Bank sees "formidable risks" to W.Balkans growth
* W.Bank warns of "formidable risks" in 2013
* Sees average GDP contraction of 0.6 pct in 2012
* Return to growth in '13 slower than first hoped
By Maja Zuvela
SARAJEVO, Dec 18 (Reuters) - The economies of the Western Balkans will shrink an average of 0.6 percent this year, the World Bank said on Tuesday, slashing its 2013 forecast and warning of "formidable risks" to growth.
The bank had previously seen average growth for the region - comprising Albania, Bosnia, Serbia, Macedonia, Montenegro and Kosovo - at 1.1 percent, but said the fallout from the euro zone debt crisis was worse than previously feared.
It said a return to growth in 2013 would be more gradual than previously thought, forecasting an expansion of 1.6 percent rather than 2.6 percent.
Zeljko Bogetic, the World Bank's leading economist and coordinator for the economic policy of the Western Balkans, said the bank had hoped a downturn in 2009 would be a "short-term aberration", but said the outlook was once again bleak.
"After recession in 2009 and two years of very sluggish growth the Western Balkans is back in recession, led primarily by a significant downturn in Serbia," he said, presenting the bank's regular economic report for the region.
He said gross domestic product (GDP) in Serbia, the region's biggest economy, would probably contract by 2 percent. The country is struggling to stimulate growth while cutting back on spiralling debt.
He said output in Bosnia, Montenegro and Macedonia would be flat at best, and only Kosovo and Albania were likely to see growth this year.
"Obviously, the exterior environment is uncertain and exerts a negative influence on the economic performance of the region," Bogetic said. The 17-nation euro zone is the Balkan region's main trade partner and source of investment.
The report said the region was proving highly vulnerable to external risks via trade, remittances, foreign direct investment and external financing channels, while current account deficits have deteriorated.
"Countries had to borrow to stay within fiscal frameworks and meet their revised 2012 deficit targets, and public debt still remains very high," Bogetic said.
He said Serbia, Albania and Montenegro, in particular, would have to persevere in cutting their deficits and bringing down public debt, while also improving the investment climate and reforming labor markets and the public sector in order to promote growth.
On a positive note, Bogetic said the banking sector in the region had shown resilience. "We have not seen major meltdowns," he said, but warned of the high level of non-performing loans.