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Policy consensus is vital for steady development

Last month’s elections bring hopes for the creation of a consensual government that will further Macedonia’s economic development and lead the country to EU accession. Meanwhile, banks report good health. Tom Blass reports.
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The smallest and poorest of the states that constituted the former Federal Republic of Yugoslavia, landlocked Macedonia is blessed with mountains but also encumbered with political and economic hills to climb. Despite its considerable problems – corruption, unemployment and a large shadow economy – the country is taking steps toward stability and integration with the wider EU some time after 2008.

Most of its problems were acquired after the break up of Yugoslavia in the 1990s. Previously locked into the larger Yugoslav economy, Macedonia was marginalised both by the wars that rocked the Balkans between 1992 and 2000, and by its small size, restricted access to neighbours and ethnic tensions. At the beginning of the decade, scenes of violence were broadcast across the world as parts of the Albanian population protested against perceived discrimination by the non-Albanian majority.

Having flared, the outbursts quickly ebbed but still had a devastating effect on nascent growth and investment from which the country is still recovering. A long border with Albania creates a security headache, and exposes Macedonia to organised crime and traffic issues, as drug smugglers and other undesirables are able to enter the country at will. And Macedonia still suffers a reputation for being a high-risk investment destination.

Allied with an underdeveloped infrastructure, these characteristics do not invite foreign direct investment. Nonetheless, and testament to careful economic management and a general global upturn, the country has achieved gross domestic product (GDP) growth of about 4% a year for the past five years.

EU prospects

Macedonia is not doomed to the isolation that beset it with the break up of the Yugoslav federation. The two-million-strong country received EU candidate status in December 2005, although it was not given any indication of when accession negotiations might commence. Key to accession is the Ohrid Agreement: the treaty signed in 2001 in the wake of Macedonia’s ethnic disturbances, and intended to decentralise power, and address ethnic Albanian concerns on representation, human rights and economic marginalisation.

In 2004, when the bulk of the agreement was implemented through the passing of the Territorial Organisation Act, Albanian/non-Albanian Macedonian tensions were once again sensitive. Among other provisions, the Act recognises Albanian as Macedonia’s second language. It also redraws boundaries in a way that increases Albanian populations, and hence representation at municipal level, in individual districts. The European Commission will keep a close eye on how implementation progresses and on policies pursued by the government formed after parliamentary elections held in early July. The elections were won by 35-year-old former amateur boxer and economist Nikola Gruevski and his VMRO-DPMNE party, defeating the incumbent, Vlado Buckovski.

While marred by low-level violence in the campaigning stage, international monitors declared the elections themselves as generally free and fair despite some irregularities. Any other finding could have hampered the country’s bid for EU accession.

Government policy

Mr Gruevski will not be able to rule without first building a coalition government that brings ethnic Albanian representation into the fold. On a positive note, sources within the government have said that in most key respects there is cross-party agreement regarding Macedonia’s political and economic direction. EU technical advisers hover over the shoulder of policy makers, a constant reminder that if Macedonia wants membership, extremism is not an option.

At this juncture, all-round consensus (if real) is exactly what the country needs if it is to pull itself up on to the next rung of economic development. The mainsprings of the Macedonian economy are currently trade, metals and agriculture. An oil refinery close to Skopje sells oil products to Kosovo. A well-developed metallurgical industry was given a boost in 2004 when Lakshmi Mittal opened a Macedonian subsidiary, Mittal Steel Skopje, recipient of a recent €33m loan from the European Bank of Reconstruction and Development (EBRD). Metals account for about 6% of industrial production. Officials say that entry into the highly regulated European market is difficult and that, as a whole, the industry is low in added valued.

Trade and investment

Macedonia has 14 free trade agreements, with neighbours and other regional powers, including Ukraine, Russia and Poland. And although Greece can hardly bring itself to officially utter the word “Macedonia” (citing the highly unlikely scenario that its smaller, impoverished neighbour might one day exercise designs on the Greek province of the same name), it has become one of its largest trade partners.

Hence, there was modest and much-welcomed investment of about $1bn in 2005. In April, German electricity group EVN purchased Macedonian electricity distributor ESM for €225m – a transaction that represented about 15% of Macedonian GDP in the 2005/06 period. (Although Germany is not among the top three investors, big spenders in Macedonia include Austria, Italy, Russia and Bulgaria.) But Macedonia must keep taxes low to attract investors – it is surrounded by low tax jurisdictions – and this slims down the development benefits that investment, as and when it occurs, can offer.

A consultant to the Macedonian ministry of finance told The Banker that the government is making significant headway in anticipation of European membership, citing a recent one-stop-shop company registration system, which “does not discriminate between Macedonian and foreign companies”, as well as reforms to the pension system, judiciary and public administration generally. All of these are intended to cut bureaucracy, strengthen institutions and reduce unnecessary expenditures.

