MACEDONIAN ECONOMY IN THE CONTEXT OF THE GLOBAL OUTLOOK - MAIN CHALLENGES AND RISKS- Ms. Anita Angelovska-Bezoska, MSc Vice-governor National Bank of the

MACEDONIAN ECONOMY IN THE CONTEXT OF THE GLOBAL

OUTLOOK

-MAIN CHALLENGES AND RISKS-

Ms. Anita Angelovska-Bezoska, MScVice-governor

National Bank of the Republic of Macedonia

Skopje, December 2011

NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM

Global recovery that started in 2010 came under pressure in 2011

The sovereign debt crisis in euro-area high global uncertainty;deceleration of financial flows and rise in cost of financing;uncertainty and lower financial flows negatively affect economic activity;weaker economic activity complicates consolidation of public finances and debt levels.

0

20

40

60

80

100

120

140

160

180

200

2007 2008 2009 2010 2011 2012 2013

Government debt (% of GDP)

euro-zone 17 Germany

Ireland Greece

Spain Italy

Portugal

Source: Eurostat until 2010; European Commission Autumn 2011 forecast for 2011-2013

0

5

10

15

20

25

30

Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11

10 year government bond yield, in %

Greece Ireland

Portugal Italy

Spain Germany

Source: Bloomberg.


September IMF WEO revised global growth downwards, including the growth of European Union (our key export partner)

EC revised EU growth downwards to 1.6% in 2011 and 0.6% in 2012

However, some recent data point to a recession in Europe (forward-looking indicators-PMI (47), German ZEW survey, and high-frequency data)

Further downward revisions of global and euro-zone growth in prospect - e.g:

Roubini expects Euro-area recession (GDP growth of -0.8% in 2012, previously 0.8%)Capital Economics expects a deeper Euro-area recession in 2012 (-1%, previously -0.5%)

There are ongoing downward growth revisions

GDP growth, y-o-y 2007 2008 2009 2010 2013Sept June Sept June Sept

World 5.4 2.8 -0.7 5.1 4.0 4.3 4.0 4.5 4.5

Advanced economies 2.8 0.1 -3.7 3.1 1.6 2.2 1.9 2.6 2.4United States 1.9 -0.3 -3.5 3.0 1.5 2.5 1.8 2.7 2.5European Union 3.3 0.7 -4.2 1.8 1.7 2.0 1.4 2.1 1.9Euro area 3.0 0.4 -4.3 1.8 1.6 2.0 1.1 1.7 1.5Japan 2.4 -1.2 -6.3 4.0 -0.5 -0.7 2.3 2.9 2.0

Emerging and developing economies 8.9 6.0 2.8 7.3 6.4 6.6 6.1 6.4 6.5Central and eastern Europe 5.5 3.1 -3.6 4.5 4.3 5.3 2.7 3.2 3.5

*Source: IMF WEO Update June 2011 and IMF WEO September 2011

2011 2012


Main challenges for the global economy are...

Dealing with the euro zone sovereign crisis, i.e. making the October EU package and the December EU-summit agreements work.

US situation: anemic growth (weakening housing market, higher household saving rates and lower consumer confidence) and difficulties over the fiscal consolidation;

Slowdown in emerging economies;

Less space for policy interventions;

Continued and widening external imbalances.

How can the Macedonian economy be affected?

Evidence from the global recession of 2009


What were the implications back then?

Economic contraction and falling inflation

Narrowing trade deficit against the backdrop of vigorous drop of import and declining oil prices

Slackening capital inflows

Banking system was not directly hit

Decelerating money and credit growth

Divergent “phases” in macro-trends throughout the year


Economic activity contracted, though mildly

Sharp fall in exports due to fall in foreign effective demand. Also, decrease of domestic demand (consumption) Positive contribution of net-exports due to more intensive fall of

imports than exports.

