VZCZCXRO7155
RR RUEHAG RUEHAST RUEHDA RUEHDF RUEHFL RUEHIK RUEHKW RUEHLA RUEHLN
RUEHLZ RUEHPOD RUEHROV RUEHSR RUEHVK RUEHYG
DE RUEHSQ #0256/01 1000816
ZNR UUUUU ZZH
R 090816Z APR 08
FM AMEMBASSY SKOPJE
TO RUEHC/SECSTATE WASHDC 7243
INFO RHEHNSC/NSC WASHDC
RUEATRS/DEPT OF TREASURY WASHDC
RUEHNO/USMISSION USNATO 3759
RUEHZL/EUROPEAN POLITICAL COLLECTIVE 0274
RUESEN/SKOPJE BETA

UNCLAS SECTION 01 OF 02 SKOPJE 000256 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
DEPT PLS PASS TO USAID 
TREASURY FOR W.LINDQUIST 
 
E.O. 12958: N/A 
TAGS: ECON EFIN PREL EAID MK
SUBJECT: MACEDONIA: SOLID 2007 ECONOMIC PERFORMANCE 
 
REF: A. SKOPJE 169 
 
¶B. SKOPJE 139 
¶C. 07 SKOPJE 464 
 
Summary 
------- 
¶1. (SBU) In 2007, Macedonia's economy performed solidly, with GDP 
growth rising to 5.1 percent, relatively low inflation, a balanced 
budget, a 40 percent increase in exports, and a low current account 
deficit.  In the last few months of 2007, however, analysts began 
noting a worrying trend of both higher inflation and a rising 
current account deficit.  Foreign direct investment remained 
relatively low, though investors showed increased interest in "green 
field" investments.  Official unemployment declined slightly, but 
was still very high at almost 35 percent.  End summary. 
 
GDP Growth Higher 
----------------- 
¶2. (U) Macedonia achieved GDP growth of 5.1 percent in 2007, the 
highest annual economic growth since  independence and an increase 
from 4.0 percent in 2006.  The GOM projects 2008 GDP growth of six 
percent, while the IMF projects a more conservative five percent 
growth rate. 
 
Industrial Growth Modest 
------------------------ 
¶3. (U) Industrial output in 2007 grew by a lower than expected 3.7 
percent.  Rising oil prices may have hampered production in some 
sectors.  Production of energy in 2007 dropped by 6.9 percent and 
non-durable consumer goods production fell by 2.0 percent.  However, 
capital goods production rose by 19.7 percent, intermediate goods by 
12.9 percent, and durable consumer goods by 8.8 percent, offsetting 
declines in other areas. 
 
Inflation Higher Than Expected 
------------------------------ 
¶4. (U) Year-on-year inflation, measured by the consumer price index, 
hit 6.1 percent in 2007, double the GOM's three percent target. 
During the year, the inflation rate climbed from less than two 
percent during the first six months of the year, to about four 
percent from September to November, ending the year at 6.1 percent. 
This trend of rising inflation accelerated during the first quarter 
of 2008 (septel).  In 2007, food prices rose by 12.8 percent, while 
rising world oil and energy prices also contributed to higher 
inflation, increasing production costs in all industries. 
 
Unemployment Fell Slightly, Wages Higher 
---------------------------------------- 
¶5. (U) The stubbornly high official unemployment rate decreased only 
slightly in 2007, despite higher GDP growth.  The unemployment rate 
decreased 1.2 percent to 34.8 percent at the end of the year.  Real 
wages grew by 5.5 percent in 2007.  In September, the GOM raised 
public administration wages by 10 percent, with a promise to again 
raise wages by ten percent in 2008 and by 14 percent in 2009.  The 
GOM also raised pensions by 15 percent. 
 
Tax Collection, And Government Spending, Increased 
--------------------------------------------- ----- 
¶6. (U)  Collection of tax revenues during 2007 grew by 16.4 percent, 
primarily due to improved tax administration and greater enforcement 
of tax collection.  The unexpectedly large increase in revenues, 
coupled with the GOM's inability to spend money efficiently (ref A), 
led to a budget surplus of over three percent of GDP by November. 
The GOM went on a spending spree in December, but still ended the 
year with a surplus of 0.3 percent of GDP, above its IMF supported 
target of one percent of GDP.  The GOM is projecting a budget 
deficit of 1.5 percent of GDP in 2008. 
 
