Maintaining Macroeconomic Stability in Turbulent Times: The Case of Macedonia

Dimitar Bogov Governor

National Bank of the Republic of Macedonia

8,0

Macedonia was one of the countries in Europe with the

lowest fall in output

in 2009...

GDP (y-o-y, %) 6,0 4,0 2,0 0,0 -2,0 -4,0 -6,0 -8,0 2008 2009 2010

Source: IMF, World Economic Outlook database , Euro stat and NBRM projections

2011 2012 Serbia Croatia Bulgaria Greece Albania B&H Macedonia

... economy had recovered after the negative impact of the global financial crisis, but

economic downturn and financial stress in the euro area poses risks

to the growth...

GDP (y-o-y, %) 7,0 6,0 6,1 5,0 4,0 3,0 2,0 4,6 4,4 5,0 1,0 0,0 -1,0 -2,0 2004 2005 2006

Source: State Statistical Office and NBRM projections

2007 5,0 2008 -0,9 2009 1,8 2010 3,3 2011 2,4 2012

14,0 In 2011 the surge in

investments and private consumption

were main growth drivers; 2012 growth is expected to driven predominantly by

investments

...

Contributions to GDP growth (p.p.)

Gross investments 12,0 Government consumption 10,0 Private consumption 8,0 Net exports 6,0 4,0 2,0 0,0 -2,0 -4,0 -6,0

2004 2005 2006

Source: State Statistical Office and NBRM projections

2007 2008 2009 2010 2011 2012

Inflation

is expected to decline to 2 percent in 2012, as the effects of higher food and commodity prices fade and in response to slowing demand

14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0 -2,0 2006 2007 2008 2009 -4,0

Source: IMF, World Economic Outlook database and NBRM projections

2010 2011 2012 Serbia Croatia Albania B&H Kosovo Macedonia

Policy rate

(Central Bank Bills rate- CB-Bills) is remaining unchanged, at the historically low level of 4%

CB-Bills interest rate 10,0

%

9,0 8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 2006

Source: NBRM

2007 2008 2009 2010 2011 2012

In the post-crisis period, there is an evident external imbalances correction ...

Current Account Balance (% of GDP) 2008 2009 2010 2011 5,0 0,0 -5,0 -10,0 -15,0 -12,8 -20,0 -25,0 -30,0

Source: IMF, World Economic Outlook database and NBRM

-6,8 -2,2 -2,8 Serbia Croatia Bulgaria Greece Albania B&H Kosovo Macedonia

...the

trade deficit

is almost fully financed by the

strong private transfers inflows

(net-foreign currency purchases by exchange offices) and improved service balance ...

35,0 % of GDP 25,0 15,0 5,0 -5,0 -15,0 -25,0 -35,0

Source: NBRM

2004 2005 2006 2007 2008 2009 2010 2011 2012 Transfers, net Income, net Services balance Trade balance Current account (% GDP)

0,0

Trade deficit is largely due to energy dependence and imports by investment

Non-energy trade balance (% of GDP) Energy trade balance (% of GDP) 5,0 Trade Balance by determinants (% GDP) 0,0 -5,0 -5,0 -10,0 -10,0 -15,0 -15,0 -20,0 -20,0 -25,0 -25,0 Investment Industry Consumption -30,0 2004 2005 2006 2007 2008 2009 2010 2011 2012

Source: NBRM

-30,0 2004 2005 2006 2007 2008 2009 2010 2011

Source: NBRM

Some

positive trends

are evident in the

export structure

; the capacity of the economy is increased with the FDIs and there is a trend of geographical diversification of export

Exports by SITC (share in total

Other

%) Belgium Exports to top 10 countries (share 1,4 in total %)

Miscellaneous manufactured articles

Bosnia and Herzegovina 2,1 2,9

Machinery and transport equipment

China 3,1

Manufactured goods classified by materials

Croatia 6,5

Chemical Products

2011 2006 Italy Greece 4,8 2011 2006

Mineral fuels, lubricants and related materials Crude materials, inedible, except fuels

