Category: North Macedonia

“The legal market is pretty stable,” reports Popovski & Partners Partner Tatjana Popovski Buloski. “The traditional concept of running a legal business that’s been present in North Macedonia keeps it like that. Not to toot our own horn, but the formation of our firm – and the discontinuation of my partnership with Polenak – was the biggest shift last year.” 

By contrast, Popovski says, the political situation in the country has been fairly tumultuous. “The current Government,” she says, “which consolidated its position in the middle 2017, began to produce some positive shifts with its policies sometime in 2018 and early 2019 – promoting some new investments and stimulating domestic growth, mostly in free economic zones.” Unfortunately, she says, the January 3, 2020 resignation of Prime Minister Zoran Zaev means that new elections are just around the corner, which she believes is likely to lead to another economic slowdown. “The anticipation of the outcome of the elections is likely to slow business down, but also, the Parliament will cease its session as of February until the elections are over.” This is especially problematic, she says, as there are “about 50 or so” acts in the legislative pipeline. “The political differences between the ruling party and the opposition are mainly to do with judicial regulation, but this inevitably spills over into other areas – which slows down the economy.”

Still, Popovski says, the North Macedonian economy itself is doing fairly well in these circumstances, with the energy and IT sectors being most active. “These two areas are clearly booming,” she says, adding that recent tax reforms should impact this as well. “We’ve seen a return to a 10% flat tax that is most likely to affect the personal income of individuals. The recent ‘excursion’ – the introduction of a bracketed personal income tax – clearly failed, so this measure should likely result in positive economic outcomes.” 

“On January 16, the Parliament passed the Strategic Investment Act which regulates Governmental investments and subsidies,” Popovski says, describing it as something that must be carefully studied and observed, especially given the scope of the Act and the economic impact it may produce. “Also, we’re expecting the NATO membership agreement to be ratified soon – our Government and Spain are the ones we’re still waiting on – but it should pass sometime this year,” she says. North Macedonia is also looking forward to receiving a start date for commencing negotiations for EU accession, but, according to her, “this is all up in the air, given our history with the EU accession process and how full of hurdles it’s been.”

Finally, Popovski reports that North Macedonia is gearing up to join a recently-announced crowdfunding platform. “This is a most interesting project, based out of Estonia, with Croatia being a regional country set to participate as well. It is likely that once in action, it should attract a lot of domestic entrepreneurs seeking capital backing.” 

Former Polenak Partner Tatjana Popovski Buloski and several colleagues have left that firm to launch Popovski and Partners in North Macedonia.

Buloski, who co-founded Polenak in 2007, is Managing Partner of the new firm, where she is joined by fellow partners (and former Polenak senior associates) Jana Dukovska Despotovska and Ognen Martinov, as well as lawyers Andrijana Volcevska, Anastazija Anastasovska, and Angela Milanovska. According to a statement on the Popovski and Partners website, the firm is “a modern, full-service law firm in the Republic of North Macedonia.”

Jana Despotovska joined Polenak in 2015 after spending 11 years with the Pepeljugoski Law Office. Ognen Martinov spent the past seven years with Polenak.

The main characteristics of the Macedonian banking market are its small size and the relatively large number of players. According to the latest reports of the National Bank of North Macedonia, out of fifteen active banks, five have significantly higher market shares than the rest. The combined market share of these five biggest banks is 74.4%, with a significant discrepancy between the bank that owns the largest amount of assets (a market share of 22.7%) and the one with the lowest (a market share of 0.5%).

In respect to the assets owned, eleven active banks majority-owned by foreign shareholders have a combined market share of 71.1%. The highest market share of these foreign-owned banks – 79.9% – is in the segment of loan activities.

According to the National Bank’s Quartal Reports for 2017 and 2018, competition among banks, based on the Herfindahl-Hirschman Index, is shrinking. Indicators of the level of competition are the number of market players and the quantity of their market share. Due to the large number of banks with a small market share, the Macedonian banking market qualifies as a non-competitive environment. 

Many believe that a non-competitive environment is not good for a country’s economy, as a competitive banking market lowers costs and extends the products portfolio for consumers and stimulates the banks to innovate. Thus, it comes as no surprise that the EBRD has highlighted the consolidation of the banking market as a priority in its Transition Report for North Macedonia 2018-19. The main benefit of the proposed consolidation would be a strengthening of the market, which should enhance the flow of goods and services in the country’s economy. 

The need for consolidation of the banking market has been recognized by the National Bank of North Macedonia as well. The Governor of the Bank, Anita Angelovska-Bezoska, has stated that lowering the number of banks should increase competition in the market, thereby expanding the portfolio of products offered by the banks. 

It is left to the National Bank of North Macedonia to determine the most appropriate measures to take in consolidating the banking market. In preparing its strategy to build up the national banking market, the National Bank will have to consider best practices in other countries, as well as the specifics of the Macedonian market. 

The Bank must be careful, as the stability of the banking market is crucial and any instability may spread by contagion to the whole economy by distorting the interbank lending market as well as credit availability and could ultimately lead to recession. Some characteristics of the banking market, such as tight regulations, entry barriers, and strict supervision, differentiate it from other traditional markets. Therefore, the manner of encouraging competition within the banking market should be adjusted to its characteristics. 

The most compelling argument for consolidating the banking market is the fact that larger banks are able both to diversify risks and utilize the economy of scale to reduce costs by increasing the size of the business. Studies show that less-competitive banking markets can be costlier and exhibit a lower quality of services, with a consequent reduction in the effective demand for external financing and discouraging economic growth. 

