Macedonia Central Bank Statement

Author: | Published: 19 Oct 2018
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In the last eight years, the Macedonian economy has gone through notable structural changes, with major reforms undertaken, bringing new foreign companies into the economy and reshaping the export sector. Concomitantly, a stronger public investment cycle has provided impetus to investments and growth. Both processes emerged when the global crisis struck, which helped build the resilience of the economy against the crisis. This also enabled solid growth thereafter, on average close to 3%. Given these growth rates, the current level of GDP exceeds the pre-crisis maximum by around 20%.

Dissimilar to the pre-crisis period when growth was mostly consumption driven, in the post-crisis period, exports and investments have been major growth drivers. Hence, significant positive structural shifts have occurred, with the share of investments and exports of GDP increasing markedly. Last year was an exception in terms of investment growth, as due to peculiar domestic political conditions, investments plunged temporarily.

The latest medium-term economic outlook envisages a stable political context and protraction of favourable trends, with growth rates assumed to hover in the range of 3% to 3.5%, or close to the potential.

Given the small size and the openness of the economy, one of the important assumptions in the forecast is the external environment, which is assessed to be growth conducive, with further recovery among our main trading partners. A further rise of the activity of foreign investors, as well as the entry of new companies into the market, are also assumed to support the growth and competitiveness of the economy. The forecast assumes the revival of the public investment cycle, which in confluence with private investment will enable strong contribution of investment.

In a stable environment, we expect the continuation of a trend of steadily increasing employment and income in the labour market, which will support consumer spending. Overall, an export-led growth model supported by strong investments is expected to prevail. This is an inevitable prerequisite for a faster real convergence and productivity catch-up for a small and open economy.

In the context of the medium-term outlook, there are several points which should be accentuated as important challenges. One of them is the maintenance of an environment conducive to the further entry of new multinational companies, which will enable the economy's stronger integration into global supply chains. There is currently a dearth of strong production-line linkages between foreign companies and domestic suppliers, but this is an important precondition for a stronger spill-over from foreign investments into the domestic economy. Furthermore, Macedonia also needs a shift towards sectors with higher levels of technological sophistication, as a precondition for more efficient and innovative growth.

All this requires additional and innovative sources of financing, which in the Macedonian context would mean more developed financial markets and more diversification in financial instruments. Lastly, it is important to deal with certain segments of the economy that are still poorly ranked, such as governance, quality of institutions and human capital. All of this, should enable stronger and sustainable growth, and the improved competitiveness of the economy.