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Fitch affirms Macedonia at BB+, outlook negative

Fitch affirms Macedonia at BB+, outlook negative Fitch (Author: fitchratings.com) License: all rights reserved.

SKOPJE (Macedonia), February 22 (SeeNews) - Global rating agency Fitch said it has affirmed Macedonia's long-term foreign and local currency Issuer Default Ratings (IDR) at 'BB+', with negative outlooks.

The issue ratings on Macedonia's senior unsecured foreign and local currency bonds have also been affirmed at 'BB+', the rating agency said in a statement on late Friday.

The Country Ceiling has been affirmed at 'BBB-' and the short-term foreign currency IDR at 'B'.

Fitch also said in the statement:

"KEY RATING DRIVERS
Macedonia's ratings are supported by a healthy economic growth outlook, a favourable business climate and governance indicators that perform better than most 'BB' range peers. However, the Negative Outlook reflects risks to political stability and the rising government debt/GDP ratio.

Macedonia is making progress in implementing the road-map brokered by European Commissioner Johannes Hahn in the summer. This aims to ease political tensions and lead to free and fair elections scheduled for April 2016, after the country was hit by political shocks in 2015. Since those shocks, important milestones have included the return of the opposition SDSM party to parliament (which it had boycotted since elections in 2014), the appointment of a special prosecutor to investigate the wiretap and other allegations, the appointment of a transitional government and the resignation of former Prime Minister Nikola Gruevski in January 2016. However, all the main political parties have yet to agree on media and electoral reforms and on participating in elections.

The political outlook remains uncertain with downside risks, in Fitch's view. It remains to be seen whether parliamentary elections take place as planned in April 2016 with the participation of all the main political parties, whether they are free and fair, if the losers accept the result, if the next administration adopts good governance standards and whether political tensions ease.

Fitch estimates that Macedonia's general government debt was 38.7% of GDP at end-2015, below the 'BB' median ratio of 43.6%. However, it is on a rising trend and has increased by 14.4pp since 2010, due to an overshooting of fiscal targets and an increase in government borrowing to co-finance investment projects. Moreover, contingent liabilities in the form of government guarantees to state-owned entities (SOEs) had increased to 8.6% of GDP in 2015 from 3.2% of GDP in 2010, pushing total public debt to 47.3% of GDP. This ratio will continue to increase in the medium term, with Fitch estimating 52.8% of GDP by 2017. Finally, foreign currency debt is high, accounting for 77.5% of total government debt. However, 88% of foreign currency debt is in euros, highlighting the importance of the peg to ensure fiscal sustainability.

The general government fiscal deficit was 3.5% of GDP in 2015, slightly above the original budget target of 3.4% but just below the July supplementary budget deficit target of 3.6%. It is in line with the 'BB' median deficit. For 2016 and 2017, Fitch forecasts Macedonia's fiscal deficits will narrow only modestly, despite strong GDP growth, to 3.4% and 3.1% of GDP, respectively. Despite a narrowing of the headline deficit, Macedonia's structural fiscal balance is expected to widen, reflecting a lack of structural policy measures in its medium-term fiscal framework.

Macedonia's economic growth performance has been stable, with GDP growth averaging 2.5% in the five years to 2015. GDP growth is estimated at 3.2% in 2015, Fitch forecasts it at 3.6% in 2016 and 2017. The government's medium-term policies include active labour market programs, increasing social welfare payments to improve standards of living and increasing infrastructure spending, which will support growth in household consumption, public and private investment. We expect domestic demand to be the main driver of growth for 2016-2017.

Macedonia's rating is also supported by GDP per capita and levels of human development above the 'BB' range median. The business climate is highly favourable - the 12th best in the world according to the 2015 World Bank Ease of Doing Business survey.

The exposure of Macedonia's banking sector to Greece has moderated. Including the two Greek-owned subsidiaries that account for 24% of Macedonia's banking system assets, Macedonian banks have remained well capitalised, with a sector average Tier 1 capital adequacy ratio of 14.5%. Liquidity is also adequate, with liquid assets to total short-term liabilities in the sector around 51%. A modest risk is the ratio of non-performing loans in the sector, which is relatively high at 10.8% (end 2015), although this ratio appears to have peaked. Additionally, they appear to be well provisioned (103.1%, end 2015).

RATING SENSITIVITIES
The main risk factors that, individually or collectively, could trigger negative rating action are:
-Heightened or prolonged political instability, for example if there is a failure to fully implement the agreement brokered by European Commissioner Johannes Hahn, elections scheduled for April fail to ease tensions or a breakdown in ethnic relations.
-Fiscal slippage or the crystallisation of contingent liabilities that jeopardise the stability 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:
- Implementation of a credible medium-term fiscal consolidation programme consistent with a stabilisation of the public debt/GDP ratio.
- A marked easing in political tension and uncertainty, for example if free and fair elections scheduled for April 2016 are completed.

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.

Fitch assumes that the EU economy, Macedonia's largest trade partner, will continue to recover gradually."

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