February 5 (SeeNews) - Fitch Ratings said it has revised the outlooks on Macedonia's long-term foreign and local-currency issuer default ratings (IDRs) to positive from negative, and affirmed the country's ratings at 'BB'.
"The domestic political situation is stabilising and key international relations are improving, after a prolonged political crisis between 2014 and 2017, which saw Macedonia suffer the second largest percentage drop in the World Bank governance indicator out of all Fitch-rated sovereigns," Fitch Ratings said in a statement late on Friday.
Fitch also said in the statement:
"KEY RATING DRIVERS
The revision of the Outlook of Macedonia's 'BB' IDRs to Positive reflects the following key rating drivers and their relative weights:
High
The coalition government led by the Social Democrats (SDSM) with the ethnic Albanian Democratic Union for Integration party is making progress in implementing its "Plan 3-6-9" reform programme since it came to power in May 2017. The plan aims to realign Macedonia's policies towards EU accession, join NATO and restore the independence and transparency of public institutions. Municipal elections in October delivered the SDSM a strong mandate and reduced opposition to its reforms. A special prosecutor's office is investigating the illegal wiretaps allegations that came to light in 2015.
The government has restarted negotiations with Greece under the auspices of the UN over the dispute about the official name of Macedonia. Diplomatic signals are positive, but Macedonia will need to compromise on its name in order to unlock NATO and EU accession, in Fitch's view. Macedonia hopes to secure a positive recommendation in the coming months from the European Commission to the EU Council for a date to open EU accession negotiations later in 2018.
Medium
Preliminary outturns suggest the 2017 central government budget deficit was 2.7% of GDP, below the government's supplementary budget target of 2.9% and in line with 2016 deficit. The government under-executed expenditures to meet the deficit target in the light of lower than expected revenues, enhancing confidence in its commitment to fiscal targets. The government is targeting a central government budget deficit of 2.7% of GDP in 2018, and then a reduction to 2.5% in 2019, 2.3% in 2020 and 2.0% in the medium term.
Fitch estimates general government debt was 39.2% of GDP at end-2017 and government guarantees of non-financial SOEs were an additional 8.2% of GDP, taking total public debt to 47.4% of GDP. This would be the first decline in the ratio (from 48.5% in 2016) after rising for nine years from 23% in 2008.
Macedonia's 'BB' IDRs also reflect the following key rating drivers:
Structural indicators such as GDP per capita, human development and governance are broadly in line with 'BB' range medians. The business climate is favourable, according to the World Bank Ease of Doing Business survey, which supports net inflows of FDI and a dynamic export performance. Unemployment is high at 22%, partly reflecting a large informal economy, but is on a downward trend.
GDP growth slowed sharply to an average of -0.4% in the first three quarters of 2017, down from 2.9% in 2016, as political uncertainty weighed on investment. Fitch forecasts GDP growth to average 0.5% in 2017, below the government's revised forecast of 1.6%, but still implying a sharp rebound in 4Q17 based on a pick-up in industrial production, exports and credit growth. We expect growth to recover to 3.1% in 2018 and 3.3% in 2019, as the normalisation of the political situation leads to an improvement in economic confidence.
Fitch estimates the CAD narrowed to 1.7% of GDP in 2017, from 2.8% in 2016. Exports of goods and services grew a robust 13.1% in the first three quarters (USD terms, yoy), compared with 8.6% for imports. Macedonia has gained market share in its main export market (the EU) and moved up the value-added chain evident in the rising share of exports of machinery and transport equipment and chemical products. Net external debt was estimated at 24.5% of GDP at end-2017, above the 'BB' range median of 12.1%.
The country has a track record of low inflation and financial stability, underpinned by a credible and coherent macroeconomic and financial policy framework consistent with the longstanding exchange rate peg to the euro.
Banks are well-capitalised, liquid and profitable, and a majority of assets are controlled by foreign-owned institutions, reducing potential contingent liabilities. Credit to the private sector is moderate at 48% of GDP, although euroisation of deposits (43% of the total) and loans creates some risks in the event of pressure on the exchange rate. The non-performing loan ratio declined to 6.3% in 2017, from 6.6% in 2016.
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 risks to political stability are still assessed to be higher than in BB peers following the extended 2014-17 political crisis, although the political situation is normalising.
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."