Download Forecasting outstanding debt securities in Europe

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