VZCZCXRO2965
RR RUEHPOD
DE RUEHSQ #0070/01 0281244
ZNR UUUUU ZZH
R 281244Z JAN 08
FM AMEMBASSY SKOPJE
TO RUEHC/SECSTATE WASHDC 6955
RUEATRS/DEPT OF TREASURY WASHDC
RUEHBS/USEU BRUSSELS
RUEHNO/USMISSION USNATO 3743
RUEAIIA/CIA WASHINGTON DC
RUEHTI/AMEMBASSY TIRANA 3615
RUEHSF/AMEMBASSY SOFIA 5147
RUEHPOD/AMEMBASSY PODGORICA
RUEHLJ/AMEMBASSY LJUBLJANA 0961
RUEHVB/AMEMBASSY ZAGREB 2371
RUEHBW/AMEMBASSY BELGRADE 2156
RUEHVJ/AMEMBASSY SARAJEVO 0288
RUEHTH/AMEMBASSY ATHENS 1802
RUEHPS/USOFFICE PRISTINA 4375
RUESEN/SKOPJE BETA

UNCLAS SECTION 01 OF 03 SKOPJE 000070 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT PLS PASS TO USAID, 
DEPT FOR EUR/SCA P.PFEUFFER AND Y.IVANOVA 
TREASURY FOR TPHILLIPS AND W.LINDQUIST 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PGOV EAID MK
SUBJECT: MACEDONIA'S MAIN ECONOMIC GOAL: ACCELERATED GROWTH 
 
REF: SKOPJE 0053 
 
Summary 
------- 
¶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 
-------------------------------- 
¶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 
------------------------ 
¶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 
--------------------------------------------- 
¶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. 
 
 
SKOPJE 00000070  002 OF 003 
 
 
¶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 
------------------------- 
¶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 
---------------------- 
¶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 
------------------- 
¶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 
--------------------------------------------- 
¶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 
 
SKOPJE 00000070  003 OF 003 
 
 
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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