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Macedonia Country Risk Report Q2 2016

Macedonia Country Risk Report Q2 2016

Core Views Structural reforms and a competitive manufacturing export sector will continue to drive robust real GDP growth in Macedonia over the coming decade, which will be further supported by a strengthening household sector. However, heightened political uncertainty and shifting demographic trends will restrict potential GDP growth and result in a deceleration by the end of our forecast period. Macedonia’s political stability will continue to be tested even after a last-minute deal was struck to postpone from April 24 to June 5 an upcoming parliamentary election, which the opposition had threatened to boycott. Major Forecast Changes We have raised our real GDP growth forecast from 2.8% to 3.0% for 2016, but now forecast deceleration to 2.6% in 2017, having previously projected 3.1% real GDP growth. Our current account deficit forecasts for Macedonia have been revised from 0.1% of GDP to 2.0% of GDP for 2016 and 2017 on account of shifting external dynamics since Q415.


Executive Summary
Core Views
Major Forecast Changes
Key Risks
Chapter 1: Economic Outlook
SWOT Analysis
BMI Economic Risk Index
Economic Growth Outlook
Slower Growth Amid Softer Eurozone Manufacturing Activity
Declining activity in Germany's manufacturing sector and heightened levels of political uncertainty in Macedonia will see economic
growth decelerate in the next two years. Strong domestic demand, however, will keep private consumption growth elevated and return
the economy to stronger real GDP growth rate from 2018 onwards.
GDP By Expenditure Outlook
TABLE: GDP GROWTH FORECASTS
TABLE: PRIVATE CONSUMPTION FORECASTS
TABLE: GOVERNMENT CONSUMPTION FORECASTS
TABLE: FIXED INVESTMENT FORECASTS
TABLE: NET EXPORTS FORECASTS
Fiscal And Public Debt Outlook
Political Uncertainty Will Slow Fiscal Consolidation
Steady growth in household spending will ensure strong revenue intakes even despite a deceleration in real GDP growth in 2016 and
2017. This will see Macedonia's fiscal deficit continue to narrow over the next two years, although at a slower pace as heightened
political uncertainty keeps borrowing costs elevated.
TABLE: CENTRAL GOVERNMENT BUDGET FORECASTS
Structural Fiscal Position
TABLE: MAIN REVENUE AND EXPENDITURE CATEGORIES (2015)
External Trade & Investment
Changing External Dynamics Will Reshape Current Account
Early indications of slowing export growth to Macedonia's largest export market, Germany, and falling private sector transfers into the
country suggest a broader shift in Macedonia's external accounts is under way. Although exports will continue to grow at a steady rate,
political uncertainty along the border with Greece could have more profound implications on net transfers, on which Macedonia is highly
reliant.
TABLE: CURRENT ACCOUNT BALANCE
Outlook On External Position
TABLE: CAPITAL & FINANCIAL ACCOUNT BALANCE
TABLE: TOP 5 GOODS EXPORTS IN 2015
TABLE: TOP 5 GOODS IMPORTS IN 2015
Chapter 2: 10-Year Forecast
The Macedonian Economy To 2025
Robust Growth Will Moderate Over The Next 10 Years
Structural reforms and a competitive manufacturing export sector will continue to drive robust real GDP growth in Macedonia over the
coming decade, which will be further supported by a strengthening household sector. However, heightened political uncertainty and
shifting demographic trends will restrict potential GDP growth and result in a deceleration by the end of our forecast period.
TABLE: LONG-TERM MACROECONOMIC FORECASTS
Chapter 3: Political Outlook
SWOT Analysis
BMI Political Risk Index
Domestic Politics
Political Instability Will Continue To Loom Large
Macedonia's political stability will continue to be tested even after a last-minute deal was struck to postpone from April 24 to June 5 an
upcoming parliamentary election, which the opposition had threatened to boycott. Although we believe that EU convergence will remain
an important policy anchor in the years ahead, the diminishing likelihood of progress towards formal accession to the bloc will test
Macedonia's political will.
TABLE: POLITICAL OVERVIEW
TABLE: A CHRONOLOGY OF MACEDONIA'S POLITICAL CRISIS
Long-Term Political Outlook
Unresolved Name Dispute And Ethnic Tensions Pose Long-Term Risks
Stalled progress on Macedonia's EU accession hopes and lingering ethnic tensions remain major challenges to the county's long-term
stability. Moreover, we note that a deteriorating demographic picture could pose severe economic challenges and exacerbate ethnic
tensions as Macedonian society grows more heterogeneous over the coming decades. A lot will depend on whether the government will
remain committed to economic and political integration with Europe, which has already driven much of the country's reform progress in
recent years.
Chapter 4: Operational Risk
SWOT Analysis
Operational Risk Index
Operational Risk
TABLE: SOUTH EAST EUROPE – LABOUR MARKET RISK
TABLE: SOUTH EAST EUROPE – LOGISTICS RISK
TABLE: SOUTH EAST EUROPE – CRIME AND SECURITY RISK
TABLE: SOUTH EAST EUROPE – TRADE AND INVESTMENT RISK
TABLE: MAIN IMPORT PRODUCTS, 2014
Chapter 5: BMI Global Macro Outlook
Global Macro Outlook
Tail Risks Mounting Amid Sub-Par Growth
TABLE: GLOBAL ASSUMPTIONS
TABLE: DEVELOPED STATES, REAL GDP GROWTH, %
TABLE: BMI VERSUS BLOOMBERG CONSENSUS REAL GDP GROWTH FORECASTS, 2015 AND 2016 (%)
TABLE: EMERGING MARKETS, REAL GDP GROWTH, %
TABLE: MACROECONOMIC DATA & FORECASTS

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