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Forum: Republic of Macedonia Development Strategy and Investment Opportunities Monetary Policy and Financial System in the Republic of Macedonia By Ms. Emilija Nacevska Vicegovernor National Bank of the Republic of Macedonia October 19, 2005, London Monetary policy stance Monetary policy oriented towards maintaining price stability, as final monetary policy goal and precondition for sustainable economic growth The result: maintenance of law and stable inflation since 1995, close to the average level of inflation in EU 2005 proj. 2004 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 Average inflation rate (in %) 400 350 300 250 200 150 100 50 0 -50 Monetary policy stance (cont’d) The maintained price stability is a result of successful implementation of the exchange rate targeting strategy – Denar exchange rate as a nominal anchor The strategy is supported by the fiscal policy 31.VII.2005 31.V.2005 31.III.2005 31.I.2005 30.XI.2004 30.IX.2004 31.VII.2004 31.V.2004 31.III.2004 31.I.2004 30.XI.2003 30.IX.2003 31.VII.2003 31.V.2003 31.III.2003 31.I.2003 30.XI.2002 30.IX.2002 31.VII.2002 31.V.2002 31.III.2002 31.I.2002 Exchange rate - Main nominal anchor in the economy Denar / EUR 65 64 63 62 61 60 59 58 57 56 55 Monetary policy stance (cont’d) The price and exchange rate stability contributed for overall macroeconomic stability and economic growth -10% 2005 proj. 2004 estim. 2003 2002 2001 2000 1999 1998 1997 1996 1995 1994 1993 1992 GDP - real growth rates - 6% 4% 2% 0% -2% -4% -6% -8% Inflation 2000-2005 Average growth rates: month / previous month period / the same period of the previous year 7 5 3 1 -1 VI V IV III II I.2005 XII XI X IX VIII VII VI V IV III II -3 I.2004 5.8% in 2000 5.5% in 2001 1.8% in 2002 1.2% in 2003 -0.4% in 2004 1.2% in 2005 proj. Inflation 2004-2005 Balance of payments Current Account Balance - as % of GDP 1993 1994 1995 0.0 -2.0 -4.0 -6.0 -8.0 -10.0 -12.0 *projected data for Dec. 2005 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005* Components of the current account - as % of GDP 20.0 15.0 10.0 5.0 0.0 -5.0 -10.0 -15.0 -20.0 -25.0 1993 1994 1995 1996 1997 1998 1999 2000 Trade balance as % of GDP Income as % of GDP Services as % of GDP Current Account as % of GDP 2001 2002 2003 Transfers as % of GDP 2004 Gross foreign exchange reserves of NBRM - In million US Dollars 1200.0 1000.0 800.0 600.0 400.0 200.0 VIII.2005 XII.2004 XII.2003 XII.2002 XII.2001 XII.2000 XII.1999 XII.1998 XII.1997 XII.1996 XII.1995 XII.1994 XII.1993 XII.1992 IV.1992 0.0 In 2004, compared to 2003, the gross FX reserves increased by US Dollar 82 million, or by 9.2%. Apr. 1992 0 Dec. 1992 59.8 Dec. 1995 274.8 Dec. 1998 333.5 Dec. 1999 458.4 Dec. 2000 713.6 Dec. 2001 775.2 Dec. 2002 725.0 Dec. 2003 893.0 Dec. 2004 975.0 Aug. 2005 1002.0 Liberalization of current and capital transactions With the acceptance of Article VIII of the IMF Articles of Agreement (June 1998) complete liberalization of current transactions; partial liberalization of capital transactions; In line with the implementation of the Stabilization and Association Agreement with EU, in October 2002, new Law on Foreign Exchange Operation was adopted with further liberalization of capital transactions. Liberalization of Capital Transactions Complete liberalization of foreign direct investments; Complete liberalization of credit and loan transactions; Investments in securities: – For residents trading abroad authorized banks only; Deposit Insurance Fund, insurance companies, pension and investment funds only in line with laws governing their operations; after the expiration of the phase I of the SAA with EU, other residents will be able to trade foreign securities abroad. – For non-residents trading domestically authorized to issue and introduce securities on the domestic market up to three-year maturity; may trade domestic securities through authorized participants. FDI 350 14.0 320 12.0 290 260 10.0 230 200 8.0 170 6.0 140 110 4.0 80 50 2.0 20 -10 1993 1994 1995 1996 1997 1998 FDI as % of CA 1999 2000 2001 FDI as % of GDP 2002 2003 2004 0.0 Banks' lending interest rates Banks' deposit interest rates Jul.05 Jan.05 Jul.04 Jan.04 Jul.03 Jan.03 Jul.02 Jan.02 Jul.01 Jan.01 Jul.00 Jan.00 Jul.99 Jan.99 Jul.98 Jan.98 Jul.97 Jan.97 Jul.96 Jan.96 Banks’ Interest Rates 30 25 20 15 10 5 0 Monetary Policy Instruments Reserve requirements On domestic currency On foreign currency Open market operations Issuance of CB bills Credit operations (credit auctions) Standing facilities Lombard credit Reserve Requirements Reserve requirements ratios 10.0% - to banks, for reserve requirements in domestic and foreign currency 2.5% - to saving houses, for reserve requirements in domestic currency deposits Remuneration of reserves In domestic currency: holdings of required reserves are remunerated at 2% In foreign currency: holdings of required reserves are not remunerated Open Market Operations Credit operations (credit auctions) Not