1. EXECUTIVE SUMMARY 

Political outlook 

A very challenging year lies ahead of North Macedonia following the Bulgarian veto on the launch of the country’s EU accession talks that had been expected in December 2020.

EU officials hope that the bilateral dispute between Sofia and Skopje will be overcome and the EU accession talks with North Macedonia can start during the Portuguese EU Council presidency in the first half of 2021.

Opposition pressure on the government of Social Democrat PM Zoran Zaev, seeking a resignation of the current cabinet and the formation of a government of national unity, is expected to continue in 2021.

Macroeconomic outlook 

The government expects a gradual recovery in 2021 and 2022 with growth of 3.9% and 3.6% respectively, following the estimated 4.9% GDP contraction in 2020.

Budget and debt outlook 

North Macedonia’s government set the budget deficit for 2021 at MKD34.8bn (€565.8mn) or 4.9% of the country’s GDP following a planned deficit of 8.49% of GDP for 2020. The budget for 2021 is aimed at supporting economic stability, the acceleration of GDP growth and long-term fiscal consolidation.

The deficit will be financed by borrowing on the local and foreign markets, of which €275mn will be raised on the domestic market.

Real economy outlook 

Industrial production in North Macedonia is expected to revive in 2021 after contracting for most of 2020 as a result of the coronavirus (COVID-19) crisis. The service sector has been severely affected by travel bans and is also expected to revve. 

Markets outlook 

The value of the blue chip equity index, MBI10, slumped at the end of March 2020, but by the end of November had recovered to a year-on-year decline of just 3.7%. 

 

2. POLITICAL OUTLOOK 

Following North Macedonia’s accession to Nato in March 2020 after it membership was blocked by Greece for many years, the launch of EU accession talks is the last major foreign policy priority for the Social Democrats-led government.

In March 2020, both Skopje and Tirana were invited to launch EU accession talks later in the year, but during the summer Bulgaria set its own conditions for Skopje concerning the country’s language and identity, and wanted them to be included in the negotiation framework. This was rejected by other EU members, but Bulgaria went on to block the start of accession talks.

Bulgaria insisted that the Macedonian language is Bulgarian dialect and the Macedonian nation was artificially created after the Second World War in 1944 and has Bulgarian roots. Sofia also wants North Macedonia to admit that there is no Macedonian minority in Bulgaria. For the Macedonian authorities the issues that undermine the country’s language and identity are unacceptable.

The Bulgarian veto was another slap in the face for North Macedonia after the two countries signed a Friendship Agreement in 2017 and Skopje’s reforms were recognised by other EU countries.

North Macedonia now enters 2021 with uncertainty about its EU future. The revival of Bulgarian romantic dreams about North Macedonia put in danger not only the country’s EU progress but the overall EU enlargement policy and endangered security in the fragile Balkans region.

North Macedonia’s government said the veto was “an irresponsible and serious geo-strategic mistake”. However the government pledged that it will not just continue EU-related reforms but will also speed up their implementation. 

Elections in Bulgaria in March, which are seen as one of the main reasons behind the veto, are expected to change the political climate about the issue.

The Macedonian-Bulgarian Chamber of Commerce commented that the Bulgarian veto will worsen economic relations and trade between the two countries, after assessing that North Macedonia’s trade exchange with Bulgaria at the beginning of 2020 was 20% higher than the previous year.

Following a series of provocations by Bulgarian officials and what the opposition said was a “scandalous” interview by Zaev with Bulgarian media, in which he indicted Sofia’s position could be softening, the main opposition party, VMRO-DPMNE, launched daily protests to defend the country’s national interests.

The opposition is seeking Zaev's resignation and the formation of a national unity government. The opposition pressure is expected to continue in 2021.

Zaev’s Social Democrats (SDSM) were reelected with a slim majority in a snap election on July 15, 2020, having only two more seats than the opposition. The snap elections were held after the SDSM was in power for three years. Zaev formed the new government with its old ethnic Albanian partner, the Democratic Union of Integration (DUI). 

The opposition insistence on the resignation of Zaev, might lead to new snap elections particularly if the country fails again to launch EU accession talks which can happen only if Bulgaria lifts its veto. However, VMRO-DPMNE under the leadership of Hristijan Mickoski is weak after former senior party members, who were excluded from membership, have been insisting on the removal of Mickoski and the election of a new, more credible leader. Zaev has said that snap elections are not an option.

The existence of the SDSM-led government can be maintained by the possible launch of EU accession negotiations in the first half of 2021.

North Macedonia’s Nato membership and expected launch of the EU accession talks are factors that have sped up economic growth, attracted more investors and created a more stable business climate in the country.

In early 2020, the outbreak of the coronavirus pandemic hampered hopes of a quick economic boom and refocused the government’s priorities on solving the health crisis and addressing economic consequences on economy, as well as solving the new bilateral issue with Bulgaria. This will continue at least in the first half of 2021.

In 2021, the government plans to launch the privatisation process for several important state-run companies. The first on the list for privatisation or for a public-private partnership (PPP) scheme is the loss-making postal operator Makedonska Posta. Macedonian railway operator Makedonski Zeleznici, Popova Sapka ski centre and tobacco factory Tutunski Kombinat Prilep are also slated for privatisation.

North Macedonia is going to hold its first census after two decades in April 2021.

 

3. MACROECONOMIC OUTLOOK

The economic recovery in the next two years is expected to be supported by domestic demand, stabilisation of the labour market, continuity of credit flows, increasing confidence, as well as further fiscal support of consumption, especially investments.

The growth will be boosted by exports, which have been improving relatively quickly, supported by the rapid recovery of global production chains and the expected recovery of foreign demand in the next period.

