World Bank Group - FYR Macedonia Partnership ………………………… Country Program Snapshot April 2015 RECENT ECONOMIC AND respectively, backed by growth in exports and SECTORAL DEVELOPMENTS domestic consumption. Real GDP growth contracted again in 2012 by 0.5 percent and Growth and Shared Prosperity climbed to 2.7 percent in 2013, driven by exports and buoyant construction. FYR Macedonia is a small, open economy with Figure 1. Growth Performance: Cross-Country a sound track record of macroeconomic Comparison of Real GDP growth stability. Landlocked, with a population of only 2.1 million, the country’s GDP per capita is a third 15 of the average of the European Union (EU) members that have joined since 2004 and 15 10 Projections percent of the EU average as a whole. Though it 5 was among the first Western Balkan countries to gain EU candidate country status in 2005, it has yet 0 to start EU accession negotiations. Nevertheless, EU accession is the main anchor of its reform -5 agenda. -10 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 FYR Macedonia has been able to preserve Albania Bosnia and Herzegovina Kosovo Macedonia, FYR macroeconomic stability in the presence of Montenegro Serbia adverse shocks. The exchange rate peg to the Source: World Bank staff calculations. euro, introduced in 1995, has successfully supported price stability, with inflation averaging Among the six SEE countries, GDP growth for 2.4 percent per year over the past 10 years. 2014 is expected to be the highest in FYR Macroeconomic policies have been geared toward Macedonia. Real GDP is estimated to have keeping the external balance manageable, and increased by 3.5 percent in 2014, with growth that monetary policy has responded quickly to any was broad-based and driven by manufacturing, possible threats to the peg. The Government has construction, and FDI-related exports. Services, also implemented key reforms to improve the including wholesale and retail trade, real estate, and business climate, elevating FYR Macedonia to one professional services, also contributed to growth. of the top performers in the 2013 Doing Business On the demand side, investment contributed 3.3 rankings: 22nd worldwide. The country maintained percentage points to growth, and private its high ranking (30th) in the latest 2015 Doing consumption 1.4 percentage points. Public Business report. The authorities have combined investment is expected to remain strong in 2015, structural reforms, support of industrial zones, and supporting the solid growth performance. fiscal measures—notably tax exemptions for foreign investors—with targeted advertisements to Despite strong growth, deflationary pressures attract foreign investors. Inflows of foreign direct continued, and the consumer price index (CPI) investment (FDI) averaged 2.8 percent of GDP per declined by 0.3 percent in 2014. Inflation was year between 2009 and 2014 but are still low by negative for three consecutive quarters in 2014, as regional standards. food and oil prices plummeted, especially in the last quarter. Core inflation reached 0.6 percent in 2014 FYR Macedonia’s growth has been above the but turned negative in the fourth quarter of the South East Europe (SEE)1 regional average year. since 2009. Between 2002 and 2008, FYR Macedonia grew an average of 4.3 percent annually In the medium term, FYR Macedonia’s growth in real terms, which was 0.7 percentage points is expected to accelerate, driven by below the regional average. Nevertheless, since manufacturing exports, public investment, and 2009, FYR Macedonia’s average growth has been a gradual recovery in domestic demand. Under 1.5 percent, exceeding the regional average of 1.3 the baseline projections, real GDP growth is percent. Real GDP growth contracted by 0.4 expected to reach 3.5 percent in 2015 and to percent in 2009 but recovered quickly, reaching 3.4 accelerate to 3.8 percent in 2016. Public investment percent in 2010 and 2.3 percent in 2011, is projected to remain an important growth driver, 1 The region of South East Europe consists of: Albania, Bosnia and Herzegovina, Kosovo, FYR Macedonia, Montenegro, and Serbia. 1 as the Government scales up public investment in Figure 2. Export Performance the roads sector (including construction on two a. Trade Deficit, Private Transfers, and Current new highways). Manufacturing exports are also Account Deficit (in % of GDP) expected to continue to support growth, driven 25 20 largely by existing and incoming FDI. In addition, 15 private consumption is expected to pick up as 10 5 unemployment continues to fall. Key risks to this 0 medium-term outlook are a weaker-than-projected -5 -10 economic outlook in the Eurozone and continued -15 deflationary pressures. -20 -25 -30 Available data suggest that gains from growth 2009 2010 2011 2012 2013 2014 est. have not been widely shared. FYR Macedonia Trde deficit Private trasnfers CAD has made impressive progress in reducing Source: