Anita Angelovska-Bezoska: Macedonia's current macroeconomic
landscape and main challenges ahead
Speech by Ms Anita Angelovska-Bezoska, Vice-Governor of the National Bank of the
Republic of Macedonia, at the economic and financial dialogue on the Economic Reforms
Programs on Western Balkan and Turkey, Brussels, 12 May 2015.
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Dear Ministers,
Dear representatives of the European Commission, European Central Bank and Eurostat,
At the beginning, let me express our gratitude to the European Central Bank, European
Commission and Eurostat for their assessment of our Economic Reforms Program for the
period 2015-2017. Let me mention that we appreciate very much this dialogue with the EU
institutions and the overall feedback on our policies that we have received during the process
and we believe that it is highly beneficial regarding our preparedness for joining the EU. At
this point, I would like to address several important issues related to the current
macroeconomic landscape of the Macedonian economy, as well as the main challenges
ahead.
The growth momentum was kept in 2014, with the real GDP growth accelerating to 3.8% p.a.
As the external environment is not sufficiently "growth-conducive", the strong performance of
the domestic economy is explained by country-specific factors. Firstly, it is a reflection of the
positive fundamental shifts, with growing foreign investments, mainly in the tradable sector.
They are helping the economy to gradually increase its resilience, by significantly increasing
the diversification of the production and the export structure of the economy, but also by
yielding positive second-round effects, improving the labor market conditions, increasing the
know-how, integrating domestic suppliers in the production process. Secondly, the economy
has been impacted favorably by the fiscal stimulus in the infrastructure, an area continuously
being pinpointed as a weak spot, when it comes to the structural competitiveness. Hence,
albeit the fiscal impulse does have positive short run effects on growth - bridging over the
current "anemic external environment", it also affects the long-term potential of the economy.
The solid economic recovery is significantly improving the labor market conditions, increasing
the labor demand, reducing the unemployment, positively impacting the participation rate, but
also boosting the productivity growth of the economy. As being largely export and
investment-led, the solid growth does not create pressures on the external position of the
economy, nor on the inflation. On the contrary, the external sector is in a relatively good
shape, with the current account deficit being brought down to 1.3% of GDP, hitting the low
end of the average of around 2% in the last five years. The incessant improvement in the
current account, to a large extent reflects the rising net-impact on trade of the new foreign
production facilities, this particularly being the case in 2014. Yet, as the foreign demand has
started to recover, some positive shifts in the more traditional export segments are also
visible. Of course, last year the fall in the oil prices was also beneficial for the trade balance.
On the financing side, the financial flows were large enough to cover the current account
deficit and to provide additional reserve accumulation. It is important to note that FDI inflows
continued to flow in the economy, with their ratio to GDP being kept stable at 3.3% of GDP.
Yet, the largest part of the financing flows came through the government borrowing at the
international market, at rather favorable terms, pinpointing the perception of the investors for
sound fundamentals and rather prudent policies in the Macedonian economy. Observing the
inflation path, it more or less resembled the inflation pattern elsewhere, with the falling food
and energy prices pushing prices down. The average headline rate for 2014 was mildly
negative (-0.3%), while the core inflation albeit slowing down, on average remained positive.
The inflation adjustment is perceived as temporary, driven by supply-side factors, and
without any risks to become entrenched in the inflation expectations and to jeopardize the
economic recovery. The fact that the negative output gap has been narrowing and the fall of
the prices has been significantly slowing down in the first months of this year, just support the
former notion.
Domestic financing through the banking sector significantly increased in 2014, with credit
market recovering much faster compared to the previous years. Given that the banking
system entered the crisis with sufficient capital and liquidity buffers, the credit flows to the
economy in fact never seized. Yet, during the last year, on the backdrop of the economic
recovery and the improvement in the overall risks perceptions, the credit accelerated to 10%
on an annual basis, reflecting both the supply and demand for credits. A notable rise of the
allocation of credits to corporate sector compared to the previous years was observed.
Hence, both the size and the structure of credits were growth supportive. The financing of the
credit growth was underpinned by solid rise in deposits (10.4% p.a.), confirming yet again the
reliance of the banks on domestic sources of financing, rather than on cross-border flows,
which might be quite volatile at the current juncture. An important point here is the trend of
rising preferences to save in domestic currency, which continued in 2014, reflecting stable
expectations and reducing the monetary policy burden. The banking sector remained stable
and sound, with solid liquidity and capital adequacy ratio of 15.7% at the end of 2014.