Since the outbreak of the coronavirus pandemic, North Macedonia, a country of 2.1mn people, registered over 70,000 positive cases and over 2,000 deaths until December 11.

The rollout of the vaccine will start between January and March 2021, but surveys showed that not many people in the country are willing to take the vaccine voluntarily.

North Macedonia’s economy is expected to contract by 4.1% in 2020 as a consequence of the coronavirus pandemic, according to the World Bank, which will be the biggest drop since 2001. The demand contraction and supply chain disruptions caused by the prolonged pandemic and containment measures have been worse than anticipated. 

In the scenario of a gradual recovery, growth in 2021 is expected to reach 3.6%, as restored consumer and investor confidence push up personal consumption, private investment, and exports.

Despite the projected growth, there is still a lot of uncertainty about the duration of the pandemic and its impacts. A longer period of social distancing policies will have an impact on households’ income and health expenditures. 

During the peak of the coronavirus crisis, growth declined by 6.4% by June 2020: manufacturing dropped by 16% y/y, with only a handful of sectors observing growth. Trade, tourism and transport, the main drivers of growth over the past several years, declined by 12.3%. The private construction decline was offset by public investment in roads. Agriculture and ICT achieved robust growth.

However, in 2021, private consumption is expected to increase 3.7% after projected contraction of 3.1% in 2020. 

Exports of goods and services are projected to increase 6.2% in 2021 following a 6% drop in 2020. Imports are seen rising 6.4% in 2021, after a drop of 3% in 2020, according to the World Bank.

North Macedonia’s average inflation is seen at 1.7% in 2021 from 0.5% in 2020.

The current account deficit is projected at 3% of GDP in 2021 from 2.9% of GDP in 2020.

Net foreign investments are expected to increase to 4.2% of GDP in 2021 from 1.2% of GDP in a previous year.

Fitch Rating agency projected that North Macedonia’s FDI will partly recover in 2021 to 3% of GDP from 1.6% in 2020.

 

4. BUDGET AND DEBT OUTLOOK 

North Macedonia’s government set a budget deficit for 2021 at MKD34.8bn (€565.8mn) or 4.9% of the country’s GDP, following a planned deficit of 8.49% of GDP for 2020. The budget for 2021 is aimed at supporting economic stability, the acceleration of GDP growth and long-term fiscal consolidation.

The deficit will be financed by borrowing on the local and foreign markets, of which €275mn will be raised on the domestic market.

In May 2020, North Macedonia issued a six-year Eurobond to cover the budget gaps for 2020 and 2021, worth €700mn with interest rate of 3.675%. This was the country’s seventh Eurobond issue so far.

The government based the budget on GDP growth of 4.1% in 2021.

Budget revenues are projected at MKD212.6bn, 8.3% up from the plan for this year. Expenditures are planned at MKD247.5bn, down by 2%.

Capital investments are seen at MKD23bn, which is 20% more than the plan for this year.

Finances for the health system, economy, capital investments, support for the judicial reform and EU accession will be priorities in the budget.

Debt is seen 59.8% of GDP in 2021, compared to 59.1% of GDP in 2020, according to the World Bank, following a 48.8%-of-GDP debt ratio in 2019.

Government support programmes somewhat alleviated the impact on workers and firms, but fiscal space narrowed amid debt levels approaching 60% of GDP. The near-term outlook is positive with increasing downside risks. 

While economic and social measures to remedy the crisis will take priority, fiscal, competition, environmental and governance reforms are needed for recovery and EU accession, according to the World Bank.

 

5. REAL ECONOMY OUTLOOK 

Industrial production in North Macedonia is expected to revive in 2021 after contracting for most of 2020 as a result of the coronavirus crisis.

According to the World Bank, the industry is expected to grow 5.7% in 2021, following the 1.5% contraction in 2020. The agriculture sector is seen rising 2.7% in 2021 compared to a 0.5% growth in 2020. The services sector is expected to revive with a growth of 2.9% in 2021 from a 5.6% contraction in 2020.

The service sector has been severely affected by travel bans. In the absence of a government response, the combined effect of lower labour incomes and remittances would increase poverty to pre-2015 levels, approximately 23%, in 2020. 

Weak education and workforce skills persistently undermined human capital which, together with total factor productivity, has been the lowest in the Western Balkans. Only 50% of working-age Macedonians are employed, while low birth rates and emigration are shrinking the workforce. 

According to North Macedonia’s central bank, the credit activity of North Macedonia's banking system during the crisis continues to be one of the key factors for supporting GDP growth. Credit flows in the first nine months were higher than expected, amid more dynamic growth of the deposit base and further relaxation of credit conditions.

The value of loans is expected to grow by 5.3% on an annual basis by the end of 2020.

The main downside risk is related to the possible re-imposition of strict measures to prevent the spread of the coronavirus, amid the second wave, as well as possible mismanagement of the epidemic.

Factors on the positive side include faster progress in the treatment of coronavirus, and successful vaccine rollout.

 

6. MARKETS OUTLOOK 

The value of the blue chip equity index, MBI10, fell to 4,477,94 points at end-November 2020 from 4,648.89 at the end of 2019, which is a decline of 3.7%. In 2020, the index reached the lowest level at the end of March. 

The MBI10 reached an all time high of 10,057.77 in August 2007. 

There were 100 listed companies on the Macedonian Stock Exchange (MSE) at the end of November, the same number as at the end of 2019.

Regarding the electricity market, the transmission and market operators of Bulgaria and North Macedonia agreed in December 2020 to push forward with the electricity market coupling project which started in 2018.

The integration of electricity markets is planned for 2022.