But unemployment is high, the consultant adds. Early growth after the signing of the Ohrid Agreement did not lead to job creation. Although official figures suggest that more than a third of the working age population is unemployed, the real figure is believed to be closer to 20% but is obscured by the large shadow economy. “When Macedonia was part of Yugoslavia, we exported our construction industry across the republic and the rest of the world,” says the consultant. “But we’re a smaller economy now and, with there being very little construction in Macedonia itself, the industry is largely redundant.”

An analyst at the EBRD concurs with this analysis. He told The Banker that the fundamentals were displaying “all the right indicators: industrial production up, inflation low, price and exchange rate stability, a drop in the current account deficit. All the macroeconomics are good except for unemployment”.

Thriving banking scene

Against this backdrop of precarious growth and unresolved ethnic and border issues, the banking industry insists that it is thriving and that, despite the small size of the market, it continues to be profitable, with credit growth of about 25% a year in the past two years. According to one banker, this growth is “healthy, sustainable and without negative reaction”. It is, he says, in step in improving growth in the real economy and will, in the medium term, boost economic growth “without adverse effects on stability”.

There are 20 banks in Macedonia: one for every 100,000 people. This is the result of a deliberate (bankers say misguided) policy at the beginning of the 1990s. Dimitar Bogov, chief economist at Stopanska Banka, told The Banker: “The government decided it would be a good idea to create the circumstances for bank creation. The standards they set – in terms of minimum capital requirements for example – led to a profusion of dwarfish banks of questionable viability.”

Stopanska Banka, which has been owned by the National Bank of Greece since 2000, is one of the triumvirate of market leading banks in Macedonia. The others are Tutunska Bank, which is owned by the Slovenian group NLB, and Commercialjna Banka, which is locally owned but believed to be subject to overtures by an as yet undeclared player.

A slew of medium-sized banks and microfinance outfits provide competition on some fronts, but the established players say that the greater threat to market share is from potential market entrants.

Market pressures

Stopanska general manager Gligor Blishev says that market pressures will eventually put the squeeze on smaller banks, providing ready pickings for foreign banks looking at a pied a terre in this part of the Balkans. “This is creating pressure on efficiency [in the sector] so banks are having to upgrade policies and risk management procedures,” he says.

Svetlana Risteska, responsible for marketing in the strategy and development department at Tutunska Banka, says that this is exactly what the Slovenian-owned bank is doing. Tutunska was formed in 1985 as a funding institution for the tobacco industry, has been a commercial bank since 1993 and was acquired by Slovenian NLB in 2000. It is rapidly developing new products and services, branching into pension funds and insurance products, and trying hard to stay competitive on interest rates, says Ms Risteska.

By the standards of many other countries, and despite its market share, Tutunska is not big. Its 22 branches field only 367 employees. But in 2005, the bank achieved a 36% growth in assets, a 27% increase in the size of its deposit base and a net profit increase of 24%, says Ms Risteska. She says this reflects a general upturn in banking.

The retail battle

The closest fought ground at the moment is the retail banking sector. It is easy to see why. Although rural Macedonia presents an Arcadian vision of fecundity (agriculture constitutes 12% of GDP) and as yet unexploited tourism potential, Skopje, one of the Balkans’ party cities, appears to be almost exclusively inhabited by young, attractive people blessed with all the accoutrements of consumerism that the modern age has to offer. Corporate Macedonia is less willing, it appears, to emerge from the shadows.

Mr Blishev believes that the opportunity cost of doing so is being reduced constantly. However, there is widespread consensus that Macedonian corruption is endemic, costing the economy untold amounts in lost or misplaced revenue. There is a role there for banks and other foreign-owned participants in the economy, both to set examples of good corporate governance and to provide incentives for doing so, suggests Mr Blishev. “And the entrance of international investors will increase corporate governance and create business ethics eventually approaching that of EU countries,” he says.

In this respect the EBRD is encouraging, softly applauding Macedonia’s efforts to raise the stakes. But despite Skopje’s youthful exuberance and positive macroeconomic indicators (including currency stability, debt restructuring, and a recorded surplus as at the end of 2005), an upbeat assessment is not universal.

Hope and discontent

On the street, there is festering discontent at the perceived scale of corruption. While the EBRD chants its mantra of privatisation, many lay the blame for Macedonia’s sluggish economy on past misappropriation of state assets through the privatisation process. One unemployed economist told The Banker: “The present owners of the company that employed me for 30 years took my company and have nearly killed it. Now it hardly makes anything. And it doesn’t employ anybody.”

There are hopes that foreign participation will bring business back up to par. In its own small way, the banking sector has provided a template for the internationalisation of part of the Macedonian economy.

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