Macedonia: investor’s darling or emerging pariah?

By bne IntelliNews July 20, 2015

Andrew MacDowall in Skopje -


The leader of the opposition has been charged with plotting a coup; the government of rigging elections, tapping phones, undermining the independence of the judiciary and the media. In May, 18 were killed as police clashed with ethnic Albanian guerrillas the state calls “terrorists”. The EU has had to step in to broker an unsatisfactory compromise to prevent a political crisis dating back more than a year from spiralling out of control, amid concerns about regional stability.

It’s not a great look for a country that was fairly recently trumpeting its investment potential in expensive advertisements in the international business press. Macedonia is ranked as having the best business climate in South East Europe (including Turkey and Greece) by the World Bank, and 30th in the world. Might all this evaporate?

Even the Minister for Foreign Investment  Vele Samak admits that these are worrying times for the country, with both investors and the government eyeing the situation with caution.

“We are keenly aware of how quickly fortunes can change if governments are unable to alleviate escalating risks, as happened in North Africa, Ukraine, and others,” Samak told bne IntelliNews. “The political crisis has been seen as a concern for both current and new potential investors. Companies already investing are focused on how this affects their ability to do business and if there are any risks for the favourable business regime. Some new investors have shown concerns and desire to re-evaluate the overall assessments of Macedonia, while others have played this down as a typical political posturing, not uncommon to what's seen across Europe. It's definitely too early to tell if these events [will] make a lasting negative impact.”

Samak adds that the Kumanovo clash is broadly seen as a one-off event. A high-profile foreign investor who spoke to bne IntelliNews on condition of confidentiality agreed, saying that there was little perception of a risk of regional conflagration, despite dire warnings of a new Balkan conflict.

“I doubt that the investors already present will pull out [because of the political situation],” the business consultant, who asked not to be named, told bne IntelliNews.“Since they are here already, I believe that they already put two and two together and that they have a pretty good idea about the political scene around here. However, it will surely repel potential newcomers.”

The government hopes that the agreement, signed on July 15, will reassure investors – and the rest of the world – that things can return to normal. The agreement involves conservative Prime Minister Nikola Gruevski, who is strongly implicated in the allegations of government corruption, stepping down in January, 100 days before early elections in April.

This is a pyrrhic victory for Zoran Zaev, leader of the ex-communist Social Democrats (SDSM) - who has been releasing tapes purporting to show Gruevski and other senior officials in all manner of wrongdoing. He now has to lead his party back into parliament after last year’s disputed vote, with opinion polls currently giving him little chance of succeeding Gruevski at the forthcoming early election.

Respectable performance

Away from the political crisis, the economic outlook is promising.

“Uninterrupted negotiations with several investors and their confirmation regarding the stability of their investment plans in Macedonia is proof of the success of this government’s efforts and actions during all these years,” Viktor Mizo, CEO of the Directorate for Technological Industrial Development Zones (TDIZs), told bne IntelliNews.

The macro figures certainly look good enough. Macedonia clocked up 3.2% growth in the first quarter of 2015, according to Erste Bank, in a report published two days before the EU deal. Down from a stellar 3.8% in 2014, but still a respectable performance for a country entering a serious political crisis.

Last year showed an acceleration of a strong rebound from the 2012 recession – a double dip after the 2009 drop. Investment rose 13.5% following a sharp decline in 2013. Exports are now 40% above their pre-crisis level, following a 35% plunge.

With a deficit hovering around 3% and debt likely to push towards 50% of GDP, Macedonia isn’t in perfect fiscal shape, but it is steadier than neighbours such as Croatia, Serbia and Montenegro. Finally, FDI has regularly topped 3% of GDP.

Noting buoyant domestic demand with promises of public investment as drivers, topped up with “vibrant” exports, Erste forecasts steady 3-4% growth in the medium term, while acknowledging downsides from the political crisis and Greece – an important export market and source of remittances. “The inward FDI outlook remains, in our view, sound amid continuous efforts to attract fresh FDI via promoting a business-friendly environment and expanding special economic zones,” the bank said.

