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R 071534Z APR 09
FM AMEMBASSY SKOPJE
TO SECSTATE WASHDC 8149
INFO NSC WASHDC
DEPT OF TREASURY WASHDC
EUROPEAN POLITICAL COLLECTIVE 0507

UNCLAS SKOPJE 000153 
 
 
DEPT PLS PASS TO USAID and EUR/SCE FOR ANNA STINCHCOMB 
TREASURY FOR WLINDQUIST 
NSC PLS PASS TO JEFF HOVENIER AND KATHERINE HELGERSON 
 
E.O. 12958: N/A 
TAGS: EFIN ECON PREL EAID MK
SUBJECT: MACEDONIA: MIXED SIGNALS AS BUDGET REALITIES MEET ELECTION 
POLITICS 
 
SENSITIVE BUT UNCLASSIFIED - PLEASE PROTECT ACCORDINGLY 
 
Summary 
------- 
 
¶1. (SBU) The Macedonian Government seems to be underestimating the 
likely effects of the global economic crisis on the Macedonian 
economy, especially on the domestic currency.  Not only has revenue 
collection in the first two months of 2009 fallen short of the 
projections on which the state budget was based, but revenues are 
down from the same period in 2008.  Demonstrating a lack of 
coordination on monetary policy measures, the GoM has begun 
borrowing from the domestic market, offering surprisingly high 
interest rates.  At the same time, foreign currency reserves 
continue to be depleted, adding to concerns for the stability of the 
domestic currency.  End summary. 
 
Economic Crisis Damaging the Real Sector 
---------------------------------------- 
 
¶2. (SBU) Macedonia's real sector economy has begun to feel the 
effects of the global downturn.  Industrial output in 
January-February 2009 fell 14 percent compared to the same period of 
last year.  Additionally, the trade deficit grew, with exports 
dropping by 44 percent.  Several large exporters in the metal 
industry closed plants and placed workers on forced leave to help 
deal with the drop in demand.  The GoM, however, has so far ignored 
the damage to Macedonia's most important export sectors. 
Significantly, the GoM in advance of the second round elections 
April 5 held firm to its original projection of 5.5 percent GDP 
growth, upon which the 2009 state budget was created. 
 
Revenue Projections Not Met, but Not Changing 
--------------------------------------------- 
 
¶3. (U) As a result of the country's reduced economic activity, 
revenues to the state budget have been insufficient to finance the 
GoM's populist spending projects.  In fact, the GoM missed its 
revenue collection targets for January and February by 17 percent, 
and Finance Minister Slaveski announced that actual collection was 
down three percent from the same period last year.  Still, the state 
budget has not been adjusted to account for the reality of the 
country's revenues.  Instead, the GoM announced plans to spend more 
than USD 10 billion on infrastructure and energy projects in the 
period 2009-2017, as Prime Minister Gruevski focused on campaigning 
for the local and presidential elections.  Unheeded, officials from 
international financial institutions such as IMF have warned the GoM 
of the widening budget deficit and recommended a prompt budget 
rebalancing with more realistic targets.  These calls, however, 
appear to have been lost in the cacophony of the election campaign. 
 
GoM Reaches to Unsustainable Financing 
-------------------------------------- 
 
¶4. (U) In order to finance the budget deficit, the GoM borrowed an 
additional USD 90 million from the domestic market in March by 
selling 28-day treasury bills at rates significantly higher than the 
interest rate on the Central Bank bills.  On March 25, IMF Resident 
Representative Bert Van Selm told us that this short term borrowing 
did not provide sustainable financing, although it draws denar 
liquidity out of the banking sector.  Furthermore, Van Selm told us 
that Slaveski had told him that the GoM could use the resources of 
the National Bank of the Republic of Macedonia (NBRM), or Central 
Bank, to finance the budget as needed.  Van Selm expressed serious 
concerns about Slaveski's cavalier claim that the GoM wished to use 
the NBRM for these purposes, which is both illegal and contrary to 
EU regulations with which the GoM has declared it seeks to 
harmonize. 
 
Central Bank Increases its Bills Rate 
------------------------------------ 
 
¶5. (U) Facing a serious drop in the level of Central Bank bills, the 
NBRM on March 27 increased the interest rate on Central Bank bills 
from seven to nine percent, sending a signal that banks should 
further tighten lending.  Most banks announced they will follow the 
Central Bank's signal and would increase their interest rates, 
leading to more expensive loans to businesses and households. 
 
Devaluation Expectations Pressure the Exchange Rate 
--------------------------------------------- ------ 
 
¶6. (U) Even as pressures for devaluation of the exchange rate are 
increasing, the GoM has been preoccupied with elections and remained 
on the economic sidelines.  In particular, the GoM sent confusing 
budget messages by offering high interest rates on government paper. 
 That action was not coordinated with the monetary authorities and 
heated up devaluation expectations, which officials at the NBRM 
complained had made their job even harder.  In the first three weeks 
of March, the NBRM had to sell an additional USD 110 million of 
reserves to defend the peg of the denar against the euro. 
 
Comment 
------- 
 
¶7. (SBU) Devaluation of the denar would be costly and have long term 
negative effects to the economy.  The NBRM knows this and is 
desperately trying to avoid it.  However, many IFIs and economic 
experts in the country think that the GoM does not fully understand 
the possible consequences.  Rumors circulate that Gruevski has a 
political game in mind and is setting up scenario for replacing NBRM 
Governor Goshev after the presidential elections.  With Gjorge 
Ivanov's election victory, this becomes a real possibility: NBRM's 
Governor is nominated by the President, with Parliament's 
concurrence.  Gruevski and his government have long been at odds 
with the Goshev's conservative approach.  The PM also has emphasized 
publicly that the NBRM is responsible for maintaining the denar's 
exchange rate.  Current economic difficulties may well provide the 
pretext needed to replace the Governor and to justify an eventual 
devaluation.  End comment. 
 
REEKER