Economic Analysis
Macedonia, The Former Yugoslav Republic of

Macedonia, The Former Yugoslav Republic of

Population 2.071 million
GDP per capita 4870 US$
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Synthesis

major macro economic indicators

  2014 2015 2016 (e) 2017 (f)
GDP growth (%) 3.6 3.8 2.4 2.9
Inflation (yearly average) (%) -0.3 -0.3 -0.2 0.9
Budget balance (% GDP) -4.2 -3.5 -3.6 -3.4
Current account balance (% GDP) -0.5 -2.1 -2.5 -1.7
Public debt (% GDP) 38.0 38.0 40.0 42.0

 

(f) Forecast

STRENGTHS

  • Integrated into the German production chain
  • Proximity to Central European factories
  • Wage competitiveness
  • Support from international donors
  • High levels of expatriate workers' remittances (19% of GDP)
  • Peg of the denar to the euro

WEAKNESSES

  • High level of structural unemployment and training shortfalls
  • Large informal economy
  • Inadequate transport infrastructures
  • Significant indebtedness of private sector (93% of GDP at end of 2014)
  • Conflictual political landscape
  • Tensions between the Slavic majority and the Albanian minority
  • Negotiations to join the EU and NATO linked to dispute with Greece over the name of the country

RISK ASSESSMENT

Solid growth

Economic activity decelerated in 2016, under the effect of political instability which affected investors. Although reliant on political stabilisation, growth should increase in 2017. Its main driver should be public investment. In fact, it should  register an upturn, due to road infrastructure projects. Thus, the industrial and construction sectors should benefit from this dynamic. Furthermore, the farming sector should recover from flooding of the summer 2016.

Private consumption should retain its dynamism. It should be favoured by the rise in employment, even though the subsidised public jobs programmes could experience a slight downturn after the  recent early elections. Furthermore, inflation should rise slightly, in line with the moderate rise in commodities. In addition, corporate investment, particularly from foreign firms, will remain dependent on the normalisation of the political situation.

Finally, exports of car components (cables, electronic circuits), chemical products, plastics, textiles and clothing, construction materials, food grade glass, will feel the benefits of moderate growth in Europe. As imports will rise at the same time because of stronger domestic demand for equipment goods, the contribution from trade to growth should remain fairly weak.

 

Improvement in public and external accounts

In 2016, the government had to revise public expenditure upwards, because of the floods. Although fiscal consolidation is looming in 2017, the budget balance should remain in deficit. Revenues are burdened by tax evasion, the scale of the informal economy and a unique income and corporation tax rate of 10%. On top of this, with the aim of attracting in and retaining foreign investment, these investors are offered 10-year tax exemptions and free access to public services. 80% of public expenditure is for wages, pensions, social security transfers and debt interest and therefore offer little flexibility. The recurring deficit and loans contracted by nationalised companies for the construction of infrastructures are at the origin of the high and growing level of indebtedness, and mainly denominated in euros. Nevertheless, the government is committed to complying, as of the beginning of 2017, with extremely ambitious deficit and indebtedness ceilings of 3% and 60% respectively. However, the budget target seems difficult to achieve.

Although structurally in deficit, the trade balance should improve. Exports by foreign-owned companies located in the country should increase due to the consolidation of their production capacities and the upturn in demand from the eurozone, providing a counterweight to the rise in the value of imports (rise in the energy bill). Expatriate workers' remittances, the balance of services surplus and, to a lesser extent, spending by visitors from Turkey, Bulgaria and Serbia cover in part the trade deficit. Overall, the current account deficit should diminish in 2017.

 

A disturbed political context that may put off investors

Macedonia has been undergoing political instability since spring 2015, following the broadcasting of audio recordings involving members of the previous government coalition in corruption and election fixing, and demonstrations by the Albanian community, during which 22 people died. The United States and the European Union reacted quickly. A settlement was agreed in July 2015, including the appointment of a special prosecutor with a team and responsibility for investigating the recordings, the ending of the parliamentary boycott by the opposition and the holding of early elections. These took place in December 2016, but could not resolve the political crisis. Indeed, the Christian-Democratic party VRMO-DPMNE (in power since 2006) won the poll with a narrow margin, but failed to form a government, as they lacked of a coalition due to the retraction of their traditional Albanian ally, the DUI. The opposition, made up of the Social Democrats of the SDSM, who ranked second in the elections, obtained the support of the Albanian parties, and managed to form a majority coalition. However, the President has refused to mandate them to form a government (March 2017), on the ground that the backing from Albanian parties has been gained in exchange of officially acknowledging Albanian as the second language. Furthermore, the country will remain confronted with a number of challenges, including the migratory crisis, the increasing ethnic polarisation in the society and the process of joining the European Union and NATO. Athens refuses to accept its neighbour being called Macedonia, a name that is also that of a Greek region. This situation is leading to caution among investors. Whilst within the Industrial and Technology Development Zones (duty-free areas), foreign companies enjoy significant fiscal benefits and low labour costs, they are faced with a shortage of skilled labour, inadequate infrastructures, insufficient resources allocated to R&D, the slowness of internal payments and of the legal system, as well as corruption. The businesses of foreign companies, the origin of the majority of exports, hardly benefit to local entrepreneurial fabric which remains relatively underdeveloped.

 

Last update : March 2017

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