August 4, 2017 / 8:12 PM / 7 months ago

Fitch Affirms Macedonia at 'BB'; Outlook Negative

(The following statement was released by the rating agency) LONDON, August 04 (Fitch) Fitch Ratings has affirmed Macedonia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BB' with Negative Outlooks. The issue ratings on Macedonia's long-term senior unsecured foreign- and local-currency bonds have also been affirmed at 'BB'. The Country Ceiling has been affirmed at 'BB+' and the Short-Term Foreign- and Local-Currency IDRs at 'B'. The senior unsecured short-term local currency issues have also been affirmed at 'B'. KEY RATING DRIVERS Macedonia's ratings are supported by a track record of credible monetary and macro-prudential policy, which has maintained longstanding stability of its exchange rate peg, supporting an environment of low inflation and stable economic growth. Government fiscal finances are also in line with its 'BB' category rated peers. However, GDP per capita is below the median of its 'BB' peers, and governance is a relative weakness. The Negative Outlook reflects Fitch's assessment that political risks for effective economic policy making and implementation, higher growth and progress towards EU accession remain, despite the formation of a new government. At the end of May, Zoran Zaev, leader of SDSM, was appointed Prime Minister in formal coalition with ethnic Albanian parties, DUI and the Alliance for Albanians, officially ending a prolonged political hiatus. The new government's policy programme, known as "Plan 3-6-9", aims to realign Macedonia's policies towards EU accession, NATO membership, and restore public confidence in the independence and transparency of public sector institutions but faces considerable challenges in its implementation. There is the risk of disagreements between SDSM and its coalition partners. In addition, opposition VMRO-DPMNE remains the largest political force in parliament and could attempt to obstruct the new government's agenda. Local elections scheduled for October will represent an early test of the government's progress. Macedonia's World Bank Governance Indicators are currently in line with the median of its 'BB' category peers. However, 2015's high level corruption scandal revealed severe shortcomings in standards of governance on a wide scale, resulting in a deterioration in certain indicators, notably "rule of law", "control of corruption", "political stability" and "voice and accountability". The impact of the political crisis negatively impacted growth in 1Q17 as the economy stagnated. High frequency indicators in retail sales and industrial production suggest another weak quarter of growth in 2Q. As a result, Fitch has revised down its 2017 real GDP forecast to 2.3% from 3.4%, six months ago. The formation of a new government should support an improvement in economic sentiment and activity in 2H17, and Fitch projects growth to recover towards an average of 3.2% in 2018-2019, in line with Macedonia's five-year average and the median growth rate of 'BB' category peers. Against Fitch's baseline, higher-than-forecast GDP could come from a robust recovery in investment. However, a resurgence in political uncertainty could present a negative shock to GDP. Macedonia's fiscal finances are currently in line with the median of its 'BB' peer group, but deterioration is forecast by Fitch for 2017. The new government's supplementary budget will increase public spending on social transfers, subsidies and minimum wages, despite targeting a lower deficit (2.9% of GDP). Fitch projects a general government deficit of 3.3% of GDP, up from 2.6% in 2016, as a result of lower tax revenues due to weaker economic activity, social expenditure pressures and the expected clearance of outstanding public sector arrears. Wider fiscal deficits increase pressure on an already upward trending general government debt ratio, although at 39.9% of GDP for 2017 it is forecast to remain below the projected 49.5% ratio of its 'BB' peers. 2017's fiscal financing requirements are covered by an adequate cash buffer, including resources from 2016's EUR450 million Eurobond. However, fiscal vulnerabilities are growing, reflected in the sovereign's relatively high share of short-term maturity debt (6.2% of GDP, 2017) and increasing guarantees accompanying large infrastructure projects. Macedonia's external finances remain broadly in line with its 'BB' peer group. Net external debt to GDP at 23.5% for 2016 is above the median 18.3% of its peer group, but the composition of debt is considered sustainable, accounted for mainly by the non-bank private sector, where just over half is inter-company lending. Current account deficits meanwhile remain adequately financed by a stable net inflow of FDI. Strong commitment by the National Bank of Macedonia (NBRM) and an adequate level of foreign reserves, covering 4.3 months of imports (2016), maintain the stability of the denar-euro peg. A track record of credible macro-prudential and monetary policy-making by the NBRM also supports a stable banking sector, where capital adequacy ratios (15.4% at 1Q17) are in line with the 'BB' median, coverage ratios of non-performing loans are at 114% (1Q17), and liquid assets to total assets are considered sufficient at 27.8% (1Q17). 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 the political risks are higher and levels of governance are weaker than what is captured in the SRM. 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. RATING SENSITIVITIES The main risk factors that, individually or collectively, could trigger negative rating action are: - A re-emergence of political instability that adversely affects the economy and government policy direction. - Fiscal slippage or the crystallisation of contingent liabilities that jeopardise the sustainability of public finances or the currency peg. - A widening of external imbalances that exerts pressure on foreign currency reserves and the currency peg. The main factors that could, individually or collectively, result in a stabilisation of the Outlook include: - A marked easing in political uncertainty supporting a more stable policy environment. - Implementation of a credible medium-term consolidation programme consistent with a stabilisation of the public debt/GDP ratio. KEY ASSUMPTIONS Fitch assumes that Macedonia will continue to pursue monetary and fiscal policy measures consistent with its currency peg to the euro. Contact: Primary Analyst Kit Ling Yeung Associate Director +44 20 3530 1527 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Erich Arispe Director +44 20 3530 1753 Committee Chairperson Tony Stringer Managing Director +44 20 3530 1219 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Country Ceilings Criteria (pub. 21 Jul 2017) here Sovereign Rating Criteria (pub. 21 Jul 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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