Macedonia Business Forecast Report Q2 2013 - New Report Available

Core Views

Macedonia's recent political deadlock still threatens to undermine the country's policy-making process and could become a significant setback to Skopje's EU accession hopes. Although we believe that Brussels will remain committed to further integration of the Balkan country, with the EU in a bid to prevent major political instability, we believe that some permanent damage has been done and have accordingly downgraded our political risk ratings for the country.

Macedonia's economy will undergo a moderate recovery over the next few years following a disappointing 2012. However, scope for robust growth over the coming years is firmly limited by anaemic growth in the eurozone and obstacles to Macedonia's further integration with the EU.

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We expect Macedonia's central government budget deficit to begin narrowing this year as economic activity picks up gradually and government spending is capped by a divided legislature. We caution, however, that demand for early elections and a tendency to overestimate revenues in the annual budget present risks to this view.

Major Forecast Changes

We have lowered our 2014 real GDP growth forecast for Macedonia to 2.8% from 3.4% previously, and see lower growth in 2015 at 2.9% from our previous projection of 4.7% growth.

We have revised up our current account deficit forecast for Macedonia from 3.3% of GDP to 4.3% in 2013, but see the shortfall peaking at 4.8% of GDP in 2014, down from our previous expectations for a 5.6% of GDP deficit next year.

Key Risks To Outlook

Fiscal austerity across Europe threatens to permanently starve Macedonia's economy of external demand, which would lead to a sharp decline in fixed investment levels and decimating any remaining competitiveness of the export sector. With little to provide a boost to domestic demand, we may be overestimating the ability for the Macedonian economy to bounce back following a disappointing 2012.

The government has shown a tendency to overestimate revenues in its budgets, which could lead to a more expansionary fiscal policy than current economic conditions would warrant. Although this could see the deficit widen sharply, we note that expenditures have traditionally been adjusted to account for the lower-than-expected revenues in previous years.

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