Fitch Ratings agency affirmed its long-term foreign- and local-currency issuer default ratings (IDRs) for Macedonia at 'BB' with negative outlooks on August 4. However, the rating agency lowered Macedonia's 2017 GDP growth forecast and warned the budget deficit is set to increase. 

Macedonia's ratings are supported by the country's credible monetary and macro-prudential policy, which has maintained longstanding stability of its exchange rate peg, supporting an environment of low inflation and stable economic growth.

The issue ratings on Macedonia's long-term senior unsecured foreign- and local-currency bonds have also been affirmed at 'BB', Fitch said in a statement.

Macedonia’s country ceiling has been affirmed at 'BB+' and the short-term foreign- and local-currency IDRs at 'B', while the senior unsecured short-term local currency issues have also been affirmed at 'B'.

However, Fitch said Macedonia’s GDP per capita is below the median of its 'BB' peers, and governance is a relative weakness.

The country’s negative outlook reflects Fitch's assessment that political risks for effective economic policy making and implementation, higher growth and progress towards EU accession remain, despite the formation of a new government.

Fitch said that there is the risk of disagreements between the governing Social Democratic Union of Macedonia (SDSM) and its ethnic Albanian coalition partners. In addition, the opposition VMRO-DPMNE, which is the largest political force in parliament could attempt to obstruct the new government's agenda. Local elections scheduled for October will represent an early test of the government's progress.

Fitch also revised down its 2017 real GDP forecast for Macedonia to 2.3% from 3.4%, six months ago as the political crisis negatively impacted growth in the first quarter of 2017.

Fitch projects Macedonia's economic growth to recover towards an average of 3.2% in the 2018-2019 period, in line with Macedonia's five-year average and the median growth rate of 'BB' category peers.

Macedonia's fiscal finances are currently in line with the median of its 'BB' peer group, but deterioration is forecast for 2017 as the new government's supplementary budget will increase public spending on social transfers, subsidies and minimum wages, despite targeting a lower deficit of 2.9% of GDP.

Fitch projects a general government deficit of 3.3% of GDP in 2017, up from 2.6% in 2016, as a result of lower tax revenues due to weaker economic activity, social expenditure pressures and the expected clearance of outstanding public sector arrears.

According to Fitch, the main risk factors that could trigger negative rating action are: re-emergence of political instability that adversely affects the economy and government policy direction, fiscal slippage, and a widening of external imbalances that exerts pressure on foreign currency reserves and the currency peg.

The country’s outlook could be stabilised if there is an easing in political uncertainty supporting a more stable policy environment as welll as the implementation of a credible medium-term consolidation programme consistent with a stabilisation of the public debt/GDP ratio.