Macedonia’s economic growth will accelerate in 2014 with support from an incipient recovery in exports, a rise in public investment in infrastructure and projects funded by foreign investment. The recovery is still narrowly based but the economy should strengthen further in the medium term, approaching 4.0% per year. However, the stock of FDI is lower than the regional average, and substantially less than in Bulgaria, Croatia and Romania. Macedonia has some of the lowest wage costs in Europe. Macedonia experienced a mild recession in 2009. Weaker export demand and tighter conditions on foreign lending were the main culprits. The economy staged a modest rebound in subsequent years but contracted again 2012. Growth returned in 2013, however at a pace that has consistently been insufficient to raise living standards.
Macedonia was generally shielded from the impact of the eurozone crisis due to the country's prudent fiscal policy, an absence of major imbalances and a financial system that is not dependent on significant parent bank capital.
Ambitious programmes to improve roads, power, water and other infrastructure - mainly through internationally-funded projects are underway and could lay the basis for sustainable growth in the future. Inflation has been rising but wage hikes have prevented a drop in consumer income.
Macedonia's economy will improve in 2014 when real GDP growth is expected to accelerate to 3.2% from 2.2% in 2013. Support should come from an incipient recovery in exports, a rise in public investment in infrastructure and projects funded by foreign investment. The recovery, however, is still narrowly based. Growth is expected to accelerate in the medium term, approaching 4.0% per year.
Inflation was 2.8% in 2013 and prices are expected to rise by 2.5% in 2014. Inflation generally tracks the rate of price increase in the eurozone.
Officials intend to boost investment spending for roads, railroads, gasification, and other energy infrastructure. Incentives include a 10-year tax holiday for companies setting up in a special development zone, subsidies for greenfield plants and some of the lowest wage costs in Europe. In addition, the government offers investors an “investment premium” to repay 50% of the cost once a production facility is completed. Macedonia's 10% flat tax along with a favourable business and investment environment is also an advantage.
The real value of private final consumption rose by 1.6% in 2013 while gains of 1.9% are expected in 2014. Stronger rates of growth are forecast in the medium term.
Unemployment was 29.7% in 2013 and is expected to edge down to 28.7% in 2014. Youth unemployment is thought to be close to 50%. However, many of those reported officially as unemployed work in the informal sector. The informal market represents 20-45% of GDP. Education and labour skills are regarded as inadequate.
Evaluation of market potential
Real growth of GDP should accelerate in 2015 and 2016. The government's target is to achieve sustainable growth of at least 6.5% over the medium term. However, the stock of FDI is lower than the regional average, and substantially less than in Bulgaria, Croatia and Romania. A sustained improvement in investment is badly needed.
Macedonia has high rates of unemployment, high youth unemployment, and low rates of labour force participation and it appears that much of the problem is structural in nature. This means it will be more difficult to cut unemployment. Pro-growth policies include preservation of a low tax environment, investments in infrastructure and education and the promotion of FDI.
In 2013, exports were 40.0% of GDP compared to 39.9% in 2008. Exports (in dollars) rose by 4.6% in 2013. Export growth should be much stronger in the medium term, underpinned by inflows of FDI to the tradable sector, low wage levels relative to neighbouring countries and a notable contribution from free trade zones. Presently, two-thirds of landlocked Macedonia's trade moves though the Thessaloniki port but the country is upgrading its roadway system to boost exports.
Tariffs on more than 100 imported products have been dropped as part of the country's drive to implement its Stabilisation and Association Agreement (SAA) with the EU. Tariffs on agricultural products will remain partially in place. The government is intent on protecting domestic agriculture, which is not covered by the SAA. Macedonian exporters are benefitting from Kosovo's embargo on Serbian goods.
Both the manufacturing sector and the agricultural sector are increasingly export-oriented. In 2013, basic manufactures – typically low-cost products with limited international competitiveness – were 26.1% of the total. In 2013, 59.8% of total exports went to the EU. The current account deficit was 3.9% of GDP in 2012 and it widened to 5.8% in 2013 as capital imports grew.
The government has introduced a series of significant reforms but there are lingering constraints on the private sector. The clearance of payment arrears began in late 2012 and provides businesses much-needed liquidly. Property rights, however, are weakly enforced and corruption in the customs department adds to the cost of trading. The operating environment for smaller investors must also be improved.
Other reforms introduced in recent years include an overhaul of the business registration system, the simplification of licensing procedures and privatisation of electricity distribution. A flat tax rate for both corporations and personal incomes has proved attractive to investors. Macedonia has also developed free economic zones in Skopje, Tetovo and Bitola. The government is committed to reform its electricity industry. A new energy law is expected to bring the country in compliance with its treaty obligations once it is fully implemented.
EU accession is the driving force behind most of the reforms. National legislation is being realigned to meet EU specifications. Officials have made specific progress in fields such as procurement, transport policy, customs union and taxation.