Nonperforming loans of the banks remained at a moderate level during the crisis period,
compared with the region. In 2014, they were relatively stable, slightly decreasing to 11.3%
at the end of the year and remained highly provisioned. The actual and the envisaged
economic recovery is expected to further improve the quality and the financial soundness of
the borrowers, and to further support the downward path of the NPLs. Yet, vigilance in this
area is important to prevent buildup and materialization of systemic risk. Last year was no
exception in terms of close monitoring of the soundness of the banking system, and changes
in the prudential regulation, which were an appropriate balance between the need to support
private sector financing, while maintaining the health of the banking system at the same time.
What was the monetary policy stance like in 2014 given the already elaborated economic
and financial conditions? In general, the accommodative stance was maintained. The main
interest rate was maintained at the historically lowest level, the targeted measures to support
net-exporting and electricity producing companies were extended until the end of 2015, and
certain credit-supportive macro-prudential measures were undertaken. This relatively loose
stance was maintained as a consequence of the "benign" external position, which did not
jeopardize the foreign reserves, and enabled a rather balanced foreign exchange market
during the year. Low inflation was also in favor of maintaining the accommodative stance.
Yet, the room for monetary policy accommodation appears to be largely exhausted.
The outlook for the 2015-2016, is more or less expected to resemble the state of the
economy in the previous year. Growth of the economy is expected to accelerate to 4.1% and
4.5% in 2015 and 2016. The fundamental factors to underpin the growth dynamics remain
the same. The boost to the export and investment is expected by the new and the existing
foreign companies, as well as those envisaged to enter the market. Investment cycle is
expected to be further strengthened by the continuation of the productive fiscal investments.
As the external demand is envisaged to recover further, additional stimuli is expected
through this channel. The above mentioned growth factors are expected to strengthen further
the labor market and the disposable income of the households, hence boosting the private
consumption as well. The growth expectations provide room for additional rise of the deposit
potential in the banking system, which accompanied with the rise in the credit demand and
the willingness of the banks to lend, should enable credit growth at a rate of 9-10% in the
period to come. The inflation is expected to be influenced mainly by the global prices of
primary commodities and the consumers prices of our main trading partners. An average
inflation of 0.5% is expected for 2015, with the current forecast indicating its reversal to 2% in
2016, reflecting the rise in the demand and in the import prices. The structural improvements
in the export sector are expected to continue in 2015, which along with the overall external
recovery and the much lower oil prices, are envisaged to bring about a moderate current
account deficit of bellow 1.6% of GDP. In the following year, widening to 3% is expected,
reflecting the fall in private transfers and import pressures from the new investment. The
external financing needs, within the current scenario, are expected to be covered by further
inflows of foreign direct investments and by the public borrowing for infrastructure purposes.
The current forecast points to a rather stable external debt to GDP ratio. No major pressures
are foreseen in the following two years on foreign reserves, and they are to be maintained at
the adequate level.
Risks surrounding this baseline macroeconomic scenario should not be neglected. For us, as
a small an open economy, they mostly come from the external environment and our main
trading and financial partners. Although with the latest monetary easing of the ECB the
downside risks to the euro zone growth are less pronounced, and in general the global
growth risks are more balanced, they are still present and if being materialized, could impact
the economy. Additional source of risks are the sharp and sudden swings in the primary
commodities prices, which for country like ours, can change the envisaged economic profile
to a large extent. A new, additional source of risks is the current domestic political context,
which can harm the economy, if not being tackled swiftly.
Of course, the risks are challenging and are to be closely monitored. This is even more
pronounced, given that the policies' space at the current juncture is to a great extent
exhausted. Hence, the continuation of the structural reforms remains paramount and a
challenge, as it can further increase the resilience of the economy, mitigate the risks and
reduce the policy burden. For us as emerging country, with foreign bank presence, the global
financial regulatory reforms also pose challenges, as they can possibly stimulate
deleveraging, reduce access to financing and financing flows to the private sector.
At the end, let me also avail myself of this opportunity to emphasize yet again our continuous
efforts to align with the EU requirements in all areas of operation, especially the banking
regulation and statistics, notwithstanding the efforts and the progress done in all other fields.
Thank you for your attention.