On the other hand, other studies emphasize that in a non-competitive banking environment banks can form long-term relationships with borrowers and lend more, with a lower interest rate, than banks in a competitive environment, due to their belief that they will be able to extract a large portion of the future surplus of the borrowers. 

It is obvious that theory alone is unclear about the consequence of reducing the number of banks and increasing competition in this market. As a result, the consequences of the consolidation and increase of competition in the banking market in North Macedonia will need, ultimately, to be assessed empirically, by using both theory and best practices from elsewhere in the EU.

Marija Filipovska, Partner, and Dushica Bojkovska, Associate, CMS Skopje

This Article was originally published in Issue 6.9 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.

ODI has advised Turkish aircraft management and rental company Rey Airlines on the winding up of its Rey Airlines Europe LLC JV, which it established in partnership with a private individual in Skopje in 2016.

The ODI team was led by Partner Gjorgji Georgievski and Associate Marija Serafimovska.

ODI has advised duty free shop operator ATU Macedonia on the granting of a EUR 0.5 million loan to its sole shareholder, Turkey-based ATU Turism A.S.

According to ODI, “the advice included drafting of a bilateral unsecured loan facility agreement and advising on all regulatory aspects for the consummation of the transition.”

The ODI team was led by Partner Gjorgji Georgievski and Associate Marija Serafimovska.

The Polenak Law Firm has advised the EBRD on its EUR 5 million loan to SME Aktiva, including transaction advice and security documentation in North Macedonia.

Aktiva, founded in 1999, provides metal fabrication services, as well as engineering, supervision and construction services for steel construction facilities. The loan will be used to complete the company’s EUR 10 million upgrade of its production and coating capacity, including the installation of a new electro-coating line, which will help the company grow its metal processing segment and increase the export share of this business segment.

The Polenak Law Firm did not reply to our inquiries about the deal.

Macedonian lawyers Tatjana Shishkovska, Aleksandar Dimic, and Metodija Velkov have joined the Polenak partnership, working alongside Managing Partner Kristijan Polenak.

Shishkovska has been working with Polenak since 2005 after graduating from the Iustinianus Primus Faculty of Law at the University of St. Cyril and Methodius in Skopje. According to Polenak, Shishkovska “will continue leading the firm’s corporate work and will co-head the M&A, she and Finance department together with Kristijan Polenak.”

Dimic, who heads the Polenak Real Estate and Litigation departments, began working with the firm immediately after graduating in 2005 from the Iustinianus Primus Faculty of Law in the University of St. Cyril and Methodius. 

Velkov, who has been at Polenak since 2008, also graduated from the Iustinianus Primus Faculty of Law at the University of St. Cyril and Methodius. He will head the firm’s the Competition, Regulatory, and Compliance departments.

“The talk about the entrance of two regional players – CMS and Schoenherr – onto the Macedonian market last year is still on everyone’s lips (among lawyers),” says Apostolska & Partners’ Founding Partner Emilija Apostolska-Temov in North Macedonia, who says that the presence of such law firms in the market will undoubtedly influence business, increasing both the quality of legal services and competition. “It also gives us a hint about investments coming in – such big law firms would not come without any plans,” she says. “They must know something that the rest of us will learn later. I think it will be a positive experience.”

There’s news coming from elsewhere in the country as well, Apostolska-Temov says. She reports that, earlier this year, North Macedonia abandoned its old flat taxation system in favor of a new progressive system. While the consequences of the new law have yet to be seen, she notes that, at least for the moment, it “is seen as something not positive for businesses.” She sighs. “We were not given time to prepare, as the law was published and the implementation process started immediately.”

The new law imposes higher costs for employers, Apostolska-Temov reports, which may affect foreign investment. For example, under the previous flat system, both personal income and income from other sources, such as royalties, sales, and capital gains, were charged at a consistent 10% rate. The new law introduces two tax brackets and rates, with annual salaries, royalties, income from professional services, and the sale of agriculture products exceeding EUR 18,000 to be taxed at an 18% tax rate. The law also introduced a new 15% rate on income from industrial property rights, capital gains, leases, and so on.

According to Apostolska-Temov, the most affected group will be software development industry employers and employees, who, she reports, “get the highest salaries in North Macedonia.” In addition, she says, “in most labor contracts, regardless whether salaries are gross or net, employers are responsible for covering taxes in case of changes in taxation law.” As a result, she says, “a lot of money will come out from the pockets of employers – and the majority of them are foreign investors.” This, she notes, may make North Macedonia less attractive for foreign investors, as it will be “no longer a tax haven, and investors will move elsewhere.” 

On the other hand, Apostolska-Temov notes, there may be a countervailing consideration for potential investors. She points to a growing interest of foreign investors in the cannabis growth and extraction segment, which she says is sparking discussion about the possibility for improved legislation on cannabis extraction. While there are no draft laws at the moment, she says that a change in the current law is possible, and she smiles that, “in such a small country as Macedonia, if there is smoke, there is fire.” If it does come, she says, it is likely to induce more investment. “The current regime is heavily regulated,” she says, as it sets out a long list of licenses to obtain and preconditions to be met. Still, she notes, “this did not prevent investors from finding North Macedonia a good destination for investment in this sector,” and she believes that a new and clearer law, with faster procedures, would be even better. 

Finally, Apostolska-Temov reports, a new Law on Public Procurement was adopted on April 1, 2019, harmonizing North Macedonian law with several EU Directives. According to her, one particular element of the law, relating to contract-awarding criteria, attracted the most attention. “In the past low prices were the most prioritized criteria in tenders,” she says. “With the new law, procedures will be more transparent and efficient, and the ways public funds are allocated will be more effective.” She considers this a positive step forward, noting that “the lowest price does not mean the greatest quality.”