F.Y.R. of Macedonia Economic Analysis

March 2011 | By Dimitrios Shistohis

POLITICAL RISK - Short-Term Risk Rising

Prime Minister Nikola Gruevski said in February that he and his VMRO-DPMNE-led coalition were ready for early elections. The situation surrounding the call for a new vote has highlighted major weaknesses in Macedonia's democratic institutions, especially with regard to political dialogue. The election announcement came soon after opposition parties, led by the Social Democrats (SDSM), decided to walk out of parliament in response to the freezing of the assets of private TV network A1. The government said the block was imposed due to an investigation into tax fraud, while opposition parties claimed it was a politically motivated attack against media critical of the regime.

Macedonia's short-term political risk rating is 58.1.

 RISK ECONOMIC- Fiscal Discipline Ahead

According to latest Ministry of Finance data, the government was on track to meet its budget deficit target of 2.5% of GDP in 2010. After the first nine months of the year, the general government deficit was estimated to stand at 1.3% of GDP, helped by a 3.3% y-o-y rise in central government revenues (which account for the majority of overall budget receipts). Expenditure by the central government remained relatively modest through the first nine months of the year, rising just 2.9% y-o-y. We retain our own forecast for a general government budget deficit equal to 2.6% of GDP, though acknowledge that the final figure could be marginally smaller than this.

Our short-term economic risk rating for Macedonia is 41.5 this month.

BUSINESS ENVIRONMENT - Foreign Liabilities No Major Threat For Now

We expect gross external debt to rise by an average 10% per year in 2011 and 2012 as the government invests in infrastructure according to its 2011-2013 pre-accession programme. Foreign debt as a percentage of GDP will rise to 72.4% by the end of that period. This marks a significant increase from the 56.6% level registered at end-2009, though we expect the ratio to stabilise in the medium term as headline growth rates gradually return to pre-crisis levels. A strong credit rating (Fitch assigns Macedonia a BB+ sovereign credit rating, one step below investment grade) and slowly improving market conditions should help contain borrowing costs, and we do not see any major risks to Macedonia's ability (or willingness) to pay its foreign obligations.

Macedonia scores 54.4 out of 100 in our business environment rating.

Source BMI