Boston, MA -- (SBWIRE) -- 03/19/2013 -- Core Views

The start of EU accession talks, which could come as soon as 2013, would provide a boost to Prime Minister Nikola's Gruevski's popularity, which has suffered somewhat due to economic recession.

However, ethnic tensions will continue to undermine political stability, putting a strain on the governing coalition and raising short-term political risk. Relations between the ruling Macedonian Revolutionary Organisation-Democratic Party for Macedonian National Unity (VMRO-DPMNE) party and its ethnic-Albanian junior coalition partner Democratic Union for Integration (DUI) will remain strained in the short term.

The economy continues to struggle against strong external headwinds, with a technical recession likely confirmed for H112. Though we still expect a tepid recovery to commence in 2013, conditions will remain difficult in the short term.

We retain our upbeat view for growth in the medium-to-long term, based on expectations that radical reforms in the business environment will draw in considerable investment once the regional investment climate improves.

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Major Forecast Changes

We have revised down our GDP growth target for 2013 to 1.5%, from a previous 2.7%, as we expect eurozone weakness and easing metal export prices to weigh on economic activity.

We have increased our average inflation target to 3.3% in 2012, from an earlier 2.1%, as supply side factors continue to keep food and fuel costs high.

On the back of weak import growth, we have lowered our target for the current account deficit in 2012 to 2.5% of GDP (from a previous target of 3.0%). We have also downgraded our target for foreign direct investment (FDI) for the year to EUR253mn, down from EUR337mn.

Key Risks To Outlook

A major policy event in the eurozone or US could yet derail the recovery in Macedonia and keep the economy stagnant in 2013.

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