Macedonia’s Great Cautionary Conquest

Ex-Yugoslav Republic Macedonia, which had battled diplomatically with Greece over proper use of the state name which produced the warrior Alexander the Great, mounted a financial defense against debt worry spillover from its neighbor as the first recipient of the IMF’s year-old precautionary credit facility. It got EUR 475 million in recognition of “sound economic policies” without immediate balance of payments tension to “mitigate regional contagion risk.” Moderate fiscal deficits and inflation and an exchange rate peg are advantages designed to be bolstered by the line, which should also “facilitate private capital markets access” as Eurobond issuance is contemplated. The multilateral resort leaves Croatia as the main former Balkans war hotspot without a program despite repeated rumors and a critical Article IV write-up urging “far-reaching medium-term reforms.” It found that recession continued in 2010 on high private debt curbing internal demand and “feeble” exports reflecting poor competitiveness. GDP growth could be a bare 1 percent this year on stubborn double-digit unemployment, while the current account gap could worsen to 4 percent of output with external debt almost at 100 percent of the figure. The fiscal shortfall at 6 percent of GDP warrants “stronger measures” despite a proposed spending freeze that spares government wages and pensions. More labor market flexibility and privatization would help redress the imbalance, and in the banking sector asset quality continues to slump as corporate and household loans are flat. To raise revenue officials are considering a financial institution tax that could bring “adverse macroeconomic implications,” the examination warns.

Bosnia-Herzegovina, along with Serbia, inked a crisis-related Fund standby in 2009, and was recently added to the MSCI frontier equity roster alongside Belgrade and Zagreb, and EU member Slovenia in the former Yugoslavia contingent. The Croatian and Serbian indices finished 2010 up 5 percent, while Ljubljana dropped 15 percent. The stabilization program along with wider deposit insurance upheld bank confidence as the budget deficit at 5 percent of GDP in 2010 is addressed through balance sheet and structural changes, according to the Fund’s latest consultation. Real wages have stagnated although inflation is low and foreign banks have committed to keeping their local subsidiary exposure notwithstanding reduced profitability. The federation still is politically fragile with newly-elected nationalist leaders underscoring ethnic and geographic divides when unitary fiscal consolidation is vital to a “sustainable footing,” in a sub-region which has already witnessed numerous tragic false steps, the assessment offers.