Maintaining Macroeconomic Stability in Turbulent Times: The Case of Macedonia

Maintaining Macroeconomic Stability in Turbulent Times: The

Case of Macedonia

Dimitar Bogov Governor

National Bank of the Republic of Macedonia

Macedonia was one of the countries in Europe with the lowest fall in output

in 2009...

2008 2009 2010 2011 2012-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

Serbia

Croatia

Bulgaria

Greece

Albania

B&H

Mace-donia

GDP (y-o-y, %)

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

... 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...

2004 2005 2006 2007 2008 2009 2010 2011 2012-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

4.6 4.45

6.1

4.95155855096883

-0.9000000000000

06

1.8

3.3

2.4

GDP (y-o-y, %)

Source: State Statistical Office and NBRM projections

In 2011 the surge in investments and private consumption were main growth drivers;

2012 growth is expected to driven predominantly by investments...

2004 2005 2006 2007 2008 2009 2010 2011 2012-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0 Contributions to GDP growth (p.p.)Gross investmentsGovernment consumptionPrivate consumptionNet exports

Source: State Statistical Office and NBRM projections

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

2006 2007 2008 2009 2010 2011 2012

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Serbia

Croatia

Albania

B&H

Kosovo

Macedonia

Source: IMF, World Economic Outlook database and NBRM projections

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

4%

2006 2007 2008 2009 2010 2011 20120.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

CB-Bills interest rate%

Source: NBRM

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

correction...Current Account Balance (% of GDP)

2008 2009 2010 2011

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

-12.8

-6.8

-2.2 -2.8 SerbiaCroatiaBulgariaGreeceAlbaniaB&HKosovoMace-donia

Source: IMF, World Economic Outlook database and NBRM

...the trade deficit is almost fully financed by the strong private transfers inflows (net-

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

2004 2005 2006 2007 2008 2009 2010 2011 2012-35.0

-25.0

-15.0

-5.0

5.0

15.0

25.0

35.0

% of GDP

Transfers, netIncome, netServices balanceTrade balanceCurrent account (% GDP)

Source: NBRM

Trade deficit is largely due to energy dependence and imports by

investment

2004 2005 2006 2007 2008 2009 2010 2011 2012-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

Energy trade balance (% of GDP)Non-energy trade balance (% of GDP)

2004 2005 2006 2007 2008 2009 2010 2011-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0Trade Balance by determinants (%

GDP)

InvestmentIndustryConsumption

Source: NBRM 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

Germany

Kosovo

Bulgaria

Serbia

Greece

Italy

Croatia

China

Bosnia and Herzegovina

Belgium

0.0 5.0 10.0 15.0 20.0 25.0 30.0

27.9

12.1

6.9

7.5

4.8

6.5

3.1

2.9

2.1

1.4

Exports to top 10 countries (share in total %)

20112006

Food and live animals

Beverages and tobacco

Crude materials, inedible, except fuels

Mineral fuels, lubricants and related materials

Chemical Products

Manufactured goods classified by materials

Machinery and transport equipment

Miscellaneous manufactured articles

Other

0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0

Exports by SITC (share in total %)

20112006

Source: State Statistical Office Source: State Statistical Office

After the external shock to FDIs these inflows were recovered and with the modest external debt rise contributed for Gross Reserves increase

2004 2005 2006 2007 2008 2009 2010 20110.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

5.9

1.6

6.6

8.5

6.1

2.0 2.3

4.1

FDIs (% GDP)Capital and financial account net inflows (% GDP)

Source: NBRM

The level of Gross Reserves is adequate and protects the exchange rate peg...

I.2008 I.2009 I.2010 I.2011 I.20120

500

1000

1500

2000

0

5

10

15

20

25

30Gross Reserves (mill.euros) Gross Reserves (% GDP)

% GDPmillion Euros

Source: NBRM

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

2004 2005 2006 2007 2008 2009 2010 20110.0

0.5

1.0

1.5

2.0

2.5

Reserves to short-term external debt

2004 2005 2006 2007 2008 2009 2010 20110.00.51.01.52.02.53.03.54.04.55.0

Reserves to imports

2004 2005 2006 2007 2008 2009 2010 20110.05.0

10.015.020.025.030.035.040.045.0

Private external debt to GDP

2004 2005 2006 2007 2008 2009 2010 20110.0

20.040.060.080.0

100.0120.0140.0160.0

Gross external debt to exports

Source: NBRM

2004 2005 2006 2007 2008 2009 2010 Q1 2011

Q2 2011

Q3 2011-5.0

5.0

15.0

25.0

35.0

45.0

55.0

65.0

24.3

39.0

63.3

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

2004 2005 2006 2007 2008 2009 2010 Q1 2011

Q2 2011

Q3 2011

0

10

20

30

40

50

60

70

80

90

100

68.5

31.5

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

... the low level of sovereign external debt in the years before the crisis was significant buffer and the higher share of long-term debt, protects the country from capital flights


Government has built significant fiscal buffers before the crisis; balanced budget

and low level of public debt...

