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MACEDONIAN ECONOMY IN THE CONTEXT OF THE GLOBAL OUTLOOK -MAIN CHALLENGES AND RISKS- Ms. Anita Angelovska-Bezoska, MSc Vice-governor National Bank of the Republic of Macedonia Skopje, December 2011 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. Government debt (% of GDP) 200 euro-zone 17 Ireland Spain Portugal 180 160 140 Germany Greece Italy 30 10 year government bond yield, in % 25 Greece Ireland Portugal Italy Spain Germany 20 120 15 100 80 10 60 40 5 20 0 2007 2008 2009 2010 2011 2012 2013 Source: Eurostat until 2010; European Commission Autumn 2011 forecast for 2011 -2013 0 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Source: Bloomberg. NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM There are ongoing downward growth revisions September IMF WEO revised global growth downwards, including the growth of European Union (our key export partner) GDP growth, y-o-y 2007 2008 2009 2010 Sept June Sept June Sept 5.4 2.8 -0.7 5.1 4.0 4.3 4.0 4.5 4.5 2.8 1.9 3.3 3.0 2.4 0.1 -0.3 0.7 0.4 -1.2 -3.7 -3.5 -4.2 -4.3 -6.3 3.1 3.0 1.8 1.8 4.0 1.6 1.5 1.7 1.6 -0.5 2.2 2.5 2.0 2.0 -0.7 1.9 1.8 1.4 1.1 2.3 2.6 2.7 2.1 1.7 2.9 2.4 2.5 1.9 1.5 2.0 Emerging and developing economies 8.9 6.0 2.8 7.3 Central and eastern Europe 5.5 3.1 -3.6 4.5 *Source: IMF WEO Update June 2011 and IMF WEO September 2011 6.4 4.3 6.6 5.3 6.1 2.7 6.4 3.2 6.5 3.5 World Advanced economies United States European Union Euro area Japan 2011 2012 2013 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 indicatorsPMI (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%) NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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. NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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. Contributions of Domestic demand and Net-exports to annual GDP growth GDP and Foreign effective demand (real annual rates, in %) 8.0 (in percentage points) 15.0 Domestic demand 6.0 10.0 4.0 5.0 2.0 -0.9 0.0 0.0 -5.0 Gross domestic product -2.0 -10.0 Foreign effective demand -4.0 Exports (right axis) -16.2 -4.2 -15.0 -6.0 -20.0 2002 2003 2004 2005 2006 2007 2008 2009 12 Net-exports 10 GDP 8 6 4 4.4 5.1 6.1 5.0 2 0 -0.9 -2 -4 -6 2005 2006 2007 2008 2009 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM Falling inflation... due to contracted domestic demand and diminishing supply side effects. driven by the sharp fall of global commodity prices. Contribution of food and energy prices to annual rate of inflation Domestic and foreign effective inflation (annual rate of change, %) 10 10 (in percentage points) Domestic inflation 8 8 Foreign effective inflation Core inflation Food prices 6 6 Energy prices Inflation 4 4 2 2 0 0 -2 2002 2003 2004 2005 2006 2007 2008 2009 -2 2002 2003 2004 2005 2006 2007 2008 2009 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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. NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM Deteriorating external developments called for policy reaction NBRM intervened on the forex market (4.7% of GDP in 2009) Gross international reserves NBRM interventions on the forex market, as % of GDP 1.6 2.0 1.2 1800 1.3 30.00 1600 25.00 1400 1.0 0.2 1200 0.0 20.00 1000 15.00 -0.2 800 -1.0 600 -1.3 -2.0 10.00 400 5.00 200 -2.4 -3.0 Q1 Source: NBRM. Q2 Q3 Q4 2008 Q1 Q2 Q3 XI IX V VII III XI I.2009 IX V VII III XI I.2008 IX V VII III XI I.2007 IX V VII III -3.4 -4.0 0.00 I.2006 0 Foreign res erves - s tock in EUR million (left s cale) Q4 2009 Source: NBRM. Foreign res erves - s tock as % oF GDP (right s cale) 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. NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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. NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM Considerable decline in the monetary and credit growth in 2009 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 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM What were the transmission channels in 2009? Escalation of the financial markets turmoil (Lehman Brothers default, Sept.2008) Heightened tensions on the international financial market Limited access to foreign sources of financing and increased costs of borrowing Severe slowdown/contract ion in EU counties economic activity – Macedonia’s main trading partner Suppressed exports Slackening capital inflows Decline in private transfers NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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. Real GDP, Exports and Foreign effective demand (y-o-y growth rates, in %) Real GDP Foreign effective demand Real exports (right axis) 10 50 8 40 6 30 4 20 2 10 0 0 -10 -4 -20 -6 -30 2005q1 2005q2 2005q3 2005q4 2006q1 2006q2 2006q3 2006q4 2007q1 2007q2 2007q3 2007q4 2008q1 2008q2 2008q3 2008q4 2009q1 2009q2 2009q3 2009q4 2010q1 2010q2 2010q3 2010q4 2011q1 2011q2 -2 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM Up till May inflation accelerated, and afterwards stabilized 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 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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. Current account balance by components (EUR million) 600 Trade balance 20.0 (as % of GDP) 18.0 400 16.0 200 14.0 0 12.0 -200 10.0 -400 8.0 6.0 -600 4.0 Source: NBRM. Source: NBRM. Q3 Q2 Q4 Q3 Q1 2011 Import Q2 Q1 2010 Export Q4 Q3 0.0 Q2 Services, net Current transfers, net Q1 2009 Trade balance Income, net Current account balance 2.0 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2008 2009 2010 2011 Q1 2008 -800 Q3 Q2 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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. 600 Structure of the net-inflows in the capital and financial account 500 (EUR million) 400 300 200 100 0 -100 -200 Q1 Q2 2008 Q3 Q4 Q1 Q2 2009 Direct investment, net Lo ng -term loans, net Q3 Q4 Q1 Q2 2010 Q3 Q4 Q1 Q2 2011 Q3 Po rtfolio investment, net Other, net So urce: NBRM. NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM Price competitiveness was not lost REER and NEER (NEER, CPI and PPI based REERs, 2006=100) 110.0 Relative prices (2006=100) 102.0 100.0 98.0 105.0 96.0 100.0 94.0 92.0 95.0 Q3 Q1 2011 Q3 Q1 2010 Q3 Q1 2009 Q3 Q3 84.0 Q1 2005 85.0 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 86.0 Q1 2008 Relative prices (domestic/foreign inflation), 2006=100 Relative prices (domestic/foreign producer prices), 2006=100 88.0 Q3 REER - PPI Q1 2007 REER - CPI Q3 NEER Q1 2006 90.0 90.0 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM Money and credit growth have picked-up, but remain below pre-crisis period Uncertain global and domestic developments as well as banks’ conservative riskpricing policy determine lending pace NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM Banking sector is sound and able to cope with risks 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) Financial Soundness Indicators of the Macedonian Banking System 2008Q1 2008Q2 Capital adequacy Regulatory capital/risk weighted assets Asset composition NPLs 1/ NPLs / gross loans Provisions to Non-Performing Loans Earning and profitability ROAA 2/ ROAE 2/ Liquidity Highly liquid assets/total assets 5/ Highly liquid assets/total short-term liabilities 6/ 2008Q3 2008Q4 2009Q1 2009Q2 2009Q3 2009Q4 2010Q1 2010Q2 2010Q3 2010Q4 2011Q1 2011Q2 2011Q3 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 7.2 113.4 6.8 114.8 6.5 115.6 6.7 118.1 7.5 107.0 8.5 99.1 9.3 97.5 8.9 101.4 9.7 97.7 9.9 97.6 10.4 93.0 9.0 100.7 9.1 103.3 8.9 104.5 9.5 103.6 1.7 14.7 2.2 19.1 1.9 16.5 1.4 12.5 0.2 1.8 0.5 4.3 0.7 6.0 0.6 5.6 0.1 1.1 0.4 3.2 0.5 4.0 0.8 7.3 -0.1 -1.0 0.2 2.1 0.1 1.0 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 23.3 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 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. 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). NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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 savings Enhanced liquidity management by banks In support of credit activity NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM Monetary policy: adequate level of reserves Gross international reserves 2000 1800 1600 6.0 4.5 4.5 5.0 5.0 4.4 1400 4.0 4.2 3.5 3.3 1200 1000 3.7 3.7 3.8 3.9 3.7 3.8 3.0 3.1 800 4.0 2.0 600 400 1.0 200 0 0.0 Q1 Q2 2008 Q3 Q4 Q1 Q2 2009 Q3 Q4 Q1 Q2 2010 Q3 Q4 Q1 Q2 2011 Q3 Fo reign res erves - s tock in EUR million Mo nthly coverage o f next years' imports o f goods and s ervices (right scale) So urce: NBRM. NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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 NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM 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. NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM THANK YOU FOR YOUR ATTENTION! http://www.nbrm.mk NBRMNBRMNBRMNational Bank of the Republic of MacedoniaNBRMNBRMNBRM