Standard & Poor's Ratings Services raised its long-term foreign and local currency sovereign credit ratings on the Republic of Macedonia to 'BB+' from 'BB', and to 'BBB-' from 'BB+', respectively, on sustained political stabilization. At the same time, the short-term local currency rating was raised to 'A-3' from 'B', and the 'B' short-term foreign currency rating was affirmed. The outlook is stable.
"The upgrade reflects rapid and sustained progress toward political stability, evidenced by the successful conclusion of the Ohrid Framework Agreement. It also takes into account ongoing progress in structural reforms, macroeconomic stability, and downward trending debt levels," said Standard & Poor's analyst Kai Stukenbrock.
The ratings on Macedonia remain constrained, however, by structural rigidities and governance issues in the economy, an inflexible government expenditure structure, and the latent risk of interethnic tensions.
Political stability in Macedonia has improved greatly since the interethnic violence of 2001. The Ohrid Framework Agreement that ended the security crisis was successfully concluded in July 2005, despite the politically sensitive and contentious legislation required. The political environment has matured and the rights of minorities have been extended, and a repeat of these events looks unlikely.
Prudent economic policies have managed to maintain macroeconomic stability. In addition, reforms have been undertaken or are underway to address growth obstacles in the economy such as inflexible labor markets, governance problems, and a weak judiciary.
Macedonia's fiscal accounts are sound. General government deficits are forecast to average 0.7% of GDP in 2005-2008, following a slight surplus in 2004. Low net financing requirements continue to push the debt level down to 40% of GDP in 2008, from 47% in 2004.
"Sustained and significant progress in enacting and implementing structural reforms, anchored by the prospect of EU membership, ongoing macroeconomic and fiscal stability, and further normalization of interethnic relations could eventually lead to an upgrade of the foreign currency ratings on Macedonia to investment grade," added Mr. Stukenbrock.
Although a delay in EU membership prospects would itself not pressure creditworthiness, the ratings on Macedonia could be lowered if the implementation of reforms and prudent macroeconomic policies were to stall.