Serbia Bulgaria 7,5 6,9

Beverages and tobacco

Kosovo 12,1

Food and live animals

27,9 Germany

0,0 5,0 10,0 15,0 20,0 25,0 30,0 35,0

0,0 10,0 20,0 30,0

Source: State Statistical Office Source: State Statistical Office

14,0

After the external shock to

FDIs

these inflows were

recovered

and with the

modest external debt rise

contributed for

Gross Reserves increase 12,0 FDIs (% GDP) Capital and financial account net inflows (% GDP) 10,0 8,5 8,0 6,6 6,0 5,9 6,1 4,1 4,0 2,3 2,0 2,0 1,6 0,0

Source: NBRM

2004 2005 2006 2007 2008 2009 2010 2011

The level of Gross Reserves

is adequate

and protects the exchange rate peg...

Gross Reserves (mill.euros) Gross Reserves (% GDP)

million Euros

2 000,0

% GDP

30,0 25,0 1 500,0 20,0 1 000,0 15,0 10,0 500,0 0,0 I.2008

Source: NBRM I.2009

I.2010

I.2011

5,0 I.2012

0,0

45,0 40,0 35,0 30,0 25,0 20,0 15,0 10,0 5,0 0,0 2,5 2,0 1,5 1,0 0,5 0,0

... sustainability and vulnerability indicators don't show some imbalances...

Reserves to short-term external debt Reserves to imports

2004 2005 2006 2007 2008 2009 2010 2011 5,0 4,5 4,0 3,5 3,0 2,5 2,0 1,5 1,0 0,5 0,0 2004 2005 2006 2007 2008 2009 2010 2011

Private external debt to GDP Gross external debt to exports

2004 2005 2006 2007 2008 2009 2010 2011 160,0 140,0 120,0 100,0 80,0 60,0 40,0 20,0 0,0 2004 2005 2006 2007 2008 2009 2010 2011 Source: NBRM

65,0 ... the

low level of sovereign external debt higher share of long-term debt

from capital flights in the years before the crisis was significant buffer and the , protects the country

Private sector external debt to GDP (%) Public sector external debt to GDP (%) Gross External Debt to GDP (%)

63,3 100

Short-term external debt to gross external debt (%) Medium/long-term external debt to gross external debt (%)

90 55,0 31,5 80 45,0 35,0 25,0 15,0 5,0 39,0 24,3 -5,0 2004 2005 2006 2007 2008 2009 2010 Q1 2011 Q2 2011 Q3 2011 Source: NBRM 40 30 20 10 70 60 50 68,5 0 2004 2005 2006 2007 2008 2009 2010 Q1 2011 Q2 2011 Q3 2011 Source: NBRM

Government has built significant public debt...

fiscal buffers

before the crisis; balanced budget and low level of

1,0 Central government (CG) fiscal balance in % of GDP 45,0 40,0 Domestic (% GDP) External (% GDP) CG debt ( % of GDP) 35,0 0,0 0,0 0,2 -0,5 0,6 -0,9 -1,0 -2,7 -2,5 -2,6 -2,0 30,0 25,0 20,0 6,8 15,0 -3,0 21,4 10,0 -4,0 5,0 -5,0 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ministry of Finance

0,0 2004 2005 2006 2007 2008 2009 2010 2011

Source: Ministry of Finance

4,0 2,0 0,0 -2,0 -4,0

Macedonia is one of the countries with lowest deficit and public debt

70,0 Budget Balance (% GDP) Public Debt (% GDP) 60,0 50,0 40,0 30,0 Serbia Croatia Bulgaria Albania B&H Macedonia 20,0 -6,0 10,0 -8,0 2008 2009 2010 2011 0,0 2008 2009 2010 2011

Source: IMF , Country Reports and Ministry of Finance , RM

30,0 25,0

Financial sector

indicators continue to suggest sound overall conditions; the capital adequacy ratio is high and liquidity risk is low

Regulatory capital/risk weighted assets (%) Tier I capital/risk weighted assets (%) 30,0 Highly liquid assets/total assets 25,0 20,0 25,3 20,0 15,0 16,8 14,1 15,0 15,8 10,0 10,0 5,0 5,0 0,0 0,0 2004 2005 2006 2007 2008 2009 2010 2011

