Macedonia Business Forecast Report Q2 2008

Publication Date	April 2008
Publisher	Business Monitor
Product Type	Report
Pages	46
ISBN Number	1750-4600
Product Code	BMI01533

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Summary

Convergence Prospects Look Good

Following 2007's solid growth outturn of .1% and our forecast for 6.0% growth in 2008, we maintain that Macedonia's economic convergence is starting to unfold. Our forecast for robust economic growth through to 2012 is underpinned by the continued expansion in industrial output on the back of efforts to build capacity and streamline production. We still caution, however, that should eurozone growth slow further than we anticipate and external demand for Macedonian exports deteriorate substantially, Macedonian economic growth may underperform our expectations.

The recent bout of political conflict could not have come at a worse time for the Macedonian government, which has been preparing for the NATO summit due to be held in Bucharest April 2-4. Accession to NATO requires a stable government, which the Macedonians looked unlikely to deliver following the departure from government of minority coalition partner the Democratic Party of Albanians (DPA), on March 1 . Despite returning to the coalition 10 days later, we believe that the government still looks unstable. However, we maintain that the most significant threat to NATO accession is the ongoing dispute with Greece over Macedonia's name, which if unresolved will likely see Greece vetoing NATO membership.

We believe that the current account will continue to report a shortfall over our five-year forecast period, with a current account deficit of 0.13% of GDP expected in 2008, rising to 1.09% by 2009.

It will then follow a narrowing trend over the medium term, reaching 0.12% by 2012. Although the trade balance will remain in the red, we do not see these dynamics posing a problem to economic growth and the convergence process over the medium term. Negative net exports are partly attributable to the imports of raw materials used by industry to meet current demand, as well as imported capital goods used to expand capacity ready for future industrial expansion.

We affirm our view that Macedonia is close to realising the benefits of sustained investment in fixed capital and the substantial improvements to the regulatory environment (particularly the reduction in corporate taxes and success in reining in excessive red tape) in place since 2007. The potential for high-yielding, low-cost opportunities in Macedonia will continue to draw in greenfield investment over the long term. Foreign companies will further be attracted by the abundance of cheap labour (with a strong technical skill base), combined with the relative ease of employing foreign workers.

Content

Executive Summary
- Convergence Prospects Look Good
Chapter 1: Political outlook
- SWOT analysis
- BMI Political Risk Ratings
- Domestic Politics
- NATO Membership Looking Unlikely
- We believe that the chances of Macedonia securing NATO membership at the Bucharest summit look slim
- amid the ongoing dispute with Greece over Macedonia's official name, as well as the uncertainty surrounding
- coalition stability.
Chapter 2: economic outlook
- SWOT analysis
- BMI economic Risk Ratings
- Economic Activity
- Economic Growth To Reach 6.0% in 2008
- We affirm our view that sustained capital investments alongside significant improvements in the business
- environment, will be supportive of industrial expansion over the medium term.
- Balance of Payments
- Modest C/A Deficit Through To 2012
- We expect Macedonia to post current account deficits through our five-year forecast period.
- External Debt
- External debt dynamics To improve Further
- Though Macedonia's nominal gross external debt stock continued to edge upwards during Q307, we maintain
- our view that debt dynamics will remain favourable over the medium term.
- Unemployment outlook
- Substantial Labour Market Tightening Through To 2012
- We believe that Macedonia's strong growth prospects over the medium term will ensure that the demand for
- labour remains strong,
- Investment Climate
- Short-Term Pain, Long-Term Gain For equities
- Though Macedonian equities continue to look weak amid ongoing volatility on global financial markets, we
- maintain that stock prices will trade higher over the long term.
- Ratings outlook
- EU convergence To Push economic Ratings Higher
- While Macedonia's structural economic risk rating remains relatively low at 51.8, we believe that strong
- economic growth, combined with real convergence with the EU and the ensuing rise in living standards,
Chapter 3: Special Report
- Looking Beyond 2008
- The Future of The World, in Three acts
- US: The Rebalancing act
- Unwinding The imbalances
- We believe that a substantial, multi-year shift in the US external accounts is under way. A weak US dollar and
- subdued domestic consumption should lead to a narrowing in the US's structural current account deficit.
- China: What if We're all Wrong?
- our core Scenario For china
- We are retaining our positive headline growth projections for China across the forecast period to 2012, with
- our expectations of the continued success of the urbanisation process and export-driven growth model
- underpinning our assumptions.
- Japan: immigration Key To Long-Term Growth
- demographic Woes Portend Long-Term decline
- Immigration remains the only realistic way that Japan can overcome its long-term economic challenges.
Chapter 4: Business Environment
- SWOT analysis
- BMI Business environment Risk Ratings
- Introduction
- Infrastructure
- Market orientation
- Macedonia: Annual FDI Inflows
- Operational Risk
List of Tables
- Table: Government of The Republic of Macedonia (as of June 4 2007)
- Table: Macedonia, economic activity
- Table: Macedonia, Balance of Payments
- Table: Macedonia, Foreign debt
- Table: BMI Business and operational Risk Ratings
- Table: BMI Legal Framework Ratings