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Fitch Affirms Macedonia at 'BB'; Outlook Negative
February 17, 2017 / 9:05 PM / 10 months ago

Fitch Affirms Macedonia at 'BB'; Outlook Negative

(The following statement was released by the rating agency) LONDON, February 17 (Fitch) Fitch Ratings has affirmed Macedonia's Long-Term Foreign and Local Currency Issuer Default Ratings (IDRs) 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 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'. KEY RATING DRIVERS 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 has been operating under a caretaker government since the resignation of former Prime Minister Nikola Gruevski of the biggest party in parliament, VMRO-DPMNE, in January 2016. Policy disagreements between VMRO-DPMNE and ethnic Albanian party, DUI, meant VMRO-DPMNE (with 51 out of 120 seats) failed to secure a coalition partner after elections in December 2016. It is unclear how long the current political hiatus will continue, and how it will be resolved. In addition, any new government will likely be unstable, leaving political tensions in Macedonia high. Macedonia's governance indicators fall in line with the 'BB' category median. However, 2015's high-level corruption scandal revealed severe shortcomings in standards of governance on a wide scale, which led Fitch to downgrade Macedonia's IDRs in August 2016. Official co-operation with the Special Prosecutor, tasked independently to investigate the 2015 wiretapping scandal, has been lacklustre after a year. Meanwhile, recent anti-foreign sentiment by VMRO-DPMNE risks delaying EU accession and damaging prospects of foreign investment. 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%. We project 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. 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%. 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 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 capitalised (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. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Macedonia a score equivalent to a rating of 'BB+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term IDR by applying its QO, relative to rated peers, as follows: - Structural Features: -1 notch, to reflect Fitch's assessment that the political risks are higher and levels of governance are weaker than what is captured by the SRM. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES The main risk factors that, individually or collectively, could trigger negative rating action are: - An escalation in political instability, particularly if it leads to a breakdown in ethnic relations or adversely affects the economy and public finances. - Fiscal slippage or the crystallisation of contingent liabilities that jeopardise the sustainability of the public finances or currency peg. - A widening of external imbalances that exerts pressure on foreign currency reserves and the currency peg. The main factors that could, individually or collectively, result in a stabilisation of the Outlook include: - A marked easing in political tension and uncertainty. - Implementation of a credible medium-term fiscal consolidation programme consistent with a stabilisation of the public debt/GDP ratio. KEY ASSUMPTIONS Fitch assumes that Macedonia will continue to pursue monetary and fiscal policy measures consistent with its currency peg to the euro. Fitch assumes there is no near-term resolution of the "name issue" with Greece that could unlock the path towards NATO and EU accession. Contact: Primary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Erich Arispe Director +44 203 530 1753 Committee Chairperson Jan Friederich Senior Director +852 2263 9910 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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