Despite Political Crisis, Macedonia Presses On With Market Reforms

Mexican billionaire Carlos Slim walks with Macedonia’s ex-Prime Minister Nikola Gruevski in Skopje after sealing a telecom deal in July 2015.

Despite political turmoil and stepping down from power in January 2016 under the Przino agreement to make peace with the opposition, long-standing prime minister Nikola Gruevski, 46, says his pro-business ruling coalition– best known by their acronym VMRO-DPMNE—will win the parliamentary elections in December and pave the way for even more reforms.

If it’s good enough for FORBES billionaire Carlos Slim, it’s probably good enough for American corporate and high yield-loving bond investors too. Slim sealed a deal last year to buy a 55% stake in Macedonian telecom giant ONE. Slim is a big shareholder in the buyer, Telekom Austria Group.

Some see the pragmatic Gruevski as a Westward-ho strong man leading a small ex-communist country in the Balkans out of the former Yugoslavia morass, while the opposition cries foul, painting him as an authoritarian. Over the last decade, Macedonia, located just north of Greece, has become more business friendly than any of the BRICs. Not to mention half of Western Europe. And of course its southern neighbor.

For Russia, December elections in Macedonia mean more disappointing news from former allies: another Slavic, Balkan state would have sailed West. (Nearby Montenegro did this Oct. 16 and is trying to become a NATO state.)

“We will win in the next elections,” Gruevski says. “The political crisis hurt the economy, but despite all that, we managed to maintain a positive direction towards industrial growth and the economy as a whole. There are investors we are talking to. This political crisis led them to pause or cancel their decisions to invest in Macedonia. Everyone, domestic and foreign, want this crisis to be over. It ends in December,” he says.

Macedonian President Gjorge Ivanov plunged Macedonia into a deep political crisis on April 12 when he announced the effective pardoning of more than 50 government officials in a massive scandal. The crisis led to massive anti-government protests.

The upheaval is part of a growing number of corruption probes – from Brazil to Ukraine – that have taken huge chunks out of economies, pulled thousands from their jobs, and cost some politicians their careers. Political opposition parties tried to capitalize on the crisis, including Macedonia’s Social Democratic Party, SDSM, which postponed elections in an attempt to buy time and improve polling data.

Macedonia unemployment skyrocketed to over 30% and now is 24%. But surprisingly enough, the economy remained positive. It is expected to grow 2.2% this year, according to the International Monetary Fund. It has grown over 7% in the last two years combined despite the country being inundated with about 1 million refugees en route to Austria, Germany, Sweden, and other Western European destinations.

Fitch has Macedonia’s credit rating at BB, which puts it on par with Brazil, an investor favorite that faces even worse problems than Macedonia. Thanks to the market’s drive for yield, Macedonia was able to place a 450 million euro bond in July that was oversubscribed and pays 5.6%.

“Macedonia shows that even a country with political turmoil can sell a bond and get demand from investors,” Lutz Roehmeyer, a money manager at the $12 billion Landesbank Berlin Investment bank told Bloomberg this summer.

Even though there is a bit more to it than that. The 2016 Doing Business Report has Macedonia listed in 12th place, ahead of every BRIC nation, as well as Italy, France, Germany and all of the Baltics. Six years ago it was ranked 94th. Macedonia is second after New Zealand in terms of ease of starting a business, according to the report. Capital tends to go where it can be most cost-efficient. Macedonia’s personal income and corporate tax rates are 10%. Its effective corporate tax rate, after standard deductions, is 7.4%, a figure that’s lured roughly a half dozen U.S. companies there over the last two years.

Last year, however, in the heat of the wiretapping scandal, U.S. companies were slower to set up shop. It slowed even more in 2016. Nevertheless, in May 2015, Southfield, Michigan based Lear Corporation invested in a manufacturing center to produce leather and fabric seat covers. The assembly line was built this year, the company said. It was their first investment in the country after nearly 10 years of winding down production in Michigan.

Eleven months ago, Johnson Controls upped the ante against its rival, opening a third plant producing the same thing.

“We were facing capacity-related challenges in Europe and as a result of that made an in-depth analysis (of where to go) and came to the conclusion that we should invest here,” says Willy Van-Looy, the global director at Johnson Controls.

A low corporate tax burden, free trade deals with the European Union, and non-EU member states, along with the usual low labor costs and an educated workforce is how Macedonia manages to compete with its Balkan neighbors.

They’ve followed in the footsteps of Baltic states like Estonia with its e-government initiatives. And like former Soviet Republic, Georgia, Macedonia has duty free technology and industrial development zones. A 10-year corporate tax exemption is another lure, as developing Europe tries to modernize and tackle old Communist Party era plagues like corruption and cronyism.

Macedonian exports from these free economic zones last year was 1.5 billion euros, accounting for 36% in total exports, according to government figures. Between January and September, exports rose 19.2% out of those zones.

“Macedonia is a growing economy — we know it — the prospects of growth will continue to be higher than other countries in Europe,” says Tilman Tacke, Associate Principal at McKinsey & Company in Berlin.

According to Tacke, Macedonia doesn’t need Russia, except for its dependency on its oil and gas. And even that may change, when the Trans-Adriatic Pipeline carrying natural gas from Azerbaijan is built from Turkey via Greece and Albania, to Italy. Macedonia is expected to benefit from an interconnector transporting gas from Greece to Bulgaria.

Macedonia’s close proximity to Europe and its tax code might be good enough to keep it developing, and eventually become a full-fledged member of the European Union.

“We would call it ‘healthy growth’ in Macedonia,”  says Tacke. “If you look at how GDP is growing, it’s not by increasing government expenditure, that was been decreasing over the last years. What is growing are corporate investments and the trade balance is also improving. These are signs of competitiveness,” he says, “If people are willing to invest their money.”

By Kenneth Rapoza ,  Contributor at Forbes