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Fitch Affirms Macedonia at BB, Outlook Negative

Global rating agency Fitch said on Friday it has affirmed Macedonia's long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB', with negative outlooks.

The issue ratings on Macedonia's long-term senior unsecured foreign and local currency bonds have also been affirmed at 'BB', the rating agency said in a statement.


The Country Ceiling has been affirmed at 'BB+' and the short-term foreign and local currency IDRs at 'B'. The senior unsecured short-term local currency issues have also been affirmed at 'B'.

Macedonia's ratings are supported by a track record of credible monetary and macro-prudential policy that has maintained longstanding stability of its exchange rate peg.

Government finances also perform marginally better than the median of 'BB' category peers. However, GDP per capita is below the median of 'BB' category peers, and governance is weak.

The Negative Outlook reflects continued political uncertainty, which the agency considers an obstacle to effective economic policy making, higher GDP growth and progress in EU accession.

Macedonia's economy is estimated by Fitch to have grown 2.6% in 2016.

This is below the median 3.1% growth estimate of 'BB' category peers, but in line with the country's five-year real GDP average.

Domestic demand proved resilient in 2016, led by household consumption. However, investment activity was weak, largely reflecting an under-execution of public capital spending.

For 2017, Fitch has maintained its real GDP growth forecast at 3.4%.

Fitch projects a continuation in current household demand and export trends and a strengthening of both public and private investment.

The main risk to our GDP baseline remains the political environment.

For 2016, Fitch estimates a general government fiscal deficit and debt ratio of 2.7% and 42.3% of GDP, respectively, compared with the 'BB' median deficit and debt ratios of 3.3% and 51.1%.

For 2017, Fitch projects Macedonia's fiscal deficit to widen to 3.3% of GDP, compared to the government budget target of 3% of GDP. Government debt will remain on an upward trajectory, rising closer to the 'BB' category median. Fiscal vulnerabilities are also present in the form of increasing government guarantees to state-owned enterprises, estimated at 9.5% of GDP in 2016, up from 2.5% of GDP in 2008.

Macedonia's headline fiscal position fares marginally better than 'BB' category peers. For 2016, Fitch estimates a general government fiscal deficit and debt ratio of 2.7% and 42.3% of GDP, respectively, compared with the 'BB' median deficit and debt ratios of 3.3% and 51.1%. F

or 2017, Fitch projects Macedonia's fiscal deficit to widen to 3.3% of GDP, compared to the government budget target of 3% of GDP. Government debt will remain on an upward trajectory, rising closer to the 'BB' category median. Fiscal vulnerabilities are also present in the form of increasing government guarantees to state-owned enterprises, estimated at 9.5% of GDP in 2016, up from 2.5% of GDP in 2008. Macedonia's external finances have stayed broadly in line with 'BB' category peers.

Net external debt to GDP at 28.4% (estimated 2016) is higher than the 'BB' median of 20.2%, but the composition of debt is judged sustainable, accounted for mainly by the private sector, where approximately half is inter-company lending.

Current account deficits remain adequately financed by a stable inflow of net FDI.

Meanwhile, strong commitment by the National Bank of Macedonia (NBRM) and a sufficient level of foreign reserves, covering 4.2 months of imports (2016), maintain the stability of the denar-euro peg. Macedonia's banking sector, which experienced a run on deposits in April 2016, remains stable and is sufficiently liquid and capitalized (CAR 3Q16 15.7%). Banks' balance sheets have also improved since the NBRM's regulation to write off NPLs that are fully provisioned for more than two years, with NPLs falling to 6.6% at end 2016 from a peak of 12.0% in 2013.

Importantly, level of deposits have recovered above 2015 levels, despite the earlier bank run, reflecting effective NBRM intervention and policy making. Fitch assumes that Macedonia will continue to pursue monetary and fiscal policy measures consistent with its currency peg to the euro. 

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