As Macedonia’s centre-left Social Democrats prepare to form their first new government after more than a decade in opposition, investors are anxiously awaiting more news on the policy agenda of the party’s leader Zoran Zaev - Macedonia’s next prime minister - and the composition of his cabinet. 

The conservative VMRO-DPMNE government, in power since 2006, made attracting FDI a priority, even though its generous incentives to foreign companies did not produce huge volumes of investment. More recently, however, VMRO’s record has been tarnished by the lengthy period of political crisis at the end of its term in office, accompanied by soaring public debt. 

Investors are now hoping Zaev’s new government will manage to maintain stability, as well as restoring fiscal discipline and transparency, and fulfilling its promise to reduce political influence on businesses. However, these are tough tasks for a coalition made up of four parties that have never worked together in office, and a government that will be under constant pressure from VMRO, which hopes to return to power as soon as possible. 

Despite this, international bondholders are not discouraged by recent political developments in Macedonia and welcome the steps being taken by the Social Democrats and three parties representing the ethnic Albanian minority to form a new government. The SDSM is expected to announce the new government’s composition early in the week starting May 29, after Zaev was finally given a mandate by President Gjorge Ivanov on May 17. The new coalition will have 67 seats in the 120-seat parliament.

However, investor confidence is not likely to be fully restored until the cabinet starts implementing comprehensive reforms and reestablishes the rule of law. Both bondholders and local analysts have recommend that the new government focus on fiscal discipline and keeping spending under control.

“As the political crisis slid into social unrest and policy paralysis we started to see its negative impact on credit ratings, FDI, economic growth and reform appetite,” Sorin Pirau, portfolio manager and economist at Danske Bank, told bne IntelliNews.

“Therefore we welcome the recent developments indicating that a new coalition will be in place soon, and we hope that they will have the will to undertake the necessary reforms in order to bring [Macedonia] back on the Euro-Atlantic path, improve governance and rule of law, and overhaul key institutions like the judiciary,” Pirau said.

Pirau was in Skopje in mid-May on a fact-finding mission to scan the situation on the ground and assess the investment outlook for Macedonian Eurobonds.

Danske Bank is a fixed-income investor which participated in all three recent Eurobond issues in Macedonia - in 2014, 2015 and 2016 - and as such it has been following Macedonia closely over the last couple of years.

Macedonia issued €500mn, €270mn and €450mn in 2014, 2015 and 2016 respectively. The interim finance ministry was also mulling plans to issue a new Eurobond in the fourth quarter of this year to repay maturing debts, but as the new government will be in place soon the issue is uncertain. The SDSM, when it was in opposition, tried to block the 2016 Eurobonds, questioning the legality of the issue and accusing the VMRO-DPMNE government of borrowing excessively to fund its spending. Currently Macedonia is rated BB-/stable by Standard & Poor’s (S&P) and BB/negative by Fitch. 

Pirau believes that before deciding to return to international bond markets and issue a Eurobond, the new government needs to present its economic philosophy and lay out a credible medium-term fiscal consolidation plan in order to reassure investors that the rise in public debt will be contained.

“Since the new coalition is untested, investors may be sceptical at first, but if the government proves it is committed to these confidence building measures, borrowing costs should gradually decrease,” the Danske Bank portfolio manager said.

Pirau stressed that Macedonia still presents a compelling story from a fixed-income perspective and bondholders will continue to stay engaged as long as the country is seen to be moving in the right direction.

Indeed foreign investors are generally positive about the formation of the new government.

“People believe the new government will be more transparent and more friendly towards the EU and Nato,” an unnamed official from a foreign company on a visit to Macedonia told bne IntelliNews.

New government to focus on economy

Zaev, 42, an economist, was an MP from 2003 to 2005, then mayor of the eastern town of Strumica from 2005 until the beginning of 2017. Zaev was elected SDSM leader in June 2013 after becoming the party's vice president in 2008.

While Zaev has described himself as a businessman, there is little information about his career before entering politics, though his close family members are owners of several successful local firms engaged in trade and construction. 

Zaev only joined the SDSM in 2006, the year VMRO took office. However, the SDSM was in power from 1992 to 1998 and from 2002 to 2006, and some of its members including Radmila Sekerinska, who probably will get a ministerial post, have government experience, as do members of one of its coalition partners, the ethnic Albanian Democratic Union for Integration (DUI).

The SDSM has already drafted an ambitious government programme for 2017 to 2020, whose focal point is economic development, better living standards and support for local companies.