Source: NBRM Source: NBRM

18,0 16,0 14,0 12,0 10,0 8,0 6,0 4,0 2,0 0,0

NPLs rose

, but remain below their post-crisis peak (10.4%) and are

fully covered by bank provisions NPLs / Gross loans (%) 6,5 Provisions to Non Performing Loans (%)

140,0 120,0

10,4

100,0

9,5

80,0

104,0

60,0 40,0 20,0 0,0 2004 2005 2006 2007 2008 2009 2010 2011 Source: NBRM Source: NBRM

45,0 40,0 35,0 30,0 25,0 20,0 55,0

Loans continue to be financed predominantly by local deposits (loan-to-deposits ratio is 0.89), with limited reliance on external financing

Banks claims on other sectors/ Deposits of other sectors at banks

49,9 120,0 50,0 46,1 100,0

Deposits of other sectors at banks, % of GDP Banks claims on other sectors, % of GDP

80,0 60,0 40,0 20,0 89,0 0,0 2004 2005 2006 2007 2008 2009 2010 2011 Source: NBRM Source: NBRM

50,0

Claims on enterprises in % of GDP Claims on households in % of GDP

45,0 40,0 35,0 30,0

Private sector

is not heavily indebted, but there is a significant currency mismatch of the non-banking sector (short FX position by the companies and long FX position by households) 27,8 15,0 10,0 10,3 12,0 12,4

Banks FX and FX indexed claims on households household FX and FX indexed deposits, % of GDP

24,9 5,0 0,0 25,0 20,0 15,0 10,0 5,0 16,9 18,2 -5,0 -10,0 -15,0 -12,2 2009 -12,8 2010 -12,3 2011

Banks FX and FX indexed claims on enterprises enterprise FX and FX indexed deposits, % of GDP

0,0 2004 Source: NBRM 2005 2006 2007 2008 2009 2010 2011 Source: NBRM

8,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0

Banks interest rate margin

is increasing recently

Banks Denar interest rate margin (average for the year) Banks Foreign currency interest rate margin (average for the year) Interest rate differential between NBRM CB-Bills and ECB policy rate (end of period)

8,0 0,0 2005 2006 2007 2008 2009 2010 2011 4,7 3,0 7,0 6,0 5,0 4,0 3,0 2,0 1,0 0,0 2005 2006 2007 2008 2009 2010 2011 3,0 Source: NBRM Source: NBRM

Summary:

Macedonian economy is more resilient now then in 2009 crisis;

 GDP growth is supported by FDIs and government investment;  Inflation is on declining path;   The EU crisis imposes risks to exports, but more diversified structure is a buffer for adjustment in a case of potential external shocks; Banking system remains sound, with higher capital adequacy ratios and liquidity ratios;  The public debt is sustainable;  Foreign reserves are at an adequate level.

25,0

Appendix: Macro prudential Indicators –Regional Comparison

Regulatory capital to risk-weighted assets (%)

20,0 15,0 10,0 5,0 16,2 16,8

B&H Serbia Bulgaria Albania Croatia Tukey Montenegro RM

0,0 2008 Source: National Central Banks official web sites 2009 2010 Q3 2011

25,0 20,0 15,0 10,0 5,0

6,7 Nonperforming loans (NPLs) to total loans (%)

0,0 2008 Source: National Central Banks official web sites 2009 2010 Q3 2011

9,5 B&H Serbia Bulgaria Albania Croatia Tukey Montenegro RM

-1,0 -2,0 -3,0 -4,0 4,0 3,0 2,0 1,0 0,0 2008

1,4

Source: National Central Banks official web sites

Return on assets (ROA, %)

2009 2010 Q3 2011

0,7 B&H Serbia Bulgaria Albania Croatia Tukey Montenegro RM

30,0 20,0 10,0 0,0 70,0 60,0 50,0 40,0

22,9 Liquidity ratio (liquid assets to total assets)

2008 Source: National Central Banks official web sites 2009 2010 Q3 2011

B&H Serbia Bulgaria 31,3 Albania Croatia Tukey Montenegro RM