Monetary Policy Supported Growth 
-------------------------------- 
¶7. (U) The Central Bank supported higher economic growth with a 
looser monetary policy.  The Central Bank lowered interest rates on 
its bills to below 5 percent, and private banks followed the Central 
Bank's signal.  The weighted average lending rate dropped to 9.9 
percent from 10.7 at the beginning of the year.  The average money 
market rate dropped to 3.1 percent from 4.9 percent at the end of 
¶2006.  As a result, credit to the private sector in 2007 was 29.7 
percent higher than in 2006.  However, as a share of GDP private 
credit is still low, even by regional standards. 
 
Reserves Up, Exchange Rate Stable 
--------------------------------- 
¶8. (U) The Central Bank accumulated net international reserves of 
$2.2 billion by the end of 2007, up 18.6 percent from 2006.  The 
 
SKOPJE 00000256  002 OF 002 
 
 
reserves are sufficient to cover about four months of imports, the 
target agreed to with the IMF.  The Central Bank's ability to 
maintain the denar's fixed exchange to the euro did not face any 
serious pressure in 2007. 
 
Trade Deficit High, Private Transfers Compensate 
--------------------------------------------- --- 
¶9. (U) Macedonia's exports grew by a significant 39.8 percent, led 
by increases in exports of metals.  However, imports rose by a 
comparable 38.9 percent.  As a result, the trade deficit remained 
high, at 23.3 percent of GDP, reaching $1.9 billion.  The financial 
effect of the trade deficit was largely offset by $1.4 billion in 
private transfers of capital from abroad.  Therefore, the current 
account deficit was only $238 million, or three percent of GDP. 
However, over the year the current account trend was negative, with 
a surplus in the first half of the year sliding into a deficit by 
November. 
 
Government Debt lower 
--------------------- 
¶10. (U) During the year, the GOM reduced its debt level, lowering 
the country's external debt to 34.3 percent of GDP from 38.9 percent 
at the beginning of the year.  Macedonia pre-paid about $300 million 
of debt on relatively unfavorable terms (ref C), including debt to 
the IMF, the World Bank, the European Investment Bank and the Paris 
Club.  Total public debt, both external and domestic, fell from 40.2 
percent of GDP to 35.3 percent by the end of 2007.  The GOM intends 
to further reduce external and total public debt. 
 
Foreign Investment Still Low 
---------------------------- 
¶11. (U) While international investors are increasingly exploring 
opportunities in Macedonia, actual foreign direct investment (FDI) 
remains low.  In 2007, FDI was $320 million, still the lowest in the 
region.  There were some bright spots, with the US automobile parts 
producer Johnson Controls completing a factory in the free trade 
zone in 2007 (ref B), and the British multinational company, Johnson 
Matthey, announcing it would break ground on a catalytic converter 
factory in 2008.  Other significant investments in 2007 were seen in 
dairy production, insurance, banking, and telecommunication 
services. 
 
Comment 
------- 
¶12. (SBU) Based on results in 2007, Macedonia's economy appears to 
face two possible paths.  If inflation and the current account 
deficit remain under control, while private credit and FDI grow, 
then the economy should continue to support steady growth and higher 
real wages.  However, if the inflation rate continues to accelerate 
unchecked and the current account deficit widens, then Macedonia may 
face slower real growth in GDP and wages.  End comment. 
 
¶13. (SBU) Macedonia's Macroeconomic Indicators 
--------------------------------------------- - 
 
                              2006      2007     2008 
             proj. 
--------------------------------------------- --------- 
Real GDP growth rate (pct)      4.0      5.1       6.0 
Industrial output (pct)         3.6      3.7       6.1 
Inflation (CPI pct)             2.9      6.1       3.5 
Real average wage (pct)         4.0      5.5       5.0 
Budget balance (pct of GDP)    -0.2      0.3      -1.5 
Exports growth rate (pct)  17.6 39.8   9.0 
Imports growth rate (pct)  16.6 38.9  14.0 
Trade balance (pct of GDP)    -21.9    -23.3     -26.2 
Current account (pct of GDP)   -0.9     -3.0      -5.0 
Forex reserves ($ million)  1,871.0  2,219.2   2,547.7 
Ext. debt (pct of GDP)   38.9 34.3  37.2 
FDI ($ million)   424.0    320.7     403.0 
Credit to private sector (pct) 30.5 29.7  37.2 
--------------------------------------------- --------- 
Source: GOM Statistical Office 
 
 
MILOVANOVIC