Adapting to the 'new normal'
We slightly downgraded our GDP forecasts to -5.5% y/y and 4% y/y in 2020 and 2021 respectively (from -4% and 5%) as we see only limited recovery after the lockdown period and accounting for a second wave of infections domestically as well as in key trading partners.
Worsening epidemiological situation is causing distortions in everyday social and economic activities, as shown in mobility indicators and high frequency data, suggesting downside risks to domestic demand figures offset partly by government aid packages and strong wage growth. Weak outlook for the global automotive industry could hurt the countries manufacturing sector, given its interlock with German automotive manufacturing chains.
Inflation was slightly higher than anticipated through mid-year, mostly due to a spike in food prices, and given the electricity price hike at the end of July, we revised our forecasts. We have raised our average CPI forecast for this year and the next to 1.2% y/y and 1.4% y/y thus still reflecting a stable outlook overall.
Monetary policy remained relaxed since the start of the crisis. The CB has lowered the rate on its CB bills twice this year by a total of 50bp decreasing it to 1.5%. Additional liquidity was provided alongside the regulatory flexibility aimed to reduce the financial burden for the economy and enhance credit support to most hit sectors.
9M20 budget gap stands at 5.4% of GDP, owing to 8.9% y/y decline in revenues and 11% y/y higher expenditures. We expect that the FY20 deficit will reach MKD55bn (8.3% of GDP) which will lift public debt to just over 60% of GDP. Next year’s gross refinancing needs are high at 11.5% of GDP and the government will likely rely heavy on IFI credit lines.
Social Democratic Union (SDSM) came out on top of parliamentary elections, barely edging out the biggest opposition party VMRO-DPMNE. Once again, the largest Albanian minority party DUI played the role of kingmakers, deciding to move ahead with the Social democrats. Rather swift government formation after elections should enable stronger focus on tackling the economical and health crisis at hand, with EU accession talks slowed by the dispute with Bulgaria.