Tensions hamper FYROM ratings

LONDON – Standard & Poor’s Ratings Services reported yesterday it had assigned its «BB/B» foreign currency and «BB+/B» local currency sovereign credit ratings to the Former Yugoslav Republic of Macedonia (FYROM), with a positive outlook. «The ratings on FYROM are constrained by the ongoing importance of interethnic relations, structural and governance issues in the economy, and a government expenditure structure that leaves little flexibility to rein in spending,» said Standard & Poor’s credit analyst Kai Stukenbrock. The ratings are supported by rapid progress toward political stability, driven by the Ohrid Framework Agreement that ended the interethnic violence of 2001, and the prospect of EU membership. Interethnic relations will still continue to play an important role in determining political stability, but the commitment of the international community to stability in FYROM remains strong, and would have a moderating influence should tensions increase again. Moreover, the ratings are underpinned by macroeconomic stability and moderate levels of external indebtedness. Excluding the crisis years of 2001-2002, the general government budget has been in moderate-to-low deficit since the second half of the 1990s, and is expected to register slightly less than 1.5 percent of gross domestic product in the medium term. If grants are included above-the-line, the budget will even be broadly balanced. Continued moderate deficits will push the debt level down to 42.8 percent of GDP in 2006, from 47.7 percent in 2003. «We expect that, in addition to the current implementation of the Ohrid Framework Agreement, the prospect of European Union membership at the turn of the decade will continue to play an essential role as a driver for further reforms and ongoing political stabilization,» said Stukenbrock. FYROM applied for EU membership in March 2004 and might be awarded candidacy status as early as 2005. Support for EU membership is broadly based, and a large share of new legislation is already geared toward EU requirements. For most of the new EU members that joined the Union in May 2004, prospective EU membership served as a strong policy anchor, which in turn resulted in ratings upgrades. «On the way toward EU membership, FYROM will have to address many weaknesses, such as improving and sustaining political stability, addressing the structural imbalances in the economy, and tackling governance issues,» added Stukenbrock. «An upgrade in the ratings on Macedonia is contingent on progress in these areas.»