Macedonia Business Forecast Report Q3 2009

Publication Date	July 2009
Publisher	Business Monitor
Product Type	Report
Pages	59
ISBN Number	1746-577X
Product Code	BMI01203

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Summary

The principal challenges facing the Macedonian economy in the remainder of 2009 and through 2010 will be global capital scarcity and weak external demand. We now forecast a real GDP contraction of 2.5% in 2009 followed by growth of 1.2% in 2010. As financial conditions remain extremely tight globally, the ability of Macedonian firms and consumers to tap external credit will concomitantly fall, and FDI inflows from the eurozone will suffer as foreign investors struggle. This will, in turn, have a serious negative impact on Macedonian gross fixed capital formation, household consumption, and government spending, with the latter likely to reduce a planned infrastructure stimulus package. Moreover, the eurozone recession will harm Macedonian exporters, although an even sharper contraction of imports should actually improve the net export position. This weak economic outlook will in turn modestly impact the country's political risk profile, likely weighing on the popularity of the government.

Macedonia's ruling, centre-right, VMRO-DPMNE-led coalition will start to come under pressure over 2009-2010, as unemployment mounts, real incomes stall, public services struggle, and access to credit shrinks. Moreover, the Social Democratic Union - the principal left-leaning opposition party - will be reinvigorated by the return of its nationally-respected founder, former President Branko Crvenkovski, to the party leadership. Nevertheless, we expect VMRO-DPMNE to remain Macedonia's most popular party, and expect its reform agenda to remain firmly in play through the medium term. However, we caution that Macedonia's political outlook will remain clouded by the 'name' dispute with Greece, which is set to stay unresolved - and therefore a barrier to EU and NATO accession - through the medium term. As both the Greek and Macedonian economies remain in recession, the allure of populism will be strong in both Skopje and Athens, and that may make compromise difficult.

Macedonia's balance of payments will remain the principal source of macroeconomic risk in the country through 2009-2010, as financial coverage of the current account deficit - which soared to 13.1% of GDP in 2008 - comes under strain. That said, while we believe that Skopje could well approach the IMF for financing assistance, we also note that an outright crisis is not our core scenario.

The banking sector will come under similar strain this year and next, as falling deposits lead to a contraction in lending - in turn harming the real economy - although again, an outright crisis is not our core scenario due to relatively benign leverage ratios. Finally, we expect Macedonia to experience deflation for much of the remainder of 2009 on the back of weak domestic demand, although inflation should be just positive by end-year due to base effects.

Macedonia's business environment will continue to improve through the medium term, and we expect the government to remain committed to its pro-EU reform agenda that has already delivered major improvements. That said, a recent ratings downgrade by Standard & Poor's will further compound the difficulty in accessing credit faced by firms operating in the country.

Content

Executive Summary
Scarce Finance The Key Challenge
Chapter 1: Political Outlook
- SWOT Analysis
- Bmi Political Risk Ratings
- Domestic Politics
- Economy, Opposition to Test Government
- The Return of Former President Branko Crvenkovski to The Leadership of Macedonia's Opposition Social Democratic
- Union Party (Sdsm), Coupled to The Looming Recession, Will Start to Weigh on The Popularity of The Vmro-Dpmne-LED Government in 2009 and 2010.
- Foreign Policy
- Recession to Complicate Tense Foreign Relations
- Macedonia's Relations with Greece Are Set to Remain Sour through The Medium Term, as Recession in Both Countries Raises The Appeal of Populist Nationalistic Posturing.
Chapter 2: Economic Outlook
- SWOT Analysis
- Bmi Economic Risk Ratings
- Economic Activity
- Financing Pressures to Deepen Recession
- Macedonia Is Heading for A Real Gdp Contraction of 2.5% in 2009, with Risks Weighted to The Downside, and Growth of Only 1.2% in 2010.
- Banking Sector
- Banking Sector Will Be Strained but Stable
- The Macedonian Banking System Will Experience A Marked Contraction in Overall Deposits in 2009, and This Will Force A Swift Reversal of High Recent Lending Growth.
- Balance of Payments
- Financing Strain to Drive Current Account Correction
- Macedonia's Current Account Deficit Is Set to Contract to 6.4% of Gdp in 2009 from 13.1% in 2008, despite A Further Widening of The Overall Shortfall in January-February.
- Monetary Policy
- Deflation Likely until End-Year
- Macedonia Is Likely to Undergo Consumer Price Deflation for Much of The Remainder of The Year, before Ticking Back into Just-Positive Cpi Growth of 0.3% Y-O-Y by End-Year on The Back of Low Base Effects.
- Regional Outlook: Banking Sector
- Real Sector Deterioration Is The Key Risk Now
- The Immediate Crisis Risks Facing The Central and Eastern European (Cee) Banking Sector in Q408 Have Subsided Markedly through H109, with The Stabilisation of Global Credit Markets Mitigating The Risks of Capital Flight in The Short Term.
- Regional Outlook: Economic Activity
- after The Crisis: Slow Recovery, Lower Trend Growth
- with First Quarter Real Gdp Growth Figures in Key Emerging Europe Economies Confirming That The Region Has Entered into Its Deepest Recession since The Post-Soviet Transition, We Reaffirm Our below-Consensus 2009 Regional Growth Forecast of -5.6%.
Chapter 3: 10-Year Forecast
- The Macedonian Economy to 2018
- Reform Agenda Will Generate Growth beyond Recession
- Macedonia's Reformist Trajectory Looks Set to Generate Robust Gdp Growth through to 2018 amid Steady Convergence to Eu Political and Economic Standards.
Chapter 4: Special Report
- The Outlook for Global Banking
- Tab Le: Loan-to-Deposit Rat Ios, Selec Ted States
- Tab Le: Loan Gr Owth (% Chg Y-O-Y), Selec Ted States
- Business Environment Rating Outlook
Chapter 5: Business Environment
- SWOT Analysis
- Bmi Business Environment Risk Ratings
- Business Environment Outlook
- Institutions
- Infrastructure
- Market Orientation
- Operational Risk
Chapter 6: BMI Global Assumptions
- Global Assumptions
List of Tables
- Table: Macedonia Political Overview
- Table: Economic Ac Tivity
- Table: Balance of Payments (Euro)
- Table: Monetary Policy
- Table: Emerg Ing Europe Growt H Forecasts
- Table : Macedonia Lon G-Te Rm Macroeconomic Forec Asts
- Table: Commercial Banking Business Environment Ratings, Selected States
- Table: Bmi Business and Operational Risk Ratings
- Table: Bmi Legal Framework Ratings
- Table: Labour Force Quali Ty
- Table: Europe, Fdi Annual Inflows
- Table: Bmi Trade Ratings
- Table: Top Export Destinations
- Table: Glo Bal Assumptions
- Table: Glo Bal & Regional Real Gdp Growth
- Table: Commodities