NBRM and World Bank staff calculations. unemployment (declining from 34 percent in 2008 b. Current Account Financing (in % of GDP) to 28 percent in the third quarter of 2014), yet most 15 jobs were created in low-productivity sectors or in the public sector. Between 2003 and 2008, 10 consumption-based absolute poverty, based on 5 2 data from the Household Budget Survey, 0 increased from 7 to 9 percent using a regional -5 poverty line of US$2.5 per day, and from 30 to 35 percent using a regional poverty line of US$5 per -10 day. During the same period, official relative -15 poverty statistics3 remained largely unchanged at 2009 2010 2011 2012 2013 2014 est. FDI flows, net Prtfolio investment, net around 30 percent. FYR Macedonia has recently Other investment, net Loans, net adopted a new way of measuring poverty through Change in reserves Capital account Current account Deficit the income-based Survey of Income and Living Conditions (SILC), also used in the EU. According Source: NBRM and World Bank staff calculations. to SILC data, the share of the population at risk of poverty declined modestly from 27 percent in 2010 The current account deficit (CAD) has steadily to 26.2 percent in 2012, with an average real GDP declined since 2009. After peaking at 6.5 percent of GDP in 2009, the CAD has been declining growth of 1.8 percent. gradually in terms of GDP to 1.8 percent in 2013 and 1.5 percent in 2014. FDI-related exports, The population at risk of poverty is expected to remain stable at around 30 percent. Under the especially in the automobile industry and electrical assumption that the main drivers of growth will machinery, were a key driver of export growth but remain the same as in the previous three years, have contributed only around 6 percent to growth in net exports, as the import content of FDI-related poverty trends are not expected to change 4 significantly. The buoyant construction sector is exports remains high. In addition, the recent decline in oil prices has reduced pressures on the expected to contribute to employment growth, current account. Energy imports have been especially for the less skilled and less well-off, and growing by around 12 percent since 2010, and the the expected increase in manufacturing and FDI- related exports can translate into net job creation decline in oil prices in 2014 reduced the CAD by and contribute to urban poverty reduction. The around 0.4 percentage points. FYR Macedonia falling oil prices will affect household budgets tends to run a large trade deficit (17.8 percent in positively through reduced transportation costs. 2014) that is largely financed through private transfers. This reliance on private transfers exposes the country to external risks that could be mitigated External Developments by increasing FDI, enhancing backward linkages between foreign firms and domestic suppliers, 2 Monitoring the evolution of poverty in FYR 3 Measured at 70 percent of median consumption. Macedonia has become challenging in recent years due 4 In addition, roughly 40 percent of the exported value to concerns over the data quality of the Household of iron and steel, FYR Macedonia’s second most Budget Survey (HBS), particularly from 2009 onward. important export good, is imported. Therefore, the HBS series is used until 2008 until further diagnostics are carried out. 2 reducing energy imports, and strengthening 2014 (or 40.8 percent in net terms). By comparison, competitiveness. public debt in the SEE region averaged 52.7 percent in 2014. This increase in public debt was Additional reforms will be required to improve driven by sustained fiscal deficits at the central the competitiveness of the FYR Macedonian government level and state-owned enterprise economy and take better advantage of the (SOE)-led investments. The Government’s €500 economic benefits of FDI. In particular, the million Eurobond in July 2014 served to pre- country is facing the following challenges: (a) finance the rollover of €150 million, which comes exports are still too concentrated in commodities due in December 2015 (figure 4). The Government (metals and minerals), where value added is low and put forward an ambitious policy program in 2014 prices are volatile; (b) medium and large firms do that—if fully implemented—would steeply not invest sufficiently in quality or innovation; and increase FYR Macedonia’s public debt over the (c) most exporting firms are small (fewer than 10 medium term. employees) and have difficulty competing in export markets because of inefficiencies and high costs Figure 3. Public Debt by Government Levels (as % related to customs, logistics, and trade of GDP) infrastructure. Further, (d) the agribusiness sector, 50 which employed 20 percent of the workforce in 45 40 2012, is constrained by several factors, including 35 the large share of state-owned land, which needs to 30 be better managed to unleash its productive and 25 20 export potential.