Anita Angelovska-Bezoska: Macedonia - current macroeconomic
developments, medium term outlook and challenges ahead
Speech by Ms Anita Angelovska-Bezoska, Vice-Governor of the National Bank of the
Republic of Macedonia, at the Ministerial Dialogue on the Preaccession Economic Programs
on EU Candidate Countries, European Commission, Brussels, 9 July 2013.
* * *
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 contribution in assessing our Preaccession Economic
Program for the period 2013-2015. Within the PEP we already presented the proactive role
of the National Bank of the Republic of Macedonia in dealing with the global crisis
consequences, by undertaking a mix of conventional and unconventional measures, aimed
at maintenance of the price stability, financial stability, as well as stimulating economic
activity.
I will use this opportunity to point out several issues regarding the current macroeconomic
developments, medium term outlook and challenges ahead.
The latest available data on Macedonian economy for the first quarter of 2013 indicated a
gradual revival of the economy with real annual GDP growth of 2.9%, slightly higher than our
expectations, being mainly driven by the investment and net export. Generally, Macedonian
economy has been relatively successful in offsetting the crisis consequences which was
mainly due to the solid initial conditions prior to the crisis without massive macroeconomic
imbalances, the establishment of few new production capacities based on foreign capital that
largely contributed to the export diversification, stable and sound financial system and
adequate macroeconomic policy mix.
The environment for monetary policy implementation in 2013 is quite favorable, considering
relatively stable inflation developments and comfortable foreign reserves level. In the first half
of 2013, the average inflation was 3.6%, mainly due to higher food and energy prices. Our
latest forecast for the average inflation rate in 2013 is 2.8%, with expected further slowdown
to 2.3% (close to our historical level) in 2014, until when no pressures of higher significance
by the demand side are being expected. However, there are risks related to this forecast,
reflecting the uncertainty about energy prices as well as the world and domestic food prices
dynamics and their direct and indirect pass-through to inflation.
The performances in the external sector in the first several months of 2013 and the latest
estimates indicate quite favorable position in the balance of payments for this year. The
reduced trade deficit is neutralizing the lower net inflows through private transfers. Therefore,
the current account deficit in 2013 is expected to remain moderate at 4.2% of GDP, which is
similar to the previous year. The financial flows (FDIs and borrowing of private and public
sector) are projected to be sufficient to cover current account deficit and to provide some
further accumulation of reserves. Thus the foreign reserves are expected to remain at
comfortable level during 2013, indicating adequate capacity for maintaining the fixed
exchange rate. In a medium run, we expect more positive effects of the FDI's in the tradable
sector on the exports, thus lowering the trade deficit, which is one of the main structural
problems.
The Macedonian banking sector has remained stable and sound despite the global financial
and economic turbulences in the last few years reflecting orientation towards traditional
banking activities at domestic market and stable domestic sources of financing. In May 2013,
the total banks' deposits were higher by 3.3% on annual basis, and what is very important,
the trend of more pronounced growth in the Denar deposits relative to the foreign currency
deposits from the previous three years continued. In May 2013, the Denar deposits were
higher by 9.3%, while foreign currency deposits declined by 3.4%, on annual basis.
Therefore, the level of euroization, measured through the share of foreign currency deposits
in the total deposits went down from almost 55% in mid-2009 to 44% in May 2013, which is a
positive indication for the confidence in the national currency and monetary policy credibility
(providing more space for accommodative monetary policy).
The financial support through the banks' credit market during the crisis years has been
moderate, but permanent, therefore supporting the economic recovery of the economy.
Anyway, in May 2013, the annual credit growth was 3.7%, pointing to a gradually slowing
pace during 2012 and first half of 2013. Possible reasons for such trends in the credit market
are: effects of financial deleverage process of foreign parent banks, banks' deteriorating risk
perceptions against the backdrop of still anemic economic activity and uncertainty regarding
the global environment, and the present (though moderate) increase of credit risk in the
system, as well as the potential. The NPL ratio reached 11.4% in the first quarter of 2013
being one the main challenges for the banking system that is closely monitored by the
NBRM. Still, it is among the lowest in the group of the EU candidate countries. Regarding the
future prospects for credit flows it can be noted that stable funding sources (loan-deposit
coverage ratio of around 90%), strong liquidity position, and capital adequacy ratio
continuously being twice as high than the minimum required, point to room for further
increase of lending in the domestic economy. The improvement of the banking sector
regulation in view of further implementation of the Basle and EU standards will remain being
a high priority on the agenda in this field.
In general, the current macroeconomic developments and the expected future outlook
indicate a moderate recovery of domestic economy (considering expected developments for
the economies of the most important trading partners and domestic drivers of growth),
inflation rate in line with the expectations, a balance of payments position that ensures a
comfortable level of foreign reserves and still slow credit flows. These assessments created
an environment for monetary relaxation, as a contribution to higher credit growth and thus,
support to the domestic economy. On that basis, in January, we reduced the key interest rate
on CB bills from 3.75% to 3.5%, which is the historically lowest level. Since January 2013,
the changes in the reserve requirement instrument came into force, through reduction of the
base of banks' reserve requirements by the amount of newly approved loans, but only for
credits to sectors whose growth reduces the external vulnerability of the economy (net
exporters and energy sector). This non-standard measure will be in effect until the end of
2014, when the need for further application will be examined. These changes in reserve
requirements have already started to contribute to higher lending to previously mentioned
sectors in the economy. Just last week, we have done yet another change in the reserve
requirement by reducing the reserve requirement ratio on Denar deposits from 10% to 8%
and simultaneous increase of the reserve requirement ratio on foreign currency deposits
from 13% to 15%, as well as introducing 0% reserve requirement ratio on banks' long term
liabilities to nonresidents. By this measure, we are aiming to: support the process of
deeuroization in the economy, inject liquidity in support of lending to the private sector and
stimulate higher inflows from nonresidents especially from financial institutions.
Last, but not least, I would like to point out our efforts in strengthening our statistics in the last
few years. In March 2013, the National Bank of the Republic of Macedonia started
transmitting the quarterly balance of payments and annual international trade in services
data to Eurostat, while in May 2013 additional data series on FDI flows and stocks
disaggregated by partner countries and activities were submitted. Currently we are working
on the establishment of new data warehouse system in the central bank that will contribute
for improved data management in general, as well as enable the transmission of more
demanding and detailed datasets in the future. In July 2012 we started with submission of a
more detailed set of the external debt data to the World Bank within the Quarterly External
Debt Statistics Database in accordance with the requirements for SDDS countries, thus
being among the first countries in the region fulfilling the overall data requirements in this
field. In addition, just recently, we have received the first Annual Report by the IMF on data
submission under SDDS, that we joined in November 2011, with positive annotations of the
overall data submission under this system. Further improvement of our statistics, bringing it
closer to the EU requirements, remains one of the key priorities of the central bank.
Just to summarize, in view of the global environment, the current macroeconomic
performances of the Macedonian economy are relatively favorable. Anyway, just like in the
previous years, the risks are still present and they are related to the expected recovery of the
external demand, the sentiment on the global financial markets and the world prices
development. Continuation with the structural reforms is a key in eliminating structural
bottlenecks and paving a way for sustainable growth and faster EU integration process. The
NBRM will continue with regular monitoring and analysis of the developments in the
economy and remain prepared, if necessary, to undertake appropriate measures to preserve
macroeconomic stability.