The Republic of Macedonia has been in the headlines for all the wrong reasons over the past few months, but surprisingly its economy has shown a strong performance and its government a commitment to social reform. Sadly last month the threat of civil war emerged again, although the government refuses to be distracted from reform.
One of the most significant pieces of legislation relates to pension reform, and draft legislation aimed at introducing second pillar pensions was presented to parliament in mid-March. Circumstances permitting, the Minister for Social Affairs Bedredin Ibrahimi hopes that parliament will pass the new law by autumn.
Out of a population of fractionally over two million, some 240,000 people currently are entitled to the state pension following retirement at 64 for men and 62 for women, which is a pay-as-you-go system. Ibrahimi is determined that the current workforce will be able to look forward to a western-style three pillar pension system provided by private pension funds. The new legislation is being supported by a massive PR exercise to explain the new concept.
A regulatory agency is planned to govern the new funds, and will report directly to the government on the operation of the fully funded plans. Article B10 of the draft legislation provides for the foundation of the funds either by domestic or foreign legal entities, limiting them to shares in just one fund, outlawing cross ownership.
Such entities must have a minimum paid up share capital of E20m, and have been incorporated for a minimum of three years. They also need a minimum BBB rating from Moody’s or Standard & Poor’s.
So far as membership is concerned, Article G1 legislates for compulsory membership of the new funds for everyone subject to Article 131 of the current Pension Law. Otherwise membership will be voluntary, and the government undertakes the responsibility of informing all individuals who are subject to the compulsory elements of the legislation. Members will be tied to their fund for a minimum of two years after joining, except in exceptional circumstances in which application may be made to the Pension Agency.
Article G3 dictates that the contributions made by the employer, or fund member in the case of the self-employed, will be paid to the Pension and Disability Fund which will then forward contributions to the individual funds within five working days.
The marketing of the funds to the public and their sale will be strictly controlled by the new agency, and the legislation will also provide for the possibility of a levy being applied to the funds to finance the new agency.
As far as fees are concerned, Article N1 provides for the funds to make deductions to cover costs. These may be in the form of a specific percentage of contributions, deducted before they are converted to accounting units. Alternatively they may deduct 0.05% of the value of net assets each month.
Investment strategy is dealt with in Article P. This provides for investment in the usual domestic securities and bonds as well as bonds bills and shares from any EU country, Japan or the US. No more than 20% of the assets may be held in such securities from outside Macedonia. Similarly no more than 80% of assets may be held in bonds, bills and securities issued or guaranteed by either the National Bank of the Republic of Macedonia, or the Macedonian government. Nor will funds be allowed to invest in futures- except formal exchange contracts and financial derivatives- in order to protect against exchange rate risk.
There are two main reasons to believe that the government is right to be confident about eventually introducing a successful three pillar system. Firstly, the government of Ljubco Georgievski has shown itself to be adept in the dangerous world of transitional economics. A privatisation scheme is in place, and the first windfall came when Hungary’s Matav paid E342m for 51% of MakTel, the state telecoms company. It may well be that the IMF will want to have a say in how this money is spent, but more deals are in the pipeline. The sale of a majority stake in ESM, the power utility could prove even more profitable than the MakTel sale. There is also a chance that the government may opt to sell the remainder of its shares in the telecoms utility.
Foreign diplomacy has also resulted in cash inflow, although not the $1bn of direct foreign investment which a former member of the government coalition promised prior to the election. The talks with Greece, an influential neighbour, which ended hostility over the ownership of the name Macedonia, also resulted in Greek companies investing in the republic. Changes in the capital market are thus taking place against a background of falling inflation and steady, if unspectacular, growth. The trade gap, current account deficit and foreign debt are also falling.
The banking sector has been ripe for reform for some time, and the government has acted swiftly to introduce legal and tax changes aimed at creating a functioning capital market. Strategic foreign investors have added impetus to these changes. National Bank of Greece has taken control of Stopanska Banka, Alpha Bank has taken a stake in Kreditna Bank, and Slovenia’s Nova Ljubjanska Banka has bought into Tutunska Bank. Even the European Bank for Reconstruction and Development has a stake in Stopanska Banka.
With the stock market and corporate governance improving, foreign fund managers are taking an interest in the fledgling stock exchange. Skopje has now linked with the Ljubljana exchange establishing contra listings aimed at increasing liquidity.
As the privatisation process continues, and companies come to the market, the government’s tax incentives should help to increase activity in shares and to encourage the new pension funds to look at equities and domestic bonds.
It seems that only the continuing unrest around the border with Kosovo, and among the ethnic Albanian minority can throw the Macedonian government off track. Fortunately they seem to have the support of the international community, and to date domestic policies suggest they deserve it.

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