Macedonia Business Forecast Report

Longer-Term Growth Prospects Remain Healthy Although the 2009 recession throughout CEE will set the stage for a prolonged period of modest or even stagnant growth in many of the region's precarious economies, we believe that Macedonia's growth outlook remains fairly upbeat. For one, the banking sector has not built up the degree of leverage which has wreaked havoc with financial systems elsewhere in emerging Europe. Similarly, the private sector has not accumulated an enormous external debt load (with total foreign liabilities forecast to reach 50% of GDP, compared to over 100% in nearby Bulgaria) and as such, domestic demand will not be weighed down to the same degree by pervasive deleveraging and analogous balance sheet contraction, as is the case elsewhere in CEE. In addition, we believe that the prospect of EU membership over the long term will continue to provide an important policy anchor for successive governments going forward.

On July 10, the Macedonian parliament approved Prime Minister Nikola Gruevski's planned cabinet reshuffle - the first in the country since the VMRO-DPMNE-led coalition took office in 2006. Although Gruevski touted the reshuffled cabinet as better-qualified to address the economic challenges facing Macedonia, and while the elevation of the economy portfolio to DPM status is a positive sign, we caution that broader efforts at structural-economic reform could be slowed by the recession. Moreover, we continue to caution that the allure of both fiscal and political populism will be strong for Gruevski's government throughout 2009 and 2010, given the marked economic downturn and stalled EU/NATO accession.

Although the collapse in external demand has helped rein in CEE's bloated current account deficits during the first half of the year, Macedonia has so far bucked the trend. Indeed, according to the National Bank of Macedonia, the current account shortfall widened slightly to EUR569.2mn during H109 compared with EUR582.81mn for the same period a year earlier. As a result of the latest data, we believe that the structural adjustment to Macedonia's balance of payments has been delayed somewhat, with our full-year forecast for 2009 now unlikely to be met. We now, therefore, project a more marginal narrowing in the current account shortfall to EUR803mn this year, equivalent to 12.7% of GDP, though still marking an improvement from the 13.1% deficit of 2008.

According to the latest data provided by the State Statistical Office, the consumer price index fell 1.4% compared to the same month a year earlier (and down 0.3% month-on-month), surpassing the 1.3% fall seen the previous month. The key factor weighing on the index was the reduction in food prices, with the 'food and non-alcoholic beverage' component of the consumer price basket falling 1.7% year-on-year (y-o-y). In addition, substantial reductions were recorded in the transport, communication and recreation components, which fell 11.8%, 4.9% and 2.7% respectively. We also draw attention to the retail and producer price indices as reflecting the intensification of deflationary pressures. The retail price index fell 2.1% y-o-y in August (propelled by steep declines in industrial and agricultural goods prices), while producer prices slumped 9.8% over the same period.