Population 2.066 million
GDP 10.198 US$ billion
@rating
country
Business climate
assessment
| 2010 | 2011 | 2012(e) | 2013(f) | |
|---|---|---|---|---|
|
GDP growth (%)
|
2.8 |
3.1 |
-0.5 |
1.5 |
|
Inflation (yearly average) (%)
|
1.6 |
3.9 |
3.4 |
3.5 |
|
Budget balance (% GDP)
|
-2.4 |
-2.5 |
-3.4 |
-3.8 |
|
Current account balance (% GDP)
|
-2.1 |
-2.7 |
-4 |
-6 |
|
Public debt (% GDP)
|
24.2 |
27.7 |
30.8 |
31 |
| (e) Estimate (f) Forecast | ||||
STRENGTHS
- Moderate public debt
- Low labour cost and a tax environment favourable to investment
- IMF and World Bank support
- Key geographic position
WEAKNESSES
- Very high unemployment (above 30%)
- Dependence on exports
- Significant debt of the non-financial private sector
- Negotiations for EU membership blocked because of dispute with Greece
Risk assessment
Weak economy dependent on the situation in Europe
Growth slowed significantly in 2012 due to weak domestic and, above all, external demand. The latter, mainly from the EU (over 50% of exports) was bit by the shrinking of European activity. In this context, Macedonian industrial production, strongly export-oriented (manufactured articles such as textiles) declined. Growth is likely to be constrained again in 2013 by the situation in Europe with the contribution of the trade balance expected to remain neutral. Nevertheless, growth is expected to increase thanks to a significant rebound in consumption, its key driver, linked to increased social transfers (50.7% of public spending). Industrial activity is also expected to benefit from job-creating foreign investment projects (car parts, cement, glass, foodstuffs, and pharmaceutical products). On the supply side, as in the past year, the dynamic sectors will remain those of services (especially transport and financial intermediation).
Worsening external accounts…
In 2012, the current account deficit deepened due to the concomitant fall in exports to the European Union and the price of metals (about a quarter of exports). In 2013, the trade deficit is expected to grow because of the rise in imported products linked to vigorous consumption, while exports are expected to stagnate. Income transfers from expatriate workers will be sustained (about 18% of GDP) and enable coverage of three-quarters of the trade deficit. Foreign direct investments look set to increase, covering half of the financing need and reflecting the country’s comparative advantages in the region: maintenance of a favourable tax environment and low labour costs. In this context, external debt is expected to grow further pushing up already high foreign debt (two thirds of GDP).
Moreover, pegging the denar to the Euro has enabled containment of inflationary pressures by limiting imported inflation. This is expected to continue in 2013. However, if the situation in Europe should worsen, pressures on the exchange rate could intensify. The Central Bank holds a satisfactory level of foreign exchange reserves but they are insufficient to contain the sharp depreciation of the Macedonian denar that such a risk scenario implies.
…as well as of public finances
The country has a rising budget deficit. This is linked to the fall in public revenues in a context of slowing activity and the government’s desire to keep taxes low. Moreover, spending remains high, driven by public investment in education and road, rail and energy infrastructures. In 2103, social transfers are expected to increase in order to stimulate consumption in a country where unemployment is approaching 30%. However, the government is likely to cut spending on health and culture, while the deficit is expected to deepen and in view of the limited development of the country’s public debt market, Macedonia is likely to resort to external funding, leading to a rise in external public debt.
Poor political stability and revival of ethnic tensions
The failure of negotiations for NATO accession (delayed till 2014) is provoking tensions in the coalition government formed by the VMRO-DPMNE (centre right) and the main Albanian party (DUI), formed in June 2011. The DUI blames this failure on the Prime Minister, Nikola Gruevski (of the VMRO-DPMNE) and is worried by the revival of interethnic tensions. Moreover, relations with Greece remain difficult since that country is still blocking negotiations for Macedonia to join the EU because of the dispute about Macedonia’s constitutional name. A draft agreement initiated by Greece in October 2012 could restart the discussions but, as the Greek government is prioritising management of the crisis, it is unlikely that the dispute will be resolved in 2013. In terms of governance, the country has made progress in fighting corruption.
