Macedonia

Macedonia, FYR: Macroeconomic Snapshot

1. Overview: The deterioration of the global economic and financial environment will impose a costly macroeconomic adjustment to the country, given the large C/A deficit and fixed exchange rate regime. Declining exports and remittances make it difficult for a significant reduce in the current account deficit, while at the same time foreign direct investment and other capital inflows are projected to slow in 2009. The remittances, which were equivalent to almost 15% of GDP in 2008, were 26% lower in the first two months of 2009. Macedonia has not yet received IMF assistance; Fitch suggests that Macedonia faces a "medium" external financing risk and may require IMF assistance. The unemployment rate stood at around 33% in 2008.

2. Growth Performance: Real GDP Growth was estimated at 5% for 2008.The Economist Intelligence Unit forecasts that real GDP will contract by 3% in 2009, reflecting the recession in Macedonia's main export markets along with the falling domestic demand. EUI expects a modest rebound in 2010, with GDP growth of 0.5%.

3. Balance of Payments: The C/A Deficit was 12.7% of GDP in 2008, compared to 7.2% in 2007, due to the worsening trade deficit and the reduced net inflows from private transfers. EUI is forecasting that the C/A deficit will narrow only moderately to 10% of GDP in 2009, as the economy is being affected by decreasing export volumes. Metals and textiles, both important exports for Macedonia, were hit hard by lower global commodity prices and the sharp decline in global trade in Q4 2008. In December 2008, S&P downgraded the country's foreign debt outlook from stable to negative, responding to the recent deterioration of external liquidity. The Macedonian economy is highly euroised with over half of loans and deposits denominated in or linked to foreign currency

4. Inflation-Monetary Policy: Average inflation was 8.3% for 2008, compared to 2.3% in 2007. This sharp increase should be attributed to higher food and energy prices. For 2009, inflation is expected to slow down to an average of around 1% (EIU). The Macedonian denar is de facto pegged to the Euro. The declining FDI and the slowing external borrowing is increasing the pressure on foreign exchange reserves. The intervention of the Central Bank in the foreign exchange market to support the peg, has led to a 21% fall in the stock of reserves over the Jan-May 2009 period.

5. Fiscal Position: The budget deficit averaged to less than 0.2% of GDP in the five years to 2008; the apparent deterioration in public finances will reverse this trend in 2009. In April 2009, the government initiated budget cuts in order to maintain the target deficit at 2.8% of GDP. Fitch projects deficit of 4.1% of GDP in 2009.

6. Business Environment: Macedonia’s rankings either improved or stayed steady for all available scored rankings, tracking closely with the averages of the SEE region. According to WEF Global Competitiveness Report, the three most problematic factors for doing business are inefficient government bureaucracy, access to financing and corruption.