used since 2000 Issuance of 28-day NBRM bills For sterilisation purposes, through volume tender auctions (unlimited amount) carried out twice a week; Current interest rate – 10.0% Standing Facilities Lombard credit Overnight standing facility Availability: on banks’ request at the end of the day Interest rate: 13.0% Recent undertaken activities in order to foster the financial market developments in April 2005, in the absence of Code for good practices, the regulatory framework for OTC trading - Rules for the Manner and the Procedure for Trade in and Settlement of Securities Transactions on the Over-the-counter Markets, was set up. Starting from April 2005, services for settlement of securities are provided free of charge in order to promote secondary trading and introduction of repurchase agreements, In July 2005, an electronic trading platform with information on securities prices and real time information on trades in foreign exchange was established in order to enhance competition and increase transparency Market maker agreement with the major participants on the FOREX market was signed in August 2005 Master Repurchase Agreement with commercial banks was signed in September 2005 Beginning from October 2005, repo transactions for intra day credit and lombard credit were introduced Core priorities of NBRM in the area of further developments of financial markets in RM Reducing the NBRM reliance on CB bills (its own securities) and introducing Treasury bills for monetary policy purposes, as a start up measure for switching to open market operations with government securities Finalizing all legal and accounting requirements to start use repo operations as main instrument of the monetary policy - replacing CB bills auctions with reverse repo auctions - replacing collateralized credit auctions with repo auctions Setting the criteria for choosing market makers for government securities Structure of the Banking System of the Republic of Macedonia as of June, 2005 20 Commercial Banks – 98.6% of the total assets of the banking system • 15 banks - full operating license (all financial activities including domestic banking operations and activities abroad) • 4 banks - limited operating license (only domestic banking operations and limited activities abroad) • 1 state owned bank – specialized in development and promotion 15 Savings Houses (operating license mainly covers the activities with citizens) Main indicators of the banking system as of June, 2005 Total assets – 132.2 billion denars (2.2 billion EUR) Credit portfolio growth – 33.8% for the last 3 years Average level of credit portfolio risk – 8.9% Banking assets in GDP – 50% Total deposits 94 billion denars (1.5 billion EUR) Total capital – 21.3 billion denars (0.35 billion EUR) Capital adequacy ratio – 23.1% Share of foreign capital as of June, 2005 Foreign capital is present in 15 banks (51.6% of the total capital) • 8 banks are foreign owned banks (foreign capital over 50%) • 4 banks are subsidiaries of a foreign banks (NBG Greece, Alpha Bank Greece, Ziraat bankasi Turkey, Nova Ljubljanska Banka Slovenia) Structure of the Banking System of the Republic of Macedonia as of June, 2005 60 Private banks with domestic capital 50 40 Banks with foreign capital* 30 20 10 State owned bank 0 Capital Total assets Deposits Credits (net basis) * Banks with more than 50% foreign capital . Concentration of the banking system of the Republic of Macedonia 80 70 60 50 Assets Capital Credits Deposits 40 30 20 10 0 Large banks Medium banks Small banks Large banks – assets above 15 billion denars Medium banks – assets between 2-15 billion denars Small banks – assets lower than 2 billion denars Enhancement of the banking corporate governance Amendments of the Banking Law: – Enhancement of the “fit and proper” criteria for qualified shareholders; – Enhancement of the regulatory power of the NBRM to revoke previously issued license to qualified shareholder – Introduction of two-tier corporate governance model – Widening of the duties and responsibilities of the management bodies – Enhancement of the “fit and proper” criteria for banks’ board members Enhancement of the banking corporate governance (con’t) Amendments of the Banking Law (con’t): – Expanding the ground under which the NBRM can revoke the license of a board member – More clear definition of duties and responsibilities of Risk management Committee and Audit Committee – Enhancing the internal audit function – Expanding of the provisions related to accounting, financial reporting and external audit Enhancement of the banking supervision of the NBRM Supervisory Development Plan - Risk based supervision Supervisory Development Plan – key objectives – Standardization of the supervision approach; – Efficient allocation of supervisory resources; – Enhanced transparency and consistency of risk analysis results; – Development of supervisory strategies for individual banks and for the whole banking sector; – Use of efficient corrective actions