By Mate Jelic, Alen Kovac, Erste Group Research
The recovery in 2Q21 seems to have been short-lived as negative sentiment is again prevailing. Stubbornness of the pandemic, supply-side bottlenecks affecting the global car industry and elevated local political uncertainty weighing on investments are factors behind our decision to slightly trim this year’s and next GDP growth forecasts. This year’s budget gap will likely be lower than budgeted due to strong VAT intake and unrealistic capex plan. We deem MoF’s mid-term budget targets as ambitious, relying heavily on strong growth figures.
After a weak start to 2021 growth bounced back in 2Q rising 13.1% y/y, thus averaging 5.2% y/y growth in 1H21. Growth was underpinned by revived domestic demand developments, notably unleashed household consumption, while net external contribution to growth was negative. High-frequency indicators suggest slowdown of growth in 2H21.
• Real retail trade activity remains in good shape with yearly prints in double-digit area, but w-d-a industrial production is under pressure due to global supply chain bottlenecks, as it declined in both July and August, despite low base effects. External trade developments will contribute negatively to growth as exports growth of 7% y/y is overturned by surging imports (16.6% y/y) in the period. We see investments, both private and public, slowing further in 4Q after political jitters that followed local elections and likely a protracted period of political uncertainty. Bottom line, we trim this year’s and next GDP growth forecasts by 0.3pp and 0.6pp respectively to 3.5% before rising to 4% in 2023.
• Supply side pressures intensified considerably recently. After averaging 3.5% y/y in 3Q, CPI surged to 4.1% y/y in October. The increase was primarily driven by electricity, fuel and food prices. We have revised our average CPI forecast for the year to 3.1% y/y, followed by 2.6% y/y and 1.6% y/y in 2022 and 2023 respectively.
• Overall stock of the C/A gap will likely remain basically unchanged, while relative to GDP the gap could narrow by 0.2pp to 3.3%. Near term external risks are low due to improved international reserve levels, external financing availability, steady inflow on the financial account and extension of the EUR 400mn repo facility with the ECB until March next year.
• The CB maintains an accommodative monetary stance with the policy rate at 1.25% since March. Monetary policy will likely remain accommodative in the upcoming period, absent stronger rise in inflation expectations. The peg of the dinar to the euro remains stable.
• Although the government revised up its budget deficit target to 6.5% of GDP, we forecast the end figure will be below 6% of the GDP courtesy of decent revenue growth and under-execution in planned public investment, especially likely in the last quarter reflecting political wrangling. The government plans to cut the deficit to 3.5% of the GDP by 2023 but consolidation measures remain unclear.
• Political uncertainty has increased following a bad result on local elections for the ruling Social Democrats. After a failed attempt by the opposition to oust the government, the ruling parties are busy trying to bolster their shaky support base in parliament. The blockade by Bulgaria continues to hamper EU accession path.
In general, risks to our forecast remain tilted to the downside. The long-lasting nature of the pandemic coupled with hesitancy of the population towards vaccination, unresolved structural bottlenecks in global supply chains affecting local production, negative investor sentiment due to unresolved bilateral dispute with Bulgaria further aggravated with recent local political uncertainty are all factors which cloud the growth outlook. A prolonged delay to securing the date for the opening of negotiations with the EU could not only lead to reduced reform momentum but could also weigh on general support for EU entry, which could be a catalyst for outflows from the country. The latter is not our base case but until there is more political clarity inflows could temporarily freeze.
Following a bad result on local elections in November PM Zoran Zaev initially offered his resignation, but after the opposition scheduled a no-confidence vote in parliament, Zaev postponed his announced resignation, saying he will stay on to keep the Social Democrat-led government afloat. The no-confidence vote eventually failed, thus giving the government a fresh boost although the long-term survival depends on success in delivering a start to EU accession talks. A small opposition ethnic Albanian party, Alternative, seems the most plausible choice to replace the equally small Albanian BESA party in the cabinet – after the latter defected. If Alternative does join Zaev’s side, its four MPs would strengthen the government’s footing in parliament from a shaky 60 MPs out of 120 to a healthier. Rumors of other opposition MPs joining the government are also circulating. The only binding glue between the ruling parties and parties who just a few weeks ago actively worked to oust them – and now seem ready to join them – is a widely felt need not to rock the political boat when the country is struggling to keep its EU agenda alive while also dealing with a health and energy crises.
Looking ahead, a reshuffle of the cabinet is likely, as the new junior partner will likely ask for two ministerial positions. For now, the biggest justification for the ruling Social Democrats and the small ethnic Albanian parties or individual MPs uniting and bolstering the government’s majority is the prospect of keeping the EU agenda alive.
But while North Macedonia joined NATO last year, progress on the EU front became stuck at the end of 2020, when Bulgaria blocked the start of its long-awaited accession talks, citing a dispute over matters of joint history. Following a lost year in which an unstable Bulgaria was preoccupied with three consecutive elections, the next chance to set things right is the December EU summit, when Bulgaria again is expected to face pressure to ease its stance.
You can view the full Erste Group Research report here.