The Macedonian economy entered a recession in the third quarter of 2009 and growth is expected to be dampened by the Greek fiscal crisis. While growth is still forecast for 2010, EU accession may be delayed due to regional economic and financial stability concerns arising from Greece's problems. Macedonia's fixed exchange rate and inflation are projected to remain moderate due to its euro peg and prudent monetary policy. Political risks could impact the generally positive 10-year economic forecast.

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Macedonia Business Forecast Report Q2 2010
Published on April 2010
Report Summary
Greek Crisis Risks Skopje's EU Bid
T he Macedonian economy headed further into recession during the third quarter of 2009, derailing
our projection that broad-based economic stabilisation would take root during the second half of the
year. Going forward, we still expect to see a return to positive growth in 2010, with a fairly robust
banking sector and limited private sector indebtedness supportive of the medium-term economic
outlook. We caution, however, that global headwinds are building, particularly Greece's fiscal crisis
and potential for sustained weak eurozone demand, which could dampen or even derail Macedonia's
recovery. In the case of the latter, we note that despite a plethora of fiscal support packages and
stimulative monetary policy from the European Central Bank, growth appeared fairly lukewarm
towards the end of 2009. This does not bode well for the economic outlook in 2010, especially
given that many such schemes will be gradually phased out, alongside fiscal consolidation as
governments come under increasing pressure to shore up public finances. Should demand in the
eurozone remain weak for a protracted period, or should the bloc slide back into recession even,
demand for Macedonian goods will similarly ebb, weighing on the domestic economic recovery.
Having shown signs of improvement towards the end of 2009, Macedonia's prospects for joining
the EU are now likely to be overshadowed by Greece's fiscal crisis, which will divert attention
away from expanding the bloc's borders to maintaining regional financial and economic stability.
While Brussels will continue to encourage reform, and even with Macedonia raising efforts to
reach a resolution with Greece over the long-running name dispute, eventual accession will likely
be delayed (potentially towards the end of our 10-year forecast period).
Given the benefits to financial and price stability, we believe that Macedonia's pegged exchange
rate system will remain in play over the medium term. Indeed, with the central bank's main policy
mandate to anchor inflation, we believe that the fixed exchange rate system offers the most credible
way of doing this. That said, given the fairly manageable external debt load, we stress that there
could be room to devalue the denar over the longer term should Macedonian exporters begin to
lose out in the international competitiveness stakes.
Although consumer price growth in Macedonia swung back into positive territory in January, we
believe it is too early to call for an end to the deflationary trend which has been broadly playing
out since Q209. That said, we still expect to see a resurgence of inflationary pressures this year,
underpinning our 2.5% end-year inflation forecast. This will be driven largely by the recovery in
domestic demand, continued gains in global commodity prices, as well as loose monetary policy
which is imported from the eurozone as a result of the denar's euro peg.
Table of Content
Executive Summary ... 7
Greek Crisis Risks Skopje's EU Bid
Chapter 1: Political Outlook ...... 11
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Political Outlook ......11
Greek Crisis Overshadows Skopje's EU Ambitions
Having shown signs of improvement towards the end of 2009, Macedonia's prospects for joining the EU are now likely
to be overshadowed by Greece's fiscal crisis, which will divert attention away from expanding the bloc's borders to
maintaining regional financial and economic stability.
Table: Macedonia Politics . 12
Chapter 2: Economic Outlook ... 17
Economic Activity ....17
Sliding Further Into Recession, Stabilisation Delayed
The Macedonian economy headed further into recession during the third quarter of 2009, derailing our projection
that broad-based economic stabilisation would take root during the second half of the year. .......17
table: ECONOMIC AC TIVITY .....17
Exchange Rate Policy ...............19
Currency Peg To Remain In Place Over Medium Term
Given the benefits to financial and price stability, we believe that Macedonia's pegged exchange rate regime will
remain in play over the medium term.
table: EXCHANGE RATE .......... 20
Monetary Policy .......21
From Deflation To Inflation In 2010
Although consumer price growth in Macedonia swung back into positive territory in January, we believe it is too early
to call for an end to the deflationary trend which has been broadly playing out since Q209.
Balance Of Payments ...............22
Rebalancing Under Way
Macedonia's current account deficit contracted sharply in 2009, having previously started to expand during the
first half of the year.
table: BALANCE OF PAYMENTS (Euro) . 23
Chapter 3: 10-Year Forecast ..... 25
The Macedonian Economy To 2019 ........25
Reform Agenda Will Generate Growth
Macedonia's reformist trajectory looks set to generate robust GDP growth through to 2019 amid steady convergence
to EU political and economic standards. Nevertheless, we caution that political risks could yet pose risks to the
longer term outlook.
table: MACEDONIA Long-Term Macroeconomic Forecasts ............... 25
Chapter 4: Special Report ......... 29
Political Risk In The Next Decade ...........29
What To Expect In 2010-2019
Table: Countries Facing Major Leadership Succession In 2010-2019 .......... 30
Table: Countries At Risk Of Major Political Upheaval ..... 32
Table: Countries At Risk Of Interst ate Conflict Or Heightened Bilateral Tension............... 36
Table: Countr ies Facing Secess ionist Or Aut onomy Movements , Insurg encies, Or Civil Wars ... 39
Table: Pivotal States ........... 41
Chapter 5: Business Environment............ 45
Business Environment Outlook ...............45
Table: BMI Business and Operational Risk Ratings... 46
Institutions ..............46
Table: BMI Legal Framework Ratings .............47
Infrastructure ..........49
TABLE: LABOUR FORCE QUALITY ............. 50
Market Orientation ..51
Table: Emerg ing Europe, Annual FDI Inflows .............. 52
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TABLE: BMI TRADE RATINGS ... 53
TABLE: TOP EXPORT DESTINATIONS ........ 54
Operational Risk ......54
Chapter 6: BMI Global Assumptions........ 57
Global Outlook ........57
EM Still Showing Signs Of Outperformance
TABLE: GLO BAL ASSUMPTIONS 57
table: DEVELO PED STATES REAL GDP GROWTH FORECA STS ..... 58
table: EMERGING MARKETS REAL GDP GROWTH FORECA STS .. 59
TABLE: GLO BAL & REGIONAL REAL GDP GROWTH FORECA STS ... 60
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