An official from the SDSM press office told bne IntelliNews that the SDSM and its ethnic Albanian partners will reveal the new government very soon. Zaev has said it will happen early next week.

“Talks are focused on principles and ways how the coalition will function. So far there were no problems in the negotiations,” the party spokesperson said on May 23.

One of the goals of the SDSM-led government will be to liberate businesses from political influence and allow domestic firms to invest in Macedonia's free industrial zones, which so far have been mostly occupied by foreign investors. Local businesspeople are hopeful that conditions for doing business will improve under the new government.

FDI in Macedonia soared by 65.4% y/y to €358.5mn in 2016, but the figure is still considered to be low, given that the previous government put a lot of effort and money into attracting foreigners to invest. Some experts think that the new government should start by assessing how much the FDI received so far has actually benefitted the country.

The previous government led by VMRO created a number of free zones, attracting a lot of foreign companies mainly from the automotive industry, offering them tax incentives and other benefits. The biggest one is Bunardzik zone, which is a home of big companies, such as Johnson Matthey, Johnson Controls and Van Hool. However, workers at the zones say the biggest beneficiaries are the foreign companies, while they work hard for low salaries even by Macedonian standards. 

On the other hand, local small firms are experiencing other difficulties such as the tax burden, delayed payment from government institutions and an unfriendly business environment. Many have decided to close their businesses as they were unprofitable.

Macedonia has one of the highest jobless rates in Europe, 23.7% at end of 2016. Currently the net average wage is about MKD22,445 (€365) while the poverty rate is around 21%.

The SDSM-led government now plans to offer a series of incentives for local firms and to allocate €22mn for active measures for creating new jobs, raising the amount available to €33mn by the end of the four-year plan. The aim is also to create 16,000 new jobs annually, to increase the average wage to MKD30,000 by the end of the mandate, to introduce a minimal wage of MKD16,000 and to lower the poverty rate to 16% by 2020.

The new government will also work to improve the efficiency of Macedonian institutions, to provide fiscal transparency as well as to introduce a just tax system.

Personal income tax, which is now flat at 10%, is planned to be increased to 18% for high earners. The SDSM-led government plans to develop the IT sector by reducing the income tax for IT firms to just 5%.

The Social Democrats have pledged investments in road and railway infrastructure, one of the key demands of foreign investors. One of the most ambitious plans is to draft a 10-year investment scheme, worth €3bn, for the construction of 600km of motorways and other regional roads. 

In the energy sector, the government plans to lower energy imports and to rely on better energy efficiency.

Pledges in the energy segment include taking action to connect Macedonia to the Trans Adriatic Pipeline (TAP) gas project that will bring Azerbaijani gas to Europe via Greece and Albania, as well as to gas connections with Greece and Bulgaria.

The fight against the crime and corruption, reforms to the judicial system and stability of the pension system are among the other priorities of the next government. The International Monetary Fund (IMF) has raised the issue of the lack of money in the state pension fund.

Fiscal transparency and good governance needed

The previous government was harshly criticised for spending over €700mn to refurbish the capital with baroque-style façades and put up numerous statues and monuments. Macedonia’s foreign debt has been constantly rising since 2007, but began to increase rapidly as of the beginning of 2016 mostly due to the €450mn Eurobond issue sold in July 2016, reaching €7.25bn at end of last year.

The next steps of the new government should be restoring fiscal discipline and transparency as well as careful or no changes in the public finance system in the next two years, Marjan Nikolov, president of the Skopje-based Centre for Economic Analyses (CEA) told bne IntelliNews via e-mail.

He recommended that in the next three months, the finance ministry should revise the budget, publish two-weekly or monthly budget plans and reports for budget implementation, establish control over the government debt and to reassess capital projects and public procurement systems.

According to Nikolov, whenever the government wants to borrow more money than initially planned, it should transparently explain how it will be spent.

“The government should also undertake additional measures, which should be launched in the first three months of ruling - to improve fiscal transparency and good governing, in cooperation with NGOs and experts,” Nikolov said.

EU, Nato to be strategic goals

The new government also plans to set European Union and Nato membership as strategic goals after Macedonia’s accession path to both organisations has been stalled for years. 

Macedonia has been an EU candidate country since 2005, when the SDSM was last in power, but the “name dispute” with Greece has been blocking the country’s attempts to join the union. Macedonia has also failed to join Nato in 2008 due to the Greek obstruction.

