Macedonia: Risk Assessment
Country Rating1
Rating: C
Business Climate Rating1
Rating: B
Risk Assessment2
Continuing but moderate recovery in 2011
After a limited recession in 2009, Macedonia recorded a modest rebound in 2010 that will likely continue in 2011, but with lower growth than pre-crisis levels. Domestic demand will be underpinned by a recovery of credit that will spur household consumption and investment, and by improvement in the job market. As in 2010, economic growth will be limited by the economic trends prevailing in neighbouring economies, particularly Greece (10% of exports). The most dynamic sectors will include transport, construction, communications, and financial intermediation. The tourism sector, affected by the crisis, is, however, expected to continue to contract. Foreign direct investment inflows could accelerate with the agreement expected to be concluded with the IMF and the World Bank early 2011 strengthening investor confidence. Similarly, improvement in infrastructure enabled by the European Bank for Reconstruction and Development support is expected to buoy FDI inflows.
External financial weaknesses
Macedonia maintained conservatist fiscal policy during the crisis. As a result in 2010, thanks to an interim budget revision, the public deficit remained moderate and will likely stay that way in 2011. The authorities have pursued two objectives: limit spending to keep the fiscal balance stable and improve the country's infrastructure to attract foreign direct investment. In this context, the public debt will remain very limited, representing about 30% of GDP (far below the regional average). And IMF support (€400 million) will make it possible to run into debts at low interest rates.
After peaking at 13% in 2008, the current account deficit began to decline in 2009, a trend that continued in 2010. In 2011, supposing stable oil prices and the uninterrupted flow of expatriate transfers (nearly 20% of GDP), the current account deficit will likely widen slightly due to the acceleration of imports. Financing needs will only be partly covered by foreign direct investment. Local companies will thus remain highly vulnerable to foreign financing conditions (foreign debt in the private sector has surged 120% since 2005). The Central Bank is thus expected to continue to reduce domestic interest rates to facilitate local financing. But with the country's limited foreign exchange reserves, it will remain constrained by the risk of capital flight and depreciation of the Macedonian denar, albeit pegged de facto to the euro.
European Union membership blocked
After the last elections - legislative in 2008 and presidential in 2009- the conservatives (VMRO-DPMNE) formed a coalition with minority Albanian party (DUI) and the socialist party (SD). But the difficult dialogue among the political forces has delayed the opening of the European Union admission process. The dispute with Greece over the country's constitutional name remains moreover a major obstacle to negotiations with both the EU and NATO. And the latent ethnic tensions between Slavic-language-speaking Macedonians and the Albanian minority continue to pose problems. Although political stability has not been secured, the country has distinguished itself by the progress made on improving governance, especially combating corruption.
Strengths
- Prudent macroeconomic policies
- Relatively sound banking system
- Very moderate public indebtednessSupport of the IMF
- Key geographic position
Weaknesses
- External accounts imbalance; exports dependent on metal prices
- EU membership negotiations blocked because of Macedonia’s dispute with Greece
- Significant foreign debt, particularly in the private sector
- Very high unemployment rate (over 30%)
- Latent interethnic tensions