The investor, however, is sceptical. “I had a meeting with the wider business community recently, and the conclusion is that people will postpone investment until the election,” he said.  “There’s unpredictability over future tax regimes, how TDIZs will be managed, how efficient the government will be.”

While the TDIZ chief Mizo admits that some investors have “slightly prolonged” their plans to invest in Macedonia, he says that the fundamental benefits of investing in Macedonia have not changed. Samak identifies these as low operating costs, a stable and business-friendly operating environment, and a workforce “adaptable to modern manufacturing demands”.

He says that wages are 20% to 50% lower than other countries in Eastern Europe for comparable skill sets, while taxes are flat at 10% (a figure that does not take account of some levies; the international investor says that the effective tax rate is more like 30-35%). “In many cases, global companies have benchmarked Macedonia's overall cost competitiveness to that of manufacturing in China, but with the proximity to European markets,” Samak says.

Within the special economic zones, advantages include 10-year holidays on profit and personal income tax, no property or municipal taxes, no construction permit fees, and zero value-added tax or customs duties for equipment and machinery. In addition, subsidies of up to $550,000 are available for the development of buildings, as are grants for “job creation” and training.

Barking up the wrong tree

Samak has a fairly impressive list of investors. Since arriving in 2012, Germany’s Draxlmaier, Kromberg & Schubert, and Belgium’s Van-Hool have made total investments of $100m, employing around 8,000 people – in Van Hool’s case, the first investment in production outside Belgium. The following year, British chemical company Johnson Matthey doubled its capacity in Macedonia and has since invested $185m; it is now the country’s largest exporter, racking up $1.1bn in 2014. Johnson Controls opened a new car seat factory, its second plant in the country, in 2014, with investments to date totalling $20m and 1,600 jobs created, Mizo says.

Thirteen new investments were announced by multinationals in free zones in 2014, with companies from the US and Germany particularly active; thousands more jobs will be created by tens of millions of dollars invested. Often investors already present in the region expand by opening new plants in Macedonia.

These investments are despite a small domestic market, a lack of coastline, and there being minimal state-owned enterprises left to privatise, Mizo says, noting what he considers Macedonia’s downsides. (He notes political stability as a positive.)

But not all are convinced by the government’s schtick, saying that the model is based on low wages (as little as €200-250 a month in the provinces) and tax breaks that mean too little feeds back into Macedonia’s coffers. The FEZs in particular come in for some criticism; they have generated jobs, but not necessarily adding value to the broader economy.  For instance, the business consultant says that the country has been “barking up the wrong tree” by focusing on manufacturing rather than services.

“There has been some success with the zones, which have provided islands of new foreign investment taking advantage of extremely generous tax breaks,” William Bartlett, an expert on the political economy of South East Europe at the London School of Economics, told bne IntelliNews. “It seems these have attracted new investors that have contributed to the reduction in unemployment (albeit from astronomical levels). However, they do not appear to have many linkages or spillovers to the local economy, so in that respect may not represent the engine of growth that is needed in Macedonia and in the wider region more generally.”

The international investor is considerably more scathing.  “It makes sense to invest in free zones, but Macedonia is your FDI on what are technically extraterritorial zones. If it’s looking for the sort of companies that will build an economy and contribute tax, it will struggle to compete.”

He adds that some workers are being paid below a living wage, raising ethical questions. “If you want super cheap labour, that’s fine, but who would be proud of that? Companies would rather have a sweatshop in China. If not, costs are otherwise not that much lower than elsewhere in the region.”

Nonetheless, he and counterparts continue to invest in the country now that they are installed. As Macedonians drift off for their summer holidays, the feeling is that the heat of the political crisis won’t be the “be all and end all” of Macedonia. Looking forward, electorally Macedonia is between “a rock and a hard place”, and he hopes for a fragmented coalition with technocratic ministers to prevent either major party consolidating a grip on the country.

“The business community is terrified that Zaev will come in, he’s a disaster. The SDSM don’t have a great economic record. They need someone who comes in on a strong anti-corruption ticket and is serious about it. But the reputation of the Gruevski government is so badly damaged, and Macedonia needs to show that it cares about that, or investors will get the impression Macedonia doesn’t care about corruption, which is extraordinarily problematic.”



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