The country has received eight recommendations to start EU accession talks. The last one, given in November 2016 was conditional on credible elections in December and the implementation of reform priorities. However, the recommendation will be meaningless unless Macedonia manages to resolve the dispute with Greece.

The EU is sceptical about the resolution of this complex issue, but the SDSM believes that Macedonia might start the EU accession talks by the end of 2017 with a compromise solution. Zaev has said optimistically that Macedonia will become the 30th Nato member following the accession of Montenegro this June.

Macedonia became a member of the United Nations under the temporary name FYROM in 1993 and this abbreviation is also used by international organisations such as the EU and Nato. However, for Macedonians, changing the country’s name is a painful issue. 

“Maybe this political reality is unacceptable for the most part of the population, but if our strategic priorities are the EU and Nato (which is supported by 70% of citizens) we must be ready for a compromise,” Marko Trosanovski, president of the Skopje-based Institute for Democracy (IDSCS), noted.

Trosanovski confirmed that the key for the EU accession is the solution of the name dispute with Greece. “In relation to this dispute, the new government should refrain from inflammatory rhetoric and the same should be done by Greece in aim the two countries to find a compromise, which should be decided in a referendum,” he said.

Resolving the name dispute would require making difficult compromises particularly on the Macedonian side. Athens is not willing to accept the accession of Macedonia under its constitutional name, but would prefer a complex name that differentiates it from the northern Greek province of the same name. On the other hand, Macedonians fear that changing the country’s name would threaten Macedonians’ national identity.

The SDSM was cautious in its programme, saying that it will not allow changes to the national or language identity of Macedonians or other ethnicities, but said nothing about the name issue. Previous proposals included names like Northern or Vardar Macedonia. Zaev has said that any changes to the country’s name, if agreed with Greece, will be put to the vote in a referendum. 

However, the name dispute is not the only issue holding Macedonia back from EU accession. According to Trosanovski, the delayed EU accession is also related to the country’s failure to implement urgent reform priorities.

“If the new government will be committed to implement these reforms, we will have strong arguments, so the EU members should press Greece to accept the start of negotiations (with Macedonia) even under the temporary name FYROM,” Trosanovski said.

Some foreign investors and analysts also believe that the EU should have bigger role in Macedonia – in the EU accession process and resolving internal conflicts, which in turn are emerging as a result of the country’s neglect by Brussels. Macedonia has been waiting for too long in front of the EU’s doors.

Stable future 

The crisis in Macedonia started in 2015 with the wiretapping scandal, which broke when Zaev released a series of illegally recorded conversations that revealed high-level crime among VMRO officials. The crisis continued with mass protests by the opposition, leading to a snap general election in December 2016. This only deepened the crisis as the results were extremely close, and culminated at end-April when a group of demonstrators close to VMRO stormed the parliament. Around 100 people were injured in the incident including the SDSM leader and other MPs.

While this appeared to be a last ditch effort to present the formation of a new government, which is now going ahead, it is unclear how long the SDSM and its coalition partners will manage to stay in power and how effective their government will be. 

VMRO is pressing for another snap election to be hold together with the local elections, possibly in October. The party has said it will closely watch the moves of the new government and will respond fiercely if guarantees given by Zaev for keeping the unitary character of the country are broken. 

Fears of the possible federalisation of the country surfaced following the publication of the ethnic Albanian post-election platform, which seeks greater rights for ethnic Albanians, including making the whole of the country bilingual, which was strongly opposed by VMRO. However, DUI leader Ali Ahmeti said recently that only fragments of the ethnic Albanian platform will be part of the new government programme, those which relate to the EU and Nato accession. Other sensitive issues will only be open for discussion.

The first major test for the new government will come by the end of June, when it will have to try to extend the mandate of the Special Prosecution Office (SPO). The SPO was set up in 2015 to probe high-level crime, and already launched a series of investigations including against former Prime Minister and VMRO-DPMNE leader Nikola Gruevski. The SPO needs an extension of its deadline for filing indictments, which will expire at end of June. This will require a two-thirds majority vote in the parliament, which means support from VMRO MPs is needed; it is still unclear how things will unfold in that direction.

Ardita Abazi Imeri, Programme Coordinator for EU acquis and sector policy at the Skopje-based European Policy Institute, told bne IntelliNews that any further tensions in Macedonia could only deepen the gap between politicians and citizens and the biggest loser will be the state.

On a more positive note, if citizens start to sense benefits from the SDSM's rule, they will most likely be more confident to support the new government further.