Standard & Poor’s (S&P) Global Ratings affirmed on March 16 its 'BB-/B' long- and short-term foreign and local currency sovereign credit ratings on Macedonia, keeping the outlook stable but warning that the ratings could be lowered if major political tensions return.
The stable outlook reflects the balance between the risks from Macedonia's rising public debt and remaining political uncertainty over the next 12 months, and the country's favourable economic prospects.
“[T]he ratings could be lowered if major political tensions returned, impairing growth and foreign direct investment (FDI) inflows and undermining the country's longer-term growth prospects,” S&P said in a statement.
S&P could also lower the ratings if large fiscal slippages or off-budget activities were to call into question the sustainability of Macedonia's public debt, raise the sovereign's borrowing costs, and substantially increase its external obligations, given the constraints of the denar-euro pegged regime.
The agency could raise Macedonia’s ratings "if reforms directed toward higher 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 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 and favourable growth potential.
Nevertheless, downside risks to policy remain, including from the administration's narrow parliamentary majority and the lack of clear fiscal consolidation path.
S&P said that political stability has improved over the last year in Macedonia, but the governing coalition still commands only a slim majority of slightly over 60 MPs in the 120-seat parliament.
Previously, Macedonia endured a long-lasting period of volatility, culminating in early elections at the end of 2016, and a subsequent parliamentary gridlock. The new government, which came to power in May 2017, is led by the Social Democratic Union for Macedonia (SDSM) in coalition with the ethnic Albanian Democratic Union for Integration (DUI), which has a total of 60 MPs, but is supported by several other MPs.
More recently there has been some progress in resolving the name dispute with Greece, but it is not clear if the final deal will mean that Macedonia's constitution has to be amended, and how the required parliamentary majority for that will be reached, S&P noted.
S&P also noted as positive the government's efforts towards expediting the accession process to Nato and EU. Closely related to this is the so called 3-6-9 plan, adopted by the government, which outlines a set of important reforms, including in the areas of the judiciary and public administration. In addition, reforms to enhance the transparency of public finances and procurement procedures are planned.
On the negative side, although it appears to have reduced, the possibility of tensions between Macedonians and ethnic Albanians remains in relation to the language law. The law was passed on March 14, but so far the president has refused to sign it.
In terms of the economy, GDP growth rates are expected to gradually accelerate toward 3% in 2019, after stagnation in 2017. They will be primarily supported by recovering investments both in the private and the public sector, following improved political stability.
Macedonia's recent episodes of political volatility have taken a toll on the economy. In 2016, growth slowed to 2.9% from 3.9% in 2015 and output stagnated in 2017. Macedonia posted economic growth of 1.2% in the fourth quarter of 2017
The rating agency believes that the economy's long-term growth prospects could benefit from the expansion of free economic zones and their better integration into the local economy by using local suppliers.
"We believe that while Macedonia's net general government debt remains comparatively low, it will continue to rise to 47% of GDP in 2021 from an estimated 40% of GDP at year-end 2017", it said.
Last year, Macedonain authorities increased their borrowing in the domestic market, but they have also recently issued a €500mn Eurobond at a historically low interest rate, benefiting from the European Central Bank's loose monetary policy.
S&P believes the favourable terms have also been aided by the improved domestic political stability. In the future, the government plans to maintain a regular presence on international financial markets.
With the public sector increasingly borrowing abroad, the Macedonian economy's external debt has been rising, despite some deleveraging in the banking sector. In 2017, S&P estimates that gross external debt, net of liquid financial and public-sector assets, increased to about 33% of current account receipts.
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 1.7% of GDP in 2021, partly owing to the positiveimpact of the expansion of foreign companies in the free economic zones," S&P said.
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