Standard and Poor’s (S&P) rating agency has affirmed its long- and short-term foreign and local currency sovereign credit ratings on Macedonia at 'BB-/B' with stable outlook, the agency said on September 15.

The stable outlook reflects the balance between the risks from Macedonia's  rising public debt and remaining political uncertainty over the next year, and the country's favorable economic prospects.

"The rating could be raised if reforms directed toward higher broader-based economic growth led to a faster increase in income levels than in our base-case scenario, alongside improved effectiveness and accountability of public institutions and policymaking," the statement said.

However, the rating could be lowered if major political tensions return, impairing economic growth and foreign direct investment (FDI) inflows and undermining the country's longer-term prospects. Large fiscal slippages or off-budget activities could also lower the rating.

The ratings on Macedonia reflect S&P view of the country's relatively low income levels; comparatively weak checks and balances between state institutions, coupled with the still-fragile political environment; and limited monetary policy flexibility arising from the country's fixed-exchange-rate regime. 

The ratings are primarily supported by moderate, albeit rising, external and public debt levels.

S&P believes that the new coalition government led by the Social Democrats should support a gradual acceleration of economic growth following a contraction in output in the first half of 2017.

“In our view, the development should support improved confidence and a gradual acceleration in economic growth,” S&P said.

The Social Democrats came to power in coalition with two ethnic Albanian parties at the end of May, ending a political deadlock in the country following the inconclusive December 2016 election.

At the same time, S&P does not expect recent political changes to bring about a major shift in policy direction as the new government will likely remain focused on Macedonia's accession to Nato and the EU, but the progress is expected to be only gradual.

Radical change in Macedonia's fiscal stance is also not expected and its moderate budgetary deficits are expected to persist over the four-year forecast horizon.

The respite in political uncertainty should support an improvement in confidence and economic sentiment, the agency said.

“The political crisis has already taken a toll on the economy, with growth slowing to 2.4% in 2016 from almost 4% in 2015, followed by an output contraction in year-on-year terms in the first half of 2017 as some private and public investments were put on hold,” it said.

Growth is expected to strengthen in the second half of 2017, resulting in an overall output expansion of 1% in 2017.

It should accelerate further, averaging about 3% in 2018-2020 supported by rising investments, consumption and net exports, S&P forecast.

Macedonia's public debt burden remains moderate in a global context, the agency noted. The net general government debt remains comparatively low and it will continue to rise to 46% of GDP in 2020 from an estimated 38% of GDP at year-end 2016.

S&P forecast that Macedonia's external debt metrics will remain broadly stable over the next four years.

“We anticipate the current account deficit will gradually tighten and reach 2% of GDP in 2020, partly owing to the positive impact of the expansion of foreign companies in the free zones. We project these deficits will be financed by a combination of borrowing and net FDI inflows,” the statement said.