Macedonian economic growth is likely to slow down to 1.6% in 2016, if the current political crisis continues, given its expected spillover effects on the economy, the central bank said on May 5. The baseline macroeconomic scenario, which is in line with the previous projections made in October 2015, foresees Macedonian economy to grow by 3.5% this year. 

Macedonian crisis has deepened following president Gjorge Ivanov’s decision on April 12 to pardon top politicians under criminal investigations, most of them from the ruling VMRO-DPMNE party, which sparked daily protests in Skopje and other cities in the country, dubbed “Colourful Revolution”.

If the current crisis persists, the slower growth of the disposable income would further restraint personal consumption, and would have a neutral effect on the economic growth, while in the baseline scenario this component was one of the main sources for the GDP growth, the central bank said in a statement.

However, the European Commission recently upgraded its 2016 projection for Macedonia’s GDP growth to 3.5% from the previous forecast of 3.3%, with the domestic demand expected to be the main driver of the growth. Macedonia posted a strong GDP growth of 3.7% in 2015. 

The confidence among potential foreign and domestic investors is expected to decrease and they can postpone their decisions to invest in the country, the central bank said.

If the crisis continues, the current account deficit is expected to widen to 2% of the projected GDP compared with 1.2% of GDP in the baseline projection.

In circumstances, where the lower domestic demand reduces import pressures and improves the trade balance, the deterioration of the current account deficit will result from the lower private transfers triggered by the expected tendency of people to keep money in foreign currency, the central bank said.

The higher current account deficit and the challenges for financing this gap could also affect the foreign exchange reserves, but their level is still sufficient to cope with unpredicted shocks.

Macedonia’s gross foreign reserves totaled nearly €2.27bn at end-March, 3.7% down from a year earlier, but up 0.6% m/m.

According to the central bank, the alternative scenario assumes the political crisis in Macedonia to be resolved by the end of this year and the possible effects on the economy to be gradually reduced in 2017.

In both scenarios, risks are associated with the external environment and with the uncertainty of the recovery pace of the global economy, especially the economy in European countries, the bank said.