Event

The Greek parliament has ratified the deal reached with Skopje to rename it Republic of North Macedonia. On 11 January, the Macedonian Parliament had previously made a similar approval following an overwhelmingly positive referendum last year (albeit with an insufficient turnout below the required 50% to make it viable). Given the wide opposition of the Greek population against this decision, further protests in large Greek cities are not ruled out.  

Impact

This is a historic vote which puts an official end to a 27-year dispute since FYR Macedonia became independent. It is a game changer for North Macedonia as it leads to two major consequences. First of all it should pave the way to EU accession negotiations and to a NATO membership later this year. More generally, the de facto normalisation of bilateral relations is a rare good news for stability in the Balkans where tensions remain vivid between several states. The Greek vote was welcomed by the whole EU. Despite the name dispute that was motivated by Athens’ recognition of a single region with the historic name of Macedonia in northern Greece, Macedonia already obtained the EU candidate status in 2005 in the hope that Athens would drop its constant veto in the future. EU accession negotiations may start although the timing is very uncertain and EU membership remains a distant prospect. The climate for EU enlargement is indeed poor. The EU Parliament’s elections in May are expected to confirm the rising wave of nationalism and rejection of the elites. It would be detrimental to welcoming extra members and could also fuel popular disappointment in North Macedonia and threaten the incumbent PM’s pro-EU government position given his narrow government majority (the new name being also controversial among Macedonians). Still, in the short and medium term, EU negotiations might begin and would then have a very positive impact on North Macedonia by boosting consumer and investor confidence and supporting legal and economic reforms. Those are more than necessary as the country suffers from structural weaknesses such as weak governance, high corruption, a politicised justice system, high unemployment and a continued brain drain (a common feature in the region).

The agreed country’s new name occurs in a good domestic economic context with a rebounding GDP growth (forecast at 1.6%) in 2018 expected to accelerate to 2.6% this year and to 2.8% as from 2020. Infrastructure investments, FDI and exports are the drivers behind those performances. Also, inflation is low (forecasted at around 2% at the end of 2018) and the chronic current account deficit is expected to have fallen to a 25-year low last year (close to 1% of GDP in 2018) which contributed to strengthening the balance of payments. The current account deficit is nevertheless forecast to deepen again in the coming years notably as a result of rising FDI-related imports. Looking ahead, North Macedonia is exposed to a likely EU slowdown, which could negatively affect the economic momentum. The country is also vulnerable to tighter global financial conditions, very volatile portfolio inflows and rising global trade protectionism. Besides, North Macedonia’s public debt has been on a constant increase since 2008, notably fuelled by infrastructure spending. A large share of public debt is external which (partly) explains why the latter is elevated (likely to be at around 80% of GDP in 2018). For all those reasons, and although the end of the name dispute is a major step forward that will improve MLT political risks, Credendo keeps North Macedonia’s MLT political risk rating in category 5/7 for the time being.

Analyst: Raphaël Cecchi – r.cecchi@credendo.com