MACEDONIA'S MAIN ECONOMIC GOAL: ACCELERATED GROWTH

UNCLAS SECTION 01 OF 03 SKOPJE 000070

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E.O. 12958: N/A
TAGS: EFIN ECON PGOV EAID MK
SUBJECT: MACEDONIA'S MAIN ECONOMIC GOAL: ACCELERATED GROWTH

REF: SKOPJE 0053

Summary
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1. (U) In its macroeconomic policy for 2008, the GOM focuses on
policies that it hopes will lead to GDP growth of six percent in
each of the next three years. Macedonia's macroeconomic foundation
remains sound. GDP growth in 2007 was estimated at about five
percent, an increase over the preceding year, but has not yet
reached the GOM's six percent target. Unemployment has declined
slightly but remains stubbornly high. The GOM expects that
continued structural reforms in key sectors will further improve the
investment climate, attracting more investors and leading to higher
growth. If the country is able to sustain this higher level of
economic growth, the average Macedonian should begin to feel the
impact in terms of greater job opportunities, higher wages, and an
overall improved standard of living. End summary.

Ambitious Goals Continue in 2008
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2. (U) In its macroeconomic policy for 2008, the GOM outlined the
economic developments it expects for the period 2008 - 2010. The
GOM's overall economic goals in 2008 are a continuation of its 2007
goals: accelerating economic growth accompanied by low inflation,
which would lead to higher disposable household income and improved
living standards. The GOM forecasts that GDP growth in this period
of between 6 and 6.5 percent.


3. (U) The main drivers of accelerated growth on the demand side are
expected to be private consumption and foreign direct investments,
while on the supply side the GOM anticipates higher growth in
services. Personal consumption is forecast to account for 3.5 to 4
percentage points of GDP growth, based on projected growth in net
wages of 5 percent, a 30 percent increase in household credit, lower
personal income taxes, and an expected stable level of private
transfers (including remittances). The GOM also expects that growth
in services will outpace growth in the industrial sectors that grew
rapidly in recent years, such as metal processing and mining.

Inflation To Remain Tame
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4. (U) Price stability is the GOM's primary monetary policy goal in

2008. The stable denar-euro exchange rate will continue to serve as
an anchor for maintaining low inflationary expectations and
supporting a predictable business environment. Even taking into
consideration world market prices for food, oil and energy, the GOM
projects the CPI-based inflation rate will be 3 percent in 2008 and
2.5 percent in 2009 and 2010, due to prudent monetary policy. In
addition, net real wages are expected to rise by five percent in
2008 and six percent in 2009-2010.


5. (U) The money supply is projected to grow by a significant 27.6
percent in 2008. Reserve money (i.e., cash in circulation and
vaults) will grow by 17.4 percent, denar and foreign currency
deposits will grow by 40.2 and 17.5 percent respectively, generating
a 37.2 percent increase in credit to the private sector, according
to government estimates.

Fiscal Policy: Tax Reform and Higher Spending
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6. (U) The GOM's tax cuts will take full effect in 2008, with both
personal income tax and the profit tax falling to a flat 10 percent
rate. Tax reform is also scheduled to continue, leading to a
simpler, more efficient tax system that the GOM hopes will do its
part to stimulate growth. Currently the calculation and collection
of various employer contributions (i.e., employee pensions,
healthcare, personal income tax, and unemployment insurance) is
complex and burdensome. During 2008, the GOM plans to ease the
burden on business entities by streamlining the calculation and
collection of employer contributions. According to Macedonia's
WTO-membership obligations, further reduction of import duties and
excises will continue on selected products.


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7. (U) The 2008 budget will increase government spending
significantly, with expenditures up more than 12 percent over 2007
and a higher projected deficit of 1.5 percent of GDP (septel will
report on the 2008 budget). Infrastructure expenditures in
Macedonia have been relatively low in recent years, but the GOM
expects them to increase with implementation of its Public
Investment Program. With funds from the budget, private investors,
foreign grants, and foreign loans, the GOM plans to direct
investments in roads, bridges, energy transmission power lines,
hydro power plants, a natural gas network, electricity generating
capacity, railways, water supply, and irrigation and sewage systems.
The GOM plans to implement these investments using two main
mechanisms: granting concessions to private investors and forming
public/private partnership.

