RaboResearch - Economic Research

Country Report Macedonia

Country Report


Macedonia flag
Economic growth in Macedonia is expected to remain relatively robust, underpinned by recent reform efforts and FDI inflows. However, impediments to EU membership remain.

This Country Report is the outcome of an internship by Saskia Moser at the Country Risk Research team at Rabobank Nederland.

Strengths (+) and weaknesses (-)

(+) Strong focus on attracting foreign direct investment

Attracting foreign direct investments is a main policy objective. Reflecting recent policy efforts, Macedonia today ranks 23rd on the World Bank’s Ease of Doing Business index.

(+) Low income levels

Macedonia is one of the poorest countries in Europe in terms of GDP per capita, which reduces the local population’s financial resilience to economic shocks.

(-) Weak administrative structures

The combination of widespread corruption and a low level of administrative sophistication limits the effectiveness of economic policies.

(-) Limited policy flexibility

A high proportion of loans and deposits are denominated in euros. This strongly mitigates monetary and exchange rate flexibility.

Key developments

1. Economy started to recover in 2013

Following a contraction of 0.3 % in 2012, Macedonia’s GDP increased by 3.1% in 2013. Growth was thus stronger and more robust than expected, driven by a strong increase in exports and private consumption. The country’s improved export performance mainly reflected stronger external demand in the euro zone, as about 60% of Macedonia’s exports are directed to this region. Coupled with subdued imports, this contributed to a narrowing of the current account deficit from about 4 % in 2012 to 1.9% in 2013. Among the sectors, the construction sector was the biggest contributor to GDP growth, as it grew by a very strong 33% (after 4.2% growth in 2012), driven largely by surging public investment.

Figure 1: Economic growth Macedonia
Figure 1: Economic growth MacedoniaSource: EIU
Figure 2: Current account
Figure 2: Current accountSource: EIU

On the demand side, private consumption increased vigorously with 4.2% of GDP driven by supportive fiscal measures and increased job opportunities partially thanks to foreign direct investment. However, gross fixed investment contracted by 11.5% of GDP. Economic growth is likely to increase somewhat in the coming years, boosted by private consumption and (foreign direct investment), though the slow recovery in the euro zone may limit the pace of growth

2. Strong FDI inflows mitigate risks related to current account deficit

Macedonia’s current account deficit, which is mainly driven by a large trade deficit, fell to 1.9% of GDP in 2013, down from 4% of GDP in 2012. The narrowing of the deficit was largely accounted for by an improvement of the trade balance, as exports rose by 4.5% and import declined by 2.1%. Net transfers, which are very high thanks to remittances, declined somewhat. Meanwhile, inward FDI increased to USD 377m in 2013, up from USD 283m in 2012. Net FDI of 3.3% in 2013 thus more than covered the current account deficit. Thanks to an improvement of the investment climate in recent years, FDI inflows are expected to remain elevated in 2014-2015. Consequently, the need for external borrowing will remain modest, although the current account deficit is likely to increase thanks to a rise of imports due to consumption growth and high (foreign direct) investment. As foreign direct investment is likely to boost exports in the longer run, the trade deficit is likely to decrease in the medium-term. Meanwhile, Macedonia had a modest import cover of 4 months in 2013 and large negative net international investment position of 62% of GDP. However, more than half of the external liabilities consists of FDI.

3. Impediments towards EU membership remain

Macedonia’s current political situation challenges the country’s capability to advance its integration process with the EU. In February 2013, the EU Enlargement Commissioner Stefan Fule canceled a planned visit, citing Macedonia’s ongoing political instability, ethnic tensions and high unemployment of 29%. However, an EU report that was published in April 2013 shows that Macedonia has made progress in most priority areas. Furthermore, since the elections in April 2013, Stefan Fule has seemed to be more conciliatory towards EU membership. Nevertheless, a threat of the opposite party, the SDSM, to boycott the 2013 election was only removed thanks to the help of the EU, underlining Macedonia’s political instability. Meanwhile, Macedonia still suffers from the still-present ethnic tensions between Macedonians and Albanians, as there were several ethnically attacks March and May 2013. Additionally, in May 2013, Amnesty International launched criticism and concerns about the human rights and prolonged ethnic tensions in Macedonia. In conclusion, the ethnic tensions, political instability, together with the unsolved bilateral ‘name’ dispute with Greece, remain tough challenges for Macedonia towards EU membership.

Factsheet of Macedonia
Factsheet of MacedoniaSource: EIU, CIA World Factbook, UN, World Economic Forum, Transparency International, Reporters Without Borders, World Bank.

Background information

Both in terms of economic size and income level per capita, Macedonia ranks among the smallest and poorest economies of former Yugoslavia. In 2013, nominal GDP amounted to about USD 10bn, while GDP per capita at PPP came in at USD 10,401 which was equivalent to about a-third of Slovenian GDP per capita at PPP. Macedonia’s economic development faced major obstacles during the last 20 years, including a civil war and a Greek economic embargo amid a name dispute over the country’s constitutional name. Serious infrastructure and administrative deficiencies and the dependency on access to the Greek port of Thessaloniki also constitute obstacles to economic growth. Still, thanks to low wages and major improvements of the business climate, Macedonia managed to attract sizeable amounts of foreign direct investment in recent years. Since these investments are mainly focusing on export opportunities, Macedonia’s economic integration with the euro area has increased and business cycle synchronicity is strong. Last year, the country mainly exported iron and steel products, as well as clothing, while the export of car parts should start this year. Macedonia remains dependent on external financing, as large inflows of remittances from Macedonians working abroad cannot completely finance a sizeable trade balance deficit. In order to support export competitiveness, the local currency, the Macedonian denar, is pegged to the euro, which abolishes local monetary policy autonomy and forces the government to run prudent fiscal policies. Given widespread support for the monetary regime, fiscal policies have generally been conservative, which is reflected in limited budget deficits and a relatively low public debt level of 33% of GDP in 2013. However, following the 2001 civil war, reconciliation between ethnic Albanians and Macedonians is still unfinished, while recurrent parliamentary boycotts by the opposition reflect major weaknesses of the democratic institutions.

Economic indicators of Macedonia
Economic indicators of MacedoniaSource: EIU

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