4.45.1

6.15.0

-0.9

-6

-4

-2

0

2

4

6

8

10

12

2005 2006 2007 2008 2009

Contributions of Domestic demand and Net-exports to annual GDP growth

(in percentage points)

Domestic demand

Net-exports

GDP

-0.9

-4.2-16.2

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

-6.0

-4.0

-2.0

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4.0

6.0

8.0

2002 2003 2004 2005 2006 2007 2008 2009

GDP and Foreign effective demand(real annual rates, in %)

Gross domestic product

Foreign effective demand

Exports (right axis)


Falling inflation...

due to contracted domestic demand and diminishing supply side effects. driven by the sharp fall of global commodity prices.

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0

2

4

6

8

10

2002 2003 2004 2005 2006 2007 2008 2009

Domestic inflation

Foreign effective inflation

Domestic and foreign effective inflation(annual rate of change, %)

-2

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4

6

8

10

2002 2003 2004 2005 2006 2007 2008 2009

Core inflation

Food prices

Energy prices

Inflation

Contribution of food and energy prices to annual rate of inflation(in percentage points)


Balance of payments effects were phased

1. First quarter of 2009 –the deepest impact:

Widening of the trade deficit by 19.4%, as a result of:

Significant impact on the exports (annual decrease of 34.5%), owing to a considerable decline in the world prices and contraction of the foreign effective demand;

Lagging downward adjustment of the imports.

Private transfers registered a negative annual growth rate of 29.6%;

Major reduction in net capital flows was recorded (annual fall of 58.4%) –lower FDI and private sector borrowing.

2. The rest of 2009 (Q2-Q4) –change in trends:

Monetary policy reaction

Expectations stabilized Positive growth rates in private transfers.

An intensified fall of imports due to declined consumption and investment ...

... resulting in a current account deficit reduction.

Foreign reserves increased, because of government net-borrowing from abroad (Eurobond issuance) and the allocation of the SDR from the IMF quota.


Deteriorating external developments called for policy reaction

-0.2

0.2

1.6

-2.4

-3.4

-1.3

1.2 1.3

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-3.0

-2.0

-1.0

0.0

1.0

2.0

Q1 Q2 Q3 Q4 2008 Q1 Q2 Q3 Q4 2009

NBRM interventions on the forex market, as % of GDP

Source: NBRM.

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5.00

10.00

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30.00

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I.20

06 III V

VII IX XI

I.20

07 III V

VII IX XI

I.20

08 III V

VII IX XI

I.20

09 III V

VII IX XI

Gross international reserves

Foreign reserves - stock in EUR million (left scale)

Foreign reserves - stock as % oF GDP (right scale)Source: NBRM.

NBRM intervened on the forex market (4.7% of GDP in 2009)

The unfavorable movements combined with the negative outlook for the external sector by the end of the year urged for monetary policy tightening

increase of the policy interest rate and increase of the reserve requirement.


Banking system remained sound and stable

Reasons:

Absence of any risky structured products in their balance sheet;

Low reliance on external financing; Reliance on deposit base as main source of financing credit

activity (credit to deposit ratio below 100); Relatively high capital adequacy ratio.


Causes: A slowdown in the deposit growth, mainly driven by the contracted economic

activity, worsened expectations and decreased capital inflows More difficult and more expensive access to other sources of banks financing Banks perceptions for growing risks in the economy Credit supply mostly oriented towards prime-rated borrowers Increased uncertainty related to the future income generating capacity of the private

sector and lower credit demand

Considerable decline in the monetary and credit growth in 2009


What were the transmission channels in 2009?

What is currently the state of the Macedonian economy and how well is it placed to cope

with new challenges?


Trend of accelerating economic activity

Economic recovery started with slow pace (1.8% in 2010) to significantly accelerate over the first half of 2011 (5.2% on average). GDP growth rebounds, close to pre-crisis growth rates

Export demand was the main driver of domestic economic recovery, supported by high growth of investments and, as well as private consumption.

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-6

-4

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2005

q120

05q2

2005

q320

05q4

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q120

06q2

2006

q320

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2007

q120

07q2

2007

q320

07q4

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q120

08q2

2008

q320

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q120

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q320

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q120

10q2

2010

q320

10q4

2011

q120

11q2

Real GDPForeign effective demandReal exports (right axis)

Real GDP, Exports and Foreign effective demand (y-o-y growth rates, in %)


During the first half of 2011, inflation reached the level of 4.4% influenced by rise of global commodity prices.

