SKOPJE (North Macedonia), March 13 (SeeNews) – Standard & Poor's said it has affirmed North Macedonia's long-term and short-term foreign and local currency sovereign credit ratings at BB-/B with a stable outlook.
"The Republic of North Macedonia's resolution of the long-lasting name dispute with Greece in January 2019 is a major milestone, but we do not expect to see an immediate material effect on North Macedonia's economy,” the ratings agency said in a statement last week.
S&P also said it expects North Macedonia to formally begin EU accession talks in 2019.
“This could accelerate a number of structural reforms as part of the negotiations, although EU membership is unlikely in the near future,” S&P said.
S&P also said:
"The stable outlook reflects the balance between the risks from North Macedonia's rising public debt and still comparatively modest income levels, and its favorable economic prospects alongside the potential for institutional settings to strengthen over time.
We could raise our ratings on North Macedonia if timely reform implementation, for instance as part of EU accession negotiations, strengthened North Macedonia's institutional arrangements and improved its economic prospects. We could also consider an upgrade if North Macedonia displayed a stronger fiscal performance that placed net general government debt firmly on a downward path.
We could lower the ratings if major political tensions returned or reform momentum waned, impairing growth and foreign direct investment (FDI) and undermining the country's longer-term growth prospects. We could also lower the ratings if large fiscal slippages or off-budget activities were to call into question the sustainability of North Macedonia's public debt, raise the sovereign's borrowing costs, and substantially increase its external obligations, given the constraints of the exchange-rate regime.
RATIONALE
The ratings on North Macedonia reflect our view of the country's relatively low income levels; still comparatively weak institutional settings despite some recent improvements; and limited monetary policy flexibility arising from the country's fixed-exchange-rate regime. The ratings are primarily supported by moderate--albeit rising--external and public debt levels and favorable growth potential.
In January 2019, a long-standing dispute between Greece and North Macedonia over the latter's name was finally resolved. The disagreement had stemmed from Greece's objection to North Macedonia calling itself Republic of Macedonia because there is a similarly named region in Greece. Under the solution unveiled for the first time in June 2018, the country's name has changed to Republic of North Macedonia. After decades of gridlock, it took less than a year to agree and implement the newfound solution. It has already been ratified in both countries' parliaments and entered into force in February.
The resolution of the name dispute is an important positive milestone that we expect will reduce North Macedonia's past isolation and contribute to regional stability. More specifically, the agreement paves the way for North Macedonia's NATO membership and the start of formal EU accession talks in the coming months. Although North Macedonia has been an EU candidate since 2005, no progress on membership talks has been achieved due to being blocked by Greece.
In addition to a number of important reforms adopted recently, North Macedonia still needs to implement some changes before EU negotiations can begin. We understand that these include undertaking a public administration reform, passing a new anti-corruption law, and adopting legislation to strengthen the judicial system. Potential hurdles could also stem from the European Parliament elections this year owing to growing EU skepticism and enlargement fatigue. Nevertheless, we believe these will be overcome given the already-substantial progress achieved to date. Our baseline expectation now is that North Macedonia's accession talks will start in the coming months.
In our view, the start of EU accession talks could accelerate reform momentum as North Macedonia implements the changes required to align it with Acquis Communautaire, the body of EU law. Nevertheless, we consider that it will take time before any adopted reforms bear fruit and become firmly entrenched within the institutional framework. We do not expect North Macedonia to join the EU in the short-to-medium term, based primarily on the experience of other countries in the region in recent years. For example, Montenegro and Serbia started accession negotiations in 2012 and 2014, respectively. The European Commission last year stated that they could join the EU by 2025 provided that required reforms are implemented. Assuming a similar timeframe, North Macedonia is unlikely to join the EU before 2030, in our view.
In addition to resolving the name dispute, North Macedonia has recently undergone an orderly power transfer that we believe has set an important precedent given that the country's political stage had been dominated by the VMRO-DPMNE party for more than 10 years previously. Despite the close 2016 election outcome, SDSM ultimately succeeded in forming a government in May 2017 and has now been in office for almost two years. We consider that the power transfer and the subsequent ability of SDSM to govern goes some way toward strengthening various public institutions, even though checks and balances and policy predictability still remain weak. To this end, we note the high levels of perceived corruption and the difficulties in enforcing some judicial decisions seen, for instance, in the escape of former prime minister Nikola Gruevski abroad, despite facing charges domestically.
North Macedonia is currently gearing up for presidential elections scheduled for April 2019, but we expect limited policy changes in the aftermath. This is primarily because the presidential post is largely ceremonial in North Macedonia. The incumbent president Gjorge Ivanov supports the main opposition VMRO party but he is due to step down in May 2019 given the end of his second term in office.
In line with our previous expectations, North Macedonia's economy returned to growth last year, following stagnation in 2017. We estimate that output expanded by 2.5% in real terms in 2018. Although we view the resolution of the name dispute as an important development, we consider that the return of political stability has been at least as important in helping accelerate economic dynamics. We currently do not expect the resolution of the name dispute to substantially alter North Macedonia's growth performance in the short term.
We project that the economy will grow by 3% on average over the next three years. Domestic consumption and exports will remain important growth drivers. Meanwhile, we expect a stronger outturn for investments after an estimated 8% real contraction in 2018. This will happen on account of both rising private investments owing to improved political stability, as well as accelerating public capital expenditure (capex) following the substantial under-use of the capex budget last year on delays in a publicly-funded road construction, among other things."