Up to the referendum and after

Nikola Popovski

The data on the movement of the economy in Macedonia give us different signals from which it is not possible simply and easily to get an image of what actually happens and in which direction it moves. It is probable that the transition period from an economic position that we had with the previous government and its way of managing, towards a new and different one,  would not be as fast as it was thought, nor as simple. The concequences of those 11 years and the awareness of what the state should be in the economic life, will follow us for a long time. Especially considering that the key changes should be made by people who, with very few exceptions, do not have any clear concept of what they should do, but only think that they should continue the same, but be better at it. Strategically insufficiently thought-out, and conceptually wrong.

Let’s go back to the signals emitted from the official data. Firstly, we all know that the movement of GDP is very problematic and that it has already been five quarters in a row (I-II-III-IV 2017 and I in 2018) showing signs of total stagnation with its movement in the margins of -1, 3 percent to +1.2 percent. Cumulatively, real GDP stagnates at the 0% threshold for 15 months. Projections for growth of over 3 percent a year, at least now seem unreachable.

It is a fact that many of the authorities in the country have recently announced that they have realistic expectations that in the “remaining three quarters of 2018” the growth will increase significantly and annually we will achieve the projected growth. It would be good to be so, but it is not bad to remember that from those “remaining three quarters of 2018” the second has already ended in June, and the third ends at the end of September and that we have nothing more to do than to wait for the data and hope for something that has already passed. At the moment, the fourth last quarter should be a challenge.

Contrary to this, the phenomenon of a steady decline in unemployment, regardless of how the level of economic activities, ie the growth of production in the country, is moving, continues for the 13th year. It is now reduced to around 21-22 percent and is likely to continue to decline to below 20 percent, primarily as a result of the migration rather than investment activities of the economy in the creation of new jobs. The fact that the Macedonian economy does not show typical and logical signs of the fluctuation of the unemployment rate along with the fluctuation of GDP is a lucky coincidence.

What’s even more lucky is the fact that prices and the level of cost of living are stable and that the inflation rate is at a very low and acceptable level. Of course, the unusual fact that in the period of three years (2014-2015-2016 year) we had a state of annual deflation of -0.3; -0.3 and -0.2 percent is something that has yet to be reevaluated. No one has investigated this phenomenon until now and did not tell us what possible consequences these three years had on the national economy. As a result, interest rates in the economy dropped to a very low level, which still persists regardless of the fact that interest rates in the world have slowly started to increase.

On this occasion, with most sincere, well-intentioned and most honest professional motives we would like, at the level of debate, to open a rather scarcely discussed issue in our economy – what role has the level of the interest rate on NBM treasury bills, as well as the treasury bills of Ministry of Finance on the investment process, but also on the process of saving in our economy. Namely, the constant decrease in the reference interest rate of the NBM (now lowered to the historical lowest level of 2.75%) is good for the investment process and is putting pressure on the financial capital to seek channels for a higher own level of fertilization with placements in private businesses, but it also reduces the interest for saving households, since it suppresses it at the level of interest of about 2% annually, which becomes relatively unpaid and can push households towards greater spending or buying up to lari and euro whose security can become much greater, although the interest rates on this saving are insignificant.

A third option would be for households to convert their savings into securities with higher returns (for example, shares), but from a macroeconomic point of view it is “turning in a circle” because in Macedonia no single joint stock company has ever resorted to emission shares as a source for their financing as opposed to taking bank loans. As far as I know, so far there were only 2-3 such attempts and they ended up unsuccessfully. These processes after the September 30th referendum can receive different qualities depending on the referendum results.

At the same time, with the previous controversial indicators, there is a foggy and undisclosed process on the capital markets. After the enthusiastic growth of the stock market in the first year since the new government came to power, when the stock index MBI-10 grew by over 30 percent, we are now facing its stagnation. Namely, from the second half of June to the present day, it has been pinned to the same value. The interpretation can be double-sided: first, the financial results of the listed companies after the publication of the reports for the second quarter, and thus for the first 6 months are insufficiently good; and secondly, the uncertainty of the success of the referendum keeps the perspectives of the companies on the stock exchange, and therefore the investors on the stock market, in their own uncertainty. Probably the truth is more in the latter, but other reasons should not be rejected.

Further, something interesting is happening in the capital market. According to NBM data, foreign direct investors radically increased their investment in the country, which is also the record figure for the FDI level of 397 million dollars in the first six months of the year. But at the same time, foreign investments in the amount of $456 million and additional $260 million in foreign investment are being exported from the economy, which foreign investors do not reinvest or store in Macedonia, but withdraw it in their countries. Is the uncertainty about the referendum and some kind of influence here or the reasons are purely economic? That is yet to be seen.

Finally, the activities of such a critical public sector are moving along a strange path. Government revenues are satisfactory within projections, but their spending is dramatically out of projections. Compensation costs for different population structures (and voters!) are constantly rising and we are witnessing pledges and payments of additional funds to those who failed to cope with their production or income – farmers, public prospects without income, unemployed persons, labor unions that do not receive regular or sufficient salaries, etc. On the other hand, capital expenditures are realized with very low dynamics and create excessive but uncertain budget liquidity.

All these economic movements and others for which there is no space here to be elaborated, show great uncertainty, illogicalities and fluctuations. Could the huge avalanche of uncertainty that rolls with the referendum and its (non)success is one of the reasons? Probably, yes. Expectations of businesses, investors, entrepreneurs, consumers and other actors in the economy, including the state, have always been a key factor whether they rely on economic or non-economic expectations. The referendum on the Prespa agreement is a classic example of one.