Boston, MA -- (ReleaseWire) -- 11/09/2012 -- Core Views Having been rejected from entering NATO again, the government's focus will very likely switch back to domestic issues, with a deteriorating short-term economic outlook and elevated ethnic tensions key underlying risks. Prime Minister Nikola Gruevski's ruling party remains popular, though could lose some ground to opposition groups in local elections due early in 2013. Economic activity is set to remain weak in 2012 and only begin to recover in 2013. In the medium term we expect robust annual growth aided by the government's widespread business-friendly reforms and foreign direct investment inflows. Macedonia's relatively sound financial fundamentals - low public deficit, low public debt and a stable banking sector - are expected to insulate it from the worst of the regional crisis. Major Forecast Changes We have lowered our 2012 growth forecast to 1.4%, from 2.2% previously, as regional headwinds weigh on exports and confidence. The need for fiscal prudence will limit state support for the economy. After coming in below expectations at 2.7% of GDP in 2011, we now expect the current account deficit to increase marginally to 3.1% of GDP in 2012 and then widen more quickly as growth accelerates and demand for imports picks up. We have revised our forecast for average inflation in 2012 to 2.1%, from a previous 2.4% forecast, in line with our expectations for weaker domestic demand. Key Risks To Outlook Recent outbreaks of violence along ethnic lines are a reminder of the underlying threat to stability posed by tensions between the ethnic Albanian and Macedonian communities. Frustration over the stalled EU accession bid and economic hardship could exacerbate this tension. Though public debt remains low, it has increased dramatically in the last two years and is concentrated in external obligations, leaving the country more exposed to volatile regional markets. Domestic demand could be hit harder than expected by a major credit event in the eurozone, though the possibility of recession in Macedonia remains remote.
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