1 2 3 4 5 6 7 80.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

21.4

6.8

External (% GDP)Domestic (% GDP)CG debt ( % of GDP)

2004 2005 2006 2007 2008 2009 2010 2011-5.0

-4.0

-3.0

-2.0

-1.0

0.0

1.0

0.0 0.2-0.5

0.6

-0.9

-2.7 -2.5 -2.6

Central government (CG) fiscal balance in % of GDP

Source: Ministry of Finance Source: Ministry of Finance

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

2008 2009 2010 2011-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0 Budget Balance (% GDP)

2008 2009 2010 20110.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0 Public Debt (% GDP)

Serbia

Croatia

Bulgaria

Albania

B&H

Macedonia

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

Financial sector indicators continue to suggest sound overall conditions; the capital adequacy ratio is high

and liquidity risk is low

2004 2005 2006 2007 2008 2009 2010 20110.0

5.0

10.0

15.0

20.0

25.0

30.0

16.8

14.1

Regulatory capital/risk weighted assets (%)Tier I capital/risk weighted assets (%)


2004

2006Q

1

2006Q3

2007Q

1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q30.0

5.0

10.0

15.0

20.0

25.0

30.0

15.8

25.3

Highly liquid assets/total assets

NPLs rose, but remain below their post-crisis peak (10.4%) and are fully covered by bank

provisions

2004

2006

Q1

2006

Q3

2007

Q1

2007

Q3

2008

Q1

2008

Q3

2009

Q1

2009

Q3

2010

Q1

2010

Q3

2011

Q1

2011

Q30.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

6.5

10.4

9.5

NPLs / Gross loans (%)

2004 2005 2006 2007 2008 2009 2010 20110.0

20.0

40.0

60.0

80.0

100.0

120.0

140.0

104.0

Provisions to Non-Per-forming Loans (%)


Loans continue to be financed predominantly by local deposits (loan-to-

deposits ratio is 0.89), with limited reliance on external financing

Jan-07Apr-

07Jul

-07Oct-

07Jan

-08Apr-

08Jul

-08Oct-

08Jan

-09Apr-

09Jul

-09Oct-

09Jan

-10Apr-

10Jul

-10Oct-

10Jan

-11Apr-

11Jul

-11Oct-

1120.0

25.0

30.0

35.0

40.0

45.0

50.0

55.0

49.9

46.1

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

2004 2005 2006 2007 2008 2009 2010 20110.0

20.0

40.0

60.0

80.0

100.0

120.0

89.0

Banks claims on other sectors/ Deposits of other sectors at

banks


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)

2004 2005 2006 2007 2008 2009 2010 20110.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

50.0

16.9 18.2

24.9

27.8

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

2009 2010 2011-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

-12.2 -12.8 -12.3

10.312.0 12.4

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

Banks FX and FX indexed claims on en-terprises - en-terprise FX and FX indexed de-posits, % of GDP


Banks interest rate margin is increasing recently

2005 2006 2007 2008 2009 2010 20110.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

3.0

Interest rate differential between NBRM CB-Bills and ECB policy rate

(end of period)

2005 2006 2007 2008 2009 2010 20110.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

3.0

4.7

Banks Denar interest rate margin (average for the year)Banks Foreign currency interest rate margin (average for the year)


Summary:

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.

Macedonian economy is more resilient now then in 2009 crisis;

Appendix:Macro prudential Indicators –

Regional Comparison

2008 2009 2010 Q3 20110.0

5.0

10.0

15.0

20.0

25.0

16.216.8

Regulatory capital to risk-weighted assets (%)

B&H

Serbia

Bulgaria

Albania

Croatia

Tukey

Montenegro

RM

Source: National Central Banks official web sites

2008 2009 2010 Q3 20110.0

5.0

10.0

15.0

20.0

25.0

6.7

9.5

Nonperforming loans (NPLs) to total loans (%)

B&H

Serbia

Bulgaria

Albania

Croatia

Tukey

Montenegro

RM


2008 2009 2010 Q3 2011

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

1.4

0.7

Return on assets (ROA, %)

B&H

Serbia

Bulgaria

Albania

Croatia

Tukey

Montenegro

RM


2008 2009 2010 Q3 20110.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

22.9

31.3

Liquidity ratio (liquid assets to total assets)

B&H

Serbia

Bulgaria

Albania

Croatia

Tukey

Montenegro

RM


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Maintaining Macroeconomic Stability in Turbulent Times: The Case of Macedonia