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Friday, September 21, 2018, 

Standard & Poor's affirms Macedonia's credit rating BB-/B with stable outlook

Standard & Poor

Skopje, 15 September 2018 (MIA) - Standard&Poor's agency has affirmed Macedonia's credit rating BB-/B with a stable outlook.

S&P says in its report that the coalition centered around SDSM has recently bolstered its parliamentary standing and now commands a stronger majority in the legislature, reducing political uncertainty.

The report notes that progress on some of the announced priorities has already been achieved. For instance, the government took steps to improve the transparency of its fiscal accounts. The new administration has also made notable progress toward resolving the decades-long name dispute with Greece, which is central for Macedonia's NATO and EU accession. The outcome of the referendum is currently difficult to predict, and the proposal is facing potential opposition in both countries' parliaments. Failure to pass any of these stages may derail the deal. In addition, this could trigger a new political crisis in Macedonia, given the prime minister's pledge to resign if the referendum does not pass.

"A successful resolution of the name dispute, on the other hand, would pave the way for negotiations on Macedonia's accession to the EU and NATO. In our view, the opening of negotiations could bring long-term economic benefits as Macedonia implements reforms required as part of the accession negotiations. Moreover, it could have some short-term economic effects through improved investor confidence and FDI inflows," reads the report.

It adds that following economic stagnation in 2017, economic growth has recently strengthened to 3.1% in the second quarter of 2018 in year-on-year terms.

"Importantly, this has happened despite a number of delays on a public highway construction project and declining investments, implying a stronger performance in the rest of the economy. We expect growth will average close to 3% over the next three years, driven by investments in both the private and public sectors, following improved political stability. In addition, we expect a more upbeat dynamic of net exports, thanks to favorable foreign trade conditions and the gradual diversification of Macedonia's export basket," says S&P.

Reflecting our budgetary forecasts, Macedonia's net general government debt will still continue to rise until 2020, although it should stabilize at close to 45% of GDP thereafter.

"This compares to net general government debt of just 27% of GDP in 2012. Our calculation includes the increasing debt of the Public Enterprise for State Roads (PESR), because we believe PESR may need to rely on government transfers to service its debt in the future. In particular, a government-guaranteed €580 million loan from the Export-Import Bank of China, contracted in 2013 for the construction of two highway sections, will continue to contribute to the increasing debt burden. We also factor in a moderate amount of arrears clearance, assumed at around 1% of GDP," reads the report.

The stable outlook reflects the balance between the risks from Macedonia's rising public debt and remaining political uncertainty, and the country's favorable economic prospects.

"We could raise our ratings on Macedonia if timely reforms are implemented and further progress is made in resolving the longstanding name dispute with Greece, and these lead to the country's economic prospects improving and strengthen Macedonia's likelihood of EU accession. We could lower the ratings if major political tensions returned or reform momentum waned, impairing growth and foreign direct investment (FDI) inflows and undermining the country's longer-term growth potential. We could also lower the ratings if large fiscal slippages or off-budget activities were to call into question the sustainability of Macedonia's public debt, raise the sovereign's borrowing costs, and substantially increase its external obligations, given the constraints of the exchange-rate regime," underlines S&P. ik/15:48

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