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Former Yugoslav Republic of Macedonia Assigned 'BB/B' FC, 'BB+/B' LC
Ratings; Outlook Positive
Publication date: 30-Jul-2004 =20
Analyst(s): Kai Stukenbrock, London (44) 20-7176-7119;
Konrad Reuss, London (44) 20-7176-7102 =20
Local Currency Foreign Currency=09
Credit Rating: BB+/Positive/B BB/Positive/B=09
On July 30, 2004, Standard & Poor's Ratings Services assigned its 'BB/B'
foreign currency and 'BB+/B' local currency sovereign credit ratings to t=
Republic of Macedonia. The outlook is positive.
The ratings on Macedonia are constrained by the ongoing importance o=
inter-ethnic relations, structural and governance issues in the economy, =
a government expenditure structure that leaves little flexibility to rein=
The ratings are supported by rapid progress toward political stabili=
driven by the Ohrid Framework Agreement and the prospect of EU membership.
Moreover, the ratings are underpinned by macroeconomic stability and
moderate levels of external indebtedness.
Political stability in Macedonia has improved greatly since the
inter-ethnic violence in 2001. The Ohrid Framework Agreement that ended t=
security crisis enjoys both broad political and public backing, and a rep=
of those events looks highly unlikely. This is demonstrated by a number o=
recent stress tests such as the death of the president in an air crash an=
renewed ethnic unrest in Kosovo (both in early 2004), which the country
navigated well. Inter-ethnic relations will still continue to play an
important role in determining political stability, but the commitment of =
international community to stability in Macedonia remains strong, and wou=
have a moderating influence should tensions increase again.
Prudent economic policies have managed to maintain macroeconomic
stability, despite the multitude of shocks hitting the economy since
independence. Inflation has remained in low single digits since the
mid-1990s, and growth is forecast to average 4.2% between 2004 and 2006.
Serious structural imbalances in the economy--such as very high levels of
unemployment--have still to be addressed, however. In addition, poor
governance in both the private and public sectors, corruption, and a weak
judiciary depress domestic and foreign investment and hinder economic and
Fiscal accounts are sound. Excluding the crisis years of 2001-2002, =
general government budget has been in moderate-to-low deficit since the
second half of the 1990s, and is expected to register slightly less than
1.5% of GDP in the medium term. If grants are included above-the-line, th=
budget will even be broadly balanced. Continued moderate deficits will pu=
the debt level down to 42.8% of GDP in 2006, from 47.7% in 2003. By
contrast, structural rigidities on the expenditure side (where wages and
transfers account for 87.0%), as well as an inefficient and costly social
security system, pose risks to the maintenance of fiscal prudence.
Macedonia's trade deficit is very high, at 18.3% of GDP in 2003, but
this is readily financed by sizable private transfers, grants, and
concessional lending. As a result, levels of net external debt have remai=
moderate, at 30.7% of current account receipts (CARs) for the public sect=
and 6.3% of CARs for the nonfinancial private sector in 2003. The financi=
sector is a net external creditor, with net assets of 15.1% of CARs in 20=
The positive outlook on Macedonia reflects Standard & Poor's expectation
that, in addition to the current implementation of the Ohrid Framework
Agreement, the prospect of EU membership at the turn of the decade will
continue to play an essential role as a driver for further reforms and
ongoing political stabilization. Macedonia applied for EU membership in
March 2004 and might be awarded candidacy status as early as 2005. Suppor=
for EU membership is broadly based and a large share of new legislation i=
already geared toward EU requirements.
For most of the new EU members that joined the Union in May 2004,
prospective EU membership served as a strong policy anchor, which in turn
resulted in ratings upgrades. On the way toward EU membership, Macedonia
will have to address many weaknesses such as improving and sustaining
political stability, addressing the structural imbalances in the economy,
and tackling governance issues. An upgrade of the ratings on Macedonia is
contingent on progress in these areas.
=B7 Foreign currency sovereign credit ratings
=B7 Local currency sovereign credit ratings
Ratings information is available to subscribers of RatingsDirect, Standar=
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