Structural Reform Efforts
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8. (U) In order to make Macedonia more attractive to investors, the
GOM promises to continue ongoing reform efforts. The GOM's
structural reform agenda aims to attract more foreign investors and
stimulate domestic businesses. This is projected to increase
employment by four percent and labor productivity by four to five
percent in 2008. The main focus of the reforms will be in the
judiciary, the labor market, the health sector, energy, agriculture,
the real estate cadastre, transportation, communications, and
decentralization. However, the GOM does not intend to privatize any
of the utilities that remain state owned, including energy
generation.

Trade Deficit to Widen
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9. (U) The GOM expects its aggressive campaign for attracting
foreign investors to produce results in 2008, and is projecting FDI
of $403 million in 2008. This level of FDI would contribute about
two percentage points to GDP growth. Import growth of 14 percent is
expected to outpace export growth of nine percent in 2008, raising
the trade deficit to a relatively large 26.2 percent of GDP. The
current account gap will increase to 5 percent of GDP, as the trade
deficit grows faster than the inflow of private transfers.

Public Debt Falling
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10. (U) The GOM expects total public debt will decline further in
2008, to 28.8 percent of GDP from the current 33.1 percent. In
terms of the currency structure of the debt, the GOM intends to
switch to more denar and euro denominated debt, and away from dollar
denominated debt. The GOM also plans for further development of the
primary and secondary market for government debt, including issuing
longer-term debt. The GOM also intends to provide greater
transparency of total government debt by establishing a unified
public debt register. Currently, there is no integrated register of
all public debt, including the debt of municipalities and public
enterprises.

Public Still Waiting For Economic improvement
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11. (U) Macedonians are intensely concerned about their economic
situation. According to a public opinion poll conducted by the
International Republican Institute (IRI) in December (reftel),
Macedonians view economic problems as the single most important
issue facing the country. When asked to choose Macedonia's most
critical issue, 50 percent of respondents said it was unemployment,
and an additional 31 percent chose other economic problems.


12. (U) According to the same poll, most Macedonians have not yet
felt significant economic improvement in their lives, but they are
still fairly optimistic that the economy will improve. 70 percent
of respondents said they had not felt any effect from the
government's measures over the past year. However, 44 percent
thought the economy would get better over the next two years, while
only 18 percent thought it would get worse.

Comment

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13. (SBU) After 18 months in office, the GOM's economic policies
have not yet had a significant impact on citizens' lives. While the
economy is stable and inflation remains low, the unemployment rate
has barely budged and real wage growth has not been high enough for
workers to see a substantial improvement in their standard of
living. The GOM appears committed to continuing with structural
reforms, while accelerating infrastructure investments. Government
leaders continue to promise that these policies will lead to higher
levels of private and public investment, and that Macedonians will
in turn finally experience a real economic boost. The one worrying
cloud on the horizon is the widening trade deficit. So far this has
not led to a large capital account deficit, but that is projected to
begin growing next year.


14. (U) The GOM's main macroeconomic indicators:
2007 2008
est. proj.
GDP real growth rate 5.1 6.0
Inflation (CPI, average) 2.0 3.0
Wages (real growth rate) 4.3 5.0
Employment growth rate 4.0 4.0
Budget deficit (% of GDP) -1.0 -1.5
Exports growth rate 35.6 9.0
Imports growth rate 30.2 14.0
Trade balance (% of GDP) -22.6 -26.2
Current account balance (% of GDP) -2.9 -5.0
Public debt (% of GDP) 33.1 28.8
FDI (in mln. US$) 363.0 403.0
Credit to private sector (growth rate) 20.0 37.2

MILOVANOVIC