fyr macedonia economic overview

Macroeconomic performance

After several strong years, GDP growth declined from 5.9 per cent in 2007 to 4.9 per cent in 2008. The global financial crisis started affecting the economy in the fourth quarter of 2008, led by a decline in the output of the metal and textile sectors. The situation deteriorated in the first half of 2009 as industrial production contracted by 11 per cent compared with a year earlier, while foreign trade dropped sharply and foreign direct investment (FDI) roughly halved. The growth of GDP was -1.4 per cent in the second quarter of 2009 (compared with -0.9 per cent in the first quarter and 2 per cent growth in the fourth quarter of 2008) and unemployment remains high at about one-third of the workforce. At the same time, external imbalances increased, forcing the central bank to increase the reference interest rate from 7 to 9 per cent in March 2009 and repeatedly intervene on the foreign exchange market. As a result, foreign exchange reserves fell to 3.4 months of imports in May 2009, but have stabilised somewhat since then at a level of above 4 months of imports, supported by the issuing of a eurobond as well as inflows based on special drawing right allocations. Gross external debt remained at around 50 per cent of GDP, partly reflecting increased public borrowing. Inflation remained subdued at around 0.1 per cent in the first half of the year.

In response to the crisis, in November 2008 the authorities adopted an economic stimulus plan, which includes a number of fiscal measures such as rebates and write-offs of unpaid social security contributions, a further lowering of taxes on profits and agricultural incomes and a reduction of some import tariffs. As a result, fiscal policy has become more expansionary and after being in surplus during most of 2008, intensive spending in the last months of the year resulted in a budget deficit of 0.9 per cent of GDP for 2008. In March 2009 the government presented a €8 billion investment programme for the next seven years, focusing on large infrastructure projects in energy, transport, environment protection, education and culture. In June 2009 in order to preserve the projected 2009 budget deficit at -2.8 per cent of GDP and following lower-than-projected revenue performance in the first months of 2009, the parliament adopted a revised budget which included a cut in public expenditures of 9 per cent, mainly through a hiring freeze and a suspension of public wage increases.

Outlook and risks

The economy is likely to fall into recession this year as a result of a sharp drop in industrial output and exports. A more expansionary policy stance, reflecting the government’s anti-crisis measures and the need to modernise the country’s infrastructure, will result in a shift from modest fiscal deficits or surpluses of earlier years to higher deficits in the near future. The combination of lower exports, falling capital inflows (including FDI) and an expansionary fiscal policy have increased external risks, especially given the drop in reserves and relatively modest reserve coverage. These pressures, with weaker remittances, could necessitate a sharp contraction in imports, triggering a deeper and more prolonged recession. However, the recent rise in reserve coverage, as well as the government’s commitment to fiscal discipline should help to mitigate these risks. Continued progress in the EU accession process is an important condition for the realisation of FYR Macedonia’s medium-term growth potential.