In 3rd quarter of prices have stabilized and are stagnating over the following two months

stabilization of import prices (food and oil prices). Inflation rate below pre-crisis

Up till May inflation accelerated, and afterwards stabilized


Balance of payments: lower external imbalances During 2010, the current account deficit narrowed further, due to

smaller trade deficit and higher private transfers; Since 2011, it started increasing moderately (1H 2011: 3.5% of GDP),

mainly driven by the trade rebound; CAD below pre-crisis; Trade deficit below pre-crisis level; More diversified trade structure.

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-600

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600

Q1 2008

Q2 Q3 Q4 Q1 2009

Q2 Q3 Q4 Q1 2010

Q2 Q3 Q4 Q1 2011

Q2 Q3

Current account balance by components(EUR million)

Trade balance Services, netIncome, net Current transfers, netCurrent account balance

Source: NBRM.

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

Q1 2

008

Q2

Q3

Q4

Q1 2

009

Q2

Q3

Q4

Q1 2

010

Q2

Q3

Q4

Q1 2

011

Q2

Q3

Trade balance(as % of GDP)

Export ImportSource: NBRM.


Balance of payments, cont’d

Capital flows recover modestly, still haven’t reached pre-crisis level; Exceptional financing by the government, IMF’s PCL arrangement of 220 EUR million in Q1

2011.

Foreign reserves are maintaining adequate level of monthly coverage of the following year’s imports of good and services.

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600

Q1 2008

Q2 Q3 Q4 Q1 2009

Q2 Q3 Q4 Q1 2010

Q2 Q3 Q4 Q1 2011

Q2 Q3

Structure of the net-inflows in the capital and financial account

(EUR million)

Direct investment, net Portfolio investment, netLong-term loans, net Other, net

Source: NBRM.


Price competitiveness was not lost

84.0

86.0

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96.0

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102.0

Q1

2005 Q3

Q1

2006 Q3

Q1

2007 Q3

Q1

2008 Q3

Q1

2009 Q3

Q1

2010 Q3

Q1

2011 Q3

Relative prices(2006=100)

Relative prices (domestic/foreign inflation), 2006=100Relative prices (domestic/foreign producer prices), 2006=100

85.0

90.0

95.0

100.0

105.0

110.0

Q1

2005 Q2

Q3

Q4

Q1

2006 Q2

Q3

Q4

Q1

2007 Q2

Q3

Q4

Q1

2008 Q2

Q3

Q4

Q1

2009 Q2

Q3

Q4

Q1

2010 Q2

Q3

Q4

Q1

2011 Q2

Q3

REER and NEER(NEER, CPI and PPI based REERs, 2006=100)

NEER REER - CPI REER - PPI


Money and credit growth have picked-up, but remain below pre-crisis period

Uncertain global and domestic developments as well as banks’ conservative risk-pricing policy determine lending pace


Capital-adequacy ratio is above the pre-crisis level: Liquidity is above the pre-crisis level; Credit to deposit ratio is now lower (about 88); Reliance on external sources of financing has remained low (10%). Stabilization of NPLs, though risks still remain; High coverage of NPLs (above 100% on average-among the highest in Europe)

Banking sector is sound and able to cope with risks

2008Q1 2008Q2 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3

Capital adequacyRegulatory capital/risk weighted assets 15.9 15.6 15.0 16.2 16.5 16.4 16.5 16.4 16.8 16.5 16.4 16.1 16.8 16.5 16.7

Asset composition NPLs 1/

NPLs / gross loans 7.2 6.8 6.5 6.7 7.5 8.5 9.3 8.9 9.7 9.9 10.4 9.0 9.1 8.9 9.5 Provisions to Non-Performing Loans 113.4 114.8 115.6 118.1 107.0 99.1 97.5 101.4 97.7 97.6 93.0 100.7 103.3 104.5 103.6

