Fitch upgrades FYROM

Fitch Ratings has upgraded the Former Yugoslav Republic of Macedonia’s (FYROM) foreign currency and local currency Issuer Default ratings (IDRs) to BB+ from BB. After the upgrade, the outlook is now labeled «stable.» The country ceiling has also been upgraded to BB+ from BB while the short-term foreign currency rating is affirmed at B. «FYROM’s ratings are underpinned by its continued prudent fiscal policy, moderate public and external debt levels and debt service ratios, as well as the country’s status as an official EU candidate country since December 2005,» said Edward Parker, head of Fitch’s Emerging Europe Sovereigns group. The government achieved a small budget surplus in 2006 and is targeting a modest deficit of 0.6 percent of GDP in the medium term. General government debt was around 36 percent of GDP in January 2006, below the BB range median of 43 percent. Moreover, receipts from the privatization of the national electricity company ESM in March and the sale of a 10 percent stake in Macedonia Telecom in June are expected to boost government deposits to around 9 percent of GDP, reducing government debt to just 27 percent by end-2006. FYROM’s low external debt burden is another rating strength, with the country set to be a small net external creditor by end-2006. Gross foreign exchange reserves rose to $1.3 billion at end-2005 from $1 billion at end-2004, equivalent to over four months’ import cover. FYROM’s external liquidity position is strong, with the ratio of liquid foreign assets over liabilities due to fall over the next year, even after including the government’s buyback of its London Club debt in January with the proceeds of its debut 150-million-euro 10-year eurobond. The current account deficit narrowed to just 1.3 percent in 2005 from 7.7 percent in 2004, easing concerns over one of the main previous rating weaknesses. This, coupled with the increase in foreign reserves, has boosted confidence in the denar exchange rate peg against the euro, allowing interest rates to fall to 5.7 percent at end-April 2006 from 10 percent in October. Raising the GDP growth rate remains a vital challenge. Fitch is encouraged by a recent higher growth rate of around 4 percent and recent progress with structural reforms. However, substantial structural weaknesses such as corruption, judicial shortcomings, excessive bureaucracy, an inflexible labor market and ambiguities over property rights still impair the business climate. Unemployment is high, and a trade deficit of 20 percent reflects a narrow export base that is vulnerable to commodity price shocks. The outcome of the parliamentary elections in July is too close to call, but Fitch expects macroeconomic discipline, structural reforms and broad support for EU accession to continue.

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