177121 11/6/2008 15:29 08SKOPJE675 Embassy Skopje UNCLASSIFIED R 061529Z NOV 08 FM AMEMBASSY SKOPJE TO SECSTATE WASHDC 7794 INFO NSC WASHDC DEPT OF TREASURY WASHDC USMISSION USNATO USEU BRUSSELS AMEMBASSY TIRANA AMEMBASSY SOFIA AMEMBASSY LJUBLJANA AMEMBASSY ZAGREB AMEMBASSY BELGRADE AMEMBASSY SARAJEVO AMEMBASSY BUCHAREST AMEMBASSY ATHENS AMEMBASSY PRISTINA UNCLAS SKOPJE 000675
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E.O. 12958: N/A TAGS: EINV, EFIN, ECON, PREL, EAID, MK SUBJECT: MACEDONIA: COUNTRY DUCKS FIRST WAVE OF FINANCIAL CRISIS, BUT FEELING EFFECT OF SECOND
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1. The first wave of the Global Financial Crisis (GFC) passed Macedonia with no significant impact owing largely to the country's limited links to major global financial markets. However, postponed foreign direct investment, withdrawn portfolio investment from the Macedonian Stock Exchange (MSE), and reduced demand for exports constitute a second wave that is already beginning to affect the local economy. End Summary.
Reluctantly Acknowledging the Financial Crisis
2. Macedonian officials have begun to acknowledge the secondary effects of the GFC on the economy, in contrast to early suggestions that the country was mostly immune from the emerging crisis. In a variety of meetings and in the press, Macedonian politicians and business leaders had confidently predicted that the country was somehow immune from the effects of the GFC. In support of this view, political leaders including Deputy Prime Minister for Economy Zoran Stavreski asserted that Macedonian banks were not deeply invested into global markets. Privately, Stavreski told us without hesitation that none of Macedonia's five major banks would fail as a result of this crisis. This was reinforced by the Governor of the National Bank of the Republic of Macedonia (NBRM), Petar Goshev, who told the Ambassador that, in fact, Macedonian banks are liquid and most operate using actual deposits. Only some eight percent of total bank liabilities were from external funds, which helped to insulate Macedonian banks.
3. Still, Macedonia is not entirely immune to the GFC's effects, as Prime Minister Gruevski, DPM Stavreski, and others have acknowledged. NBRM Governor Goshev reported to us last week that the first effects were being felt in Macedonia as demand for Macedonian metals exports were declining. Both the PM and DPM also told us that a number of European investors have put on hold planned investments in Macedonia.
Macedonian Stock Exchange Echoes Other World Markets
4. Portfolio investments almost disappeared and investors from the region have sought to pull investment capital out of the MSE, causing prices of shares to fall. Although leading Macedonian companies traded at the MSE have shown considerable profits in the first half of 2008, psychological effects of the GFC has significantly reduced interest in and trading at the MSE. The MBI10 index of the prices of shares of the ten most liquid companies at the MSE dropped to 3,018 points on November 3, 2008, from 8,487 points on the same date of 2007.
5. Macedonia's economy is vulnerable to the global crisis, even if its effect has been blunted as a result of the country's relative isolation from international financial markets. The government had been relying on foreign direct investment to lessen its growing current account deficit, lessen the effects of a growing trade deficit, and increased spending by the government.
6. According to NBRM experts, the country's current account deficit would reach 12 percent this year. The sectors driving the increased trade deficit were energy, equipment to support new foreign investments, and personal vehicles. This last item was cited by the NBRM as a sign of increased consumption in the country. Personal consumption and household debt was a concern, and the NBRM had reacted by capping the growth of household credit and was taking measures to monitor the rate of household loan defaults, as this was the sector with the greatest credit risk.
7. Macedonia is not immune from the effects of problems in the global economy, and government officials are beginning to recognize this. In particular, the reduction of foreign direct investment will affect GOM efforts to live up to its promises to develop Macedonia's economy and maintain its current accounts balance through such investment. Attracting new investment remains key to GOM plans to grow the economy, and it will be worth watching how the PM, DPM Stavreski and other officials portray investment opportunities during their visit to the U.S. for events in Palo Alto (November 11) and Chicago (November 14) designed to highlight Macedonia as an investment destination. End Comment.