Fitch revises Macedonia's outlook to positive; affirms at BB

Fitch Ratings has revised the outlooks on Macedonia’s long-term foreign and local-currency issuer default ratings to positive from negative, and affirmed the ratings at 'BB'.

The revision of the Outlook of Macedonia's 'BB' IDRs to Positive reflects the following key rating drivers and their relative weights: The domestic political situation is stabilising and key international relations are improving, after a prolonged political crisis between 2014 and 2017, which saw Macedonia suffer the second largest percentage drop in the World Bank governance indicator out of all Fitch-rated sovereigns.

The coalition government led by the Social Democrats (SDSM) with the ethnic Albanian Democratic Union for Integration party is making progress in implementing its "Plan 3-6-9" reform programme since it came to power in May 2017. The plan aims to realign Macedonia's policies towards EU accession, join NATO and restore the independence and transparency of public institutions. Municipal elections in October delivered the SDSM a strong mandate and reduced opposition to its reforms. A special prosecutor's office is investigating the illegal wiretaps allegations that came to light in 2015.

The government has restarted negotiations with Greece under the auspices of the UN over the dispute about the official name of Macedonia. Diplomatic signals are positive, but Macedonia will need to compromise on its name in order to unlock NATO and EU accession, in Fitch's view. Macedonia hopes to secure a positive recommendation in the coming months from the European Commission to the EU Council for a date to open EU accession negotiations later in 2018.

Preliminary outturns suggest the 2017 central government budget deficit was 2.7% of GDP, below the government's supplementary budget target of 2.9% and in line with 2016 deficit. The government under-executed expenditures to meet the deficit target in the light of lower than expected revenues, enhancing confidence in its commitment to fiscal targets. The government is targeting a central government budget deficit of 2.7% of GDP in 2018, and then a reduction to 2.5% in 2019, 2.3% in 2020 and 2.0% in the medium term.

GDP growth slowed sharply to an average of -0.4% in the first three quarters of 2017, down from 2.9% in 2016, as political uncertainty weighed on investment. Fitch forecasts GDP growth to average 0.5% in 2017, below the government's revised forecast of 1.6%, but still implying a sharp rebound in 4Q17 based on a pick-up in industrial production, exports and credit growth. We expect growth to recover to 3.1% in 2018 and 3.3% in 2019, as the normalisation of the political situation leads to an improvement in economic confidence.

The main risk factors that, individually or collectively, could lead to an upgrade are: an improvement in governance standards and further reduction in political risk, for example through a track record of political stability, implementation of key institutional reforms and/or progress towards EU accession; implementation of a medium-term fiscal consolidation programme consistent with a stabilisation of the public debt/GDP ratio.

The main factors that could, individually or collectively, result in negative rating action include: a re-emergence of political instability that adversely affects governance standards, the economy and/or government policy direction; fiscal slippage or the crystallisation of contingent liabilities that increases risks to the sustainability of the public finances and a widening in the current account deficit that exerts pressure on foreign currency reserves and/or the currency peg against the euro.


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