Earning and profitabilityROAA 2/ 1.7 2.2 1.9 1.4 0.2 0.5 0.7 0.6 0.1 0.4 0.5 0.8 -0.1 0.2 0.1ROAE 2/ 14.7 19.1 16.5 12.5 1.8 4.3 6.0 5.6 1.1 3.2 4.0 7.3 -1.0 2.1 1.0

Liquidity

Highly liquid assets/total assets 5/ 18.1 18.2 17.6 16.9 15.9 15.8 17.8 20.6 22.0 23.7 24.0 25.3 24.2 24.7 23.3Highly liquid assets/total short-term liabilities 6/ 24.6 24.7 22.1 24.0 22.9 22.8 25.8 30.1 32.8 35.6 36.0 38.5 37.4 38.4 36.3

4/ Noninterest expenses include fees and commissions expenses, operating expenses and other expenses excluding extraordinary expenses.

5/ Highly liquid assets are defined as cash and balance with the NBRM, treasury bills, NBRM bills, and correspondent accounts with foreign banks. Assets in domestic banks are excluded from total assets. 6/ Short-term liabilities are defined as deposits and other liabilities with a maturity of one year or less (without deposits and borrowings from domestic banks).

1/ Includes loans to financial and nonfinancial sector.

2/ Adjusted for unallocated provisions for potential loan losses. Since 31.03.2009 these items have been adjusted for unrecognized impairment.

3/ Interest margin is interest income less interest expense. Gross income includes net interest income, fees and commissions income (gross, not net) and other gross income excluding extraordinary income.

Financial Soundness Indicators of the Macedonian Banking System


Monetary policy

Policy rate kept steady at 4% after a series of cuts during 2010

September 2011:

Changes in the Reserve requirements setup – 0% reserve requirement rate on long-term-households’ deposits

Amendments in the Decision on Managing Banks’ Liquidity Risk – simplified conditions for managing liquidity

Encourage long-term savingsEnhanced liquidity management

by banksIn support of credit activity


Monetary policy: adequate level of reserves

4.5 4.55.0

4.4

3.3

3.1

4.0 4.23.5 3.7 3.7 3.8 3.9 3.7 3.8

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2000

Q1 2008

Q2 Q3 Q4 Q1 2009

Q2 Q3 Q4 Q1 2010

Q2 Q3 Q4 Q1 2011

Q2 Q3

Gross international reserves

Foreign reserves - stock in EUR million Monthly coverage of next years' imports of goods and services (right scale)

Source: NBRM.


Fiscal policy: room for counter-cyclicality

Higher levels of budget deficits as compared to historical average...

...and subsequent mild increase in Central Government’s debt

Prudent fiscal policy as compared to benchmarks.

.....room for counter-cyclical fiscal policy


Macro-projections for 2011 (as of October 2011)

Projected real GDP growth of 3.5%

Average inflation rate of around 3.9%

Projected CAB deficit of 4.8% of GDP

Adequate level of foreign exchange reserves

Expected money and credit growth of 9% and 9.2%, respectively


Macro-outlook for 2012

Slight deceleration in real GDP growth to 3%

Inflation is expected to further decelerate to its historical average of 2%

Current account deficit close to the level of 2011

Adequate level of foreign exchange reserves sustained

Continued monetary and credit growth by 9.8% and 8% respectively

Main risks to projection: unfavorable external developments


Instead of conclusion

Where do we stand now:

GDP growth rates close to pre-crisis level

Inflation back to historically low level, without demand side pressures

Exports and imports close to pre-crisis level, however with more diversified structure as a buffer for adjustment in episodes of potential external shocks

Sound banking system (higher capital-adequacy and liquidity ratios)

Still room for counter-cyclical fiscal policy

Foreign reserves at an adequate level


NBRM remains committed to de-facto fixed exchange rate.

Given the high global uncertainty, NBRM continuously monitors the developments and is ready to undertake all measures to preserve macroeconomic stability.


THANK YOU FOR YOUR ATTENTION!

http://www.nbrm.mk

Documents

MACEDONIAN ECONOMY IN THE CONTEXT OF THE GLOBAL OUTLOOK - MAIN CHALLENGES AND RISKS- Ms. Anita Angelovska-Bezoska, MSc Vice-governor National Bank of the