June 7, 2017 / 12:18 PM / 6 months ago

Fitch: Macedonia Makes Political Progress, but Risks Persist

(The following statement was released by the rating agency) LONDON, June 07 (Fitch) The formation of a new government in Macedonia concludes a prolonged political hiatus but does not eliminate political risk in the country, Fitch Ratings says. The new government faces challenges in restoring political stability and public confidence in the political system, and in realigning policy in its preferred direction. Macedonia's parliament last week passed a vote of confidence in a new government under Zoran Zaev, leader of the Social Democrats (SDSM), in formal coalition with two parties representing ethnic Albanians, DUI and the Alliance for Albanians. Between them, the coalition parties hold 62 of the 120 parliamentary seats. A fourth party, which holds five seats, has agreed to provide informal support. Macedonia had been operating under a caretaker government after former Prime Minister Nikola Gruevski's VMRO-DPMNE party was unable to reach a coalition deal with DUI in January following delayed legislative elections the previous month. The formation of a government signals that political tensions have eased in recent weeks, after peaking in late April when protestors stormed parliament after a new speaker was elected, which drew widespread condemnation from the international community. But it may be difficult for the SDSM-led government to enact its policies, which include economic reforms and kick-starting moves to join the EU and NATO. With 51 seats, VMRO-DPMNE remains the largest single party in parliament, and after a decade in power it has long-standing connections with state institutions and the media. Given the persistent disagreements between SDSM and VMRO-DPMNE in areas such as the investigation of 2015's wire-tapping scandal and Albanian's status as an official language, it is possible that political tensions will flare up again, and that VMRO-DPMNE will seek to obstruct the implementation of the new government's policies. The lengthy political crisis appears to have taken its toll on the economy through weaker business and consumer sentiment. High-frequency indicators on industrial production, retail sales and credit growth show that economic activity slowed in 1Q17, and we have significantly revised down our real GDP growth forecast for 2017, to 2.6% from 3.4%. Slower growth would also imply a larger 2017 fiscal deficit without offsetting spending cuts. We think the new government is likely to revise the 2017 budget, and its electoral promises of higher public sector wages and enhanced social protection and healthcare access for the public could result in a 2017 fiscal deficit that is wider than our 3.3% of GDP forecast. This would cause the public debt ratio, estimated at 42.3% of GDP in 2016, to rise further, bringing it closer to the 'BB' category median of 43.9%. We affirmed Macedonia's 'BB'/Negative sovereign rating in February. As we stated at the time, a marked easing in political tension and uncertainty, or implementation of a credible medium-term fiscal consolidation programme, could result in a stabilisation of the Outlook. Conversely, an escalation in political instability, fiscal slippage, or a widening of external imbalances that put pressure on reserves or the currency peg could be negative for the rating. Contact: Kit Ling Yeung Associate Director Sovereigns +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Paul Gamble Senior Director Sovereigns +44 20 3530 1623 Mark Brown Senior Analyst, Fitch Wire +44 20 3530 1588 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Related Research Macedonia here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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