Fitch Ratings said on August 19 it has downgraded Macedonia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) to 'BB' from 'BB+', with negative outlook due to the unresolved political crisis and its consequences for the economy.

Macedonia's political crisis started following the emergence of major corruption allegations in February 2015. The implementation of the Przino agreement brokered by the EU in July last year failed after the unsuccessful attempts to hold early election in April and June this year. The timing of Macedonia's elections is still unclear. The ongoing crisis has already hit investment, with a negative effect on economic growth.

The issue ratings on Macedonia's long-term senior unsecured foreign and local currency bonds have also been downgraded to 'BB' from 'BB+', Fitch said in a statement on August 19.

The Country Ceiling has been lowered to 'BB+' from 'BBB-', while the Short-Term Foreign Currency and Local Currency IDRs have been affirmed at 'B'. The issue ratings on Macedonia's short-term senior unsecured local currency bond have been affirmed at 'B'. 

Fitch said that in July, the main political parties in Macedonia, with EU and US mediation, made some progress on agreeing the conditions for snap elections and setting an election date but it remains uncertain whether the vote will actually take place, and if so, whether it will lead to the stabilisation of the political situation.

Fitch noted that the political crisis has started to adversely affect the economy as the country’s real GDP growth slowed sharply to 2% y/y in Q1 from 3.7% in 2015, dragged down by a large contraction in investment activity, likely affected by the uncertain political environment.

“We have revised our real GDP growth forecast for 2016 to 2.5%, from 3.6% previously,” Fitch said.

It added that the forecast is in line with Macedonia's five-year average growth, but it is below the 3.5% five-year average of the 'BB' median.

Fitch expects the Macedonian economy to recover to 3.4% in 2017 based on a recovery in investment activity, but warned that the risk of a deeper political crisis could negatively impact FDI inflows, which is a key driver of Macedonia's economic model.

Fitch's forecast for Macedonian budget deficit gap in 2016 is 3.8% of GDP, reflecting the expectation of higher than planned expenditures related to large investment projects and costs associated with the political and migrant crises, as well as the recent floods.

Meanwhile the government has approved a new budget revision setting the budget gap target at 4% of GDP and sent it to the parliament for approval, broadcaster 24vesti reported on August 20.

Fitch expects Macedonia's current account deficit in 2016 to be moderate, at 1.9% of GDP.