Macedonia: Risk Assessment
Country Risk Rating
Business Climate Rating
- Integrated into the German production chain
- Proximity to Central European factories
- Wage competitiveness
- Support from international donors
- High levels of immigrant workers’ remittances (19% of GDP)
- Denar pegged to the euro
- High level of structural unemployment and training shortfalls
- Large informal economy
- Inadequate transport infrastructures
- Significant indebtedness of private sector (93% of GDP at end 2014)
- Conflictual political landscape
- Tensions between the Slavic majority and the Albanian minority
Acceleration of Growth
The stabilization of the domestic political scene should put an end to two years of cyclical lows, and increase growth. Private investors, particularly from overseas, made cautious by the long political crisis, are expected to regain confidence. Public investment should retain its momentum with the construction of the motorway and rail infrastructure (corridor VIII between Albania and Bulgaria and Corridor X between Serbia and Greece) thanks to financing from the EIB and the EBRD. The industrial and construction sectors should benefit from this dynamic. Household consumption should remain strong, fostered by growth in jobs and immigrant workers’ remittances. Household credit should continue to be favored by accommodative monetary policy and the banking sector’s good health. Lastly, exports of car components (cables, electronic circuits), chemical products, plastics, textiles, construction materials, and food-grade glass will feel the benefits of the European economic upturn. However, given that imports of capital goods related to the recovery of investment will increase at the same time, the contribution of trade to growth is expected to be fairly low.
Slow Improvement of Public Accounts, but Significant Current Account Deficit
The August 2016 floods and the economic downturn halted the fiscal consolidation that is set to resume in 2018. Improvement will be slow. Revenues are burdened by tax evasion, the scale of the informal economy, and a single income and corporation tax rate of 10%. On top of this, with the aim of attracting and retaining foreign investment, these investors are offered 10-year tax exemptions and free access to public services. 80% of public expenditure concerns wages, pensions, social transfers, and debt interest, and offers little flexibility. The recurrent deficit and the sovereign guarantee of funds borrowed by public companies for the construction of infrastructures have led to significant and growing public debt, held at 69% by foreign creditors and denominated in euros, to which the local currency, the denar, is pegged.
The trade balance deficit is expected to remain high (18.8% of GDP in 2016). The increase in exports by foreign companies related to the development of their local production capacities and the recovery in the Eurozone will be offset by the increase in purchases of capital goods and consumer goods. Remittances from expatriate workers (16% of GDP), surpluses of services, and, to a lesser extent, spending by visitors from Turkey, Bulgaria, and Serbia should partially cover the trade deficit and the deficit of foreign investment revenues. In total, the current account deficit will remain covered by foreign net investments. The private sector is responsible for two-thirds of foreign debt (73.5% of GDP) particularly in connection with foreign investment. Its short-term share is only one fourth and is largely covered by foreign exchange reserves, which represent four months of imports.
A Disturbed Political Scene That May Put Off Investors
The early elections of December 2016 eventually led to the formation of a coalition government in May 2017, composed of the social democrats (SDSM) of the new Prime Minister Zoran Zaev, with 49 seats in Parliament out of 120, and of the parties representing the Albanian minority. This minority, which constitutes one-quarter of the population and is concentrated in the north and the west, obtained from its partner an extension of the use of Albanian to the entire country; beyond the areas where it exceeds 20% of the population. Although holding 51 seats and the support of the Macedonian president, the conservatives of VMRO-DPMNE, led by Nicola Gruevski, ultimately had to accept defeat after eleven years in power, as their traditional Albanian ally, the TUI, failed them. This put an end to a period of political turmoil that began in spring 2015, with the broadcasting of audio recordings implicating members of the previous government coalition in election corruption and fixing, followed by demonstrations by the Albanian community, during which 22 people died.
The country will continue to face several challenges: the strength of the government coalition, increased ethnic polarization of the society, and the process of the country’s accession to the European Union and NATO. On this last point, Greece has given its support to this dual accession, although it was opposed to it because it refused to see its neighbor be called Macedonia, a name that refers to a Greek region. This situation is leading to caution among investors. Whilst within the Industrial and Technology Development Zones (duty-free areas), foreign companies benefit from significant tax advantages and low labor costs, they are faced with a shortage of skilled labor, inadequate infrastructures, insufficient resources allocated to R&D, the slowness of internal payments and the legal system, as well as corruption. The local entrepreneurial fabric, which remains underdeveloped, derived little benefit from the business of foreign companies, the origin of the majority of exports.