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November, 2015 Macroeconomic projections for the period 2015 2017 • Key exogenous assumptions for the projections • Baseline macroeconomic scenario for the period 2015 – 2017 Slower global growth than expected due to slow-down in the economic activity in the emerging countries and slower than expected recovery in advanced countries. Downward risks to the projected growth more pronounced compared to April projection, mainly related to: • • • Higher risk aversion and increased volatility in the global financial markets Sharp and unexpected changes in primary commodities prices The risks for stagnation and persistent low inflation in advanced countries still present Global growth and growth in the euro zone (annual changes in %) 6 0.3 4 0.2 2 0.1 0 0 -2 -0.1 -4 -0.2 -6 -0.3 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 World changes in p.p. (right scale) EA changes in p.p. (right scale) World October 2015 EA April 2015 World April 2015 EA October 2015 Foreign effective demand growth rate in 2015 unchanged compared to April Slight downward revision for 2016, on the backdrop of the weaker prospects for the Greek economy The expectations for gradual recovery of the foreign demand unchanged 2.5 2.0 1.5 1.3 0.5 -0.5 (weighted contributions to annual foreign effective demand growth rates) 2.0 1.5 1.4 0.8 -0.2 -0.1 Slovenia 1.5 Croatia 1.0 0.8 1.0 0.0 Decomposition of foreign effective demand growth Foreign effective demand (annual growth rates, in %) 1.8 1.3 Bulgaria Serbia 0.5 Netherlands 0.0 Italy -0.5 -1.0 Spain Greece -1.0 -1.5 Germany -1.5 -2.0 2013 2014 April 2015 2015 2016 2017 October 2015 Belgium -2.0 2013 2014 2015 2016 2017 Foreign effective inflation forecast – minor downward correction relative to the April forecast Lower pressures on domestic prices than previously expected Decomposition of foreign effective inflation Foreign effective inflation (annual rates, in %) 3.0 2.5 1.9 2.0 1.9 1.0 1.4 0.0 -0.5 2014 April 2015 Italy Croatia 0.0 -0.1 2015 Serbia 0.5 Greece -0.5 -1.0 2013 Slovenia 1.5 1.0 0.0 0.0 Austria 2.0 1.5 1.7 0.0 Bulgaria 2.5 1.5 0.5 (contributions to annual foreign effective inflation rates) 3.0 2016 2017 October 2015 Germany -1.0 France -1.5 2013 2014 2015 2016 2017 Terms of trade picture more mixed: lower energy and food prices –favorable change; lower metal prices – adverse shock for the terms of trade 2016 -20 2015 -10 -60 2010 0 -40 2016 10 -20 2015 20 0 April 2015 2014 2010 30 20 2014 40 2013 2016 2015 2014 -30 40 2012 -10 60 2011 10 October 2015 50 April 2015 2010 30 Nickel prices, in EUR (annual growth rates, %) 60 October 2015 80 50 2016 2015 Corn price, in EUR (annual growth rates, %) 100 April 2015 2013 2014 -20 2013 -40 2012 -30 2011 0 -10 2010 -20 2013 10 2016 -10 2012 20 2015 30 0 2011 10 April 2015 2014 40 2011 20 October 2015 October 2015 50 April 2015 Wheat price, in EUR (annual growth rates, %) Copper prices, in EUR (annual growth rates, %) 2013 October 2015 30 70 60 2012 Price of Brent Crude Oil, in EUR (annual growth rates, %) 40 2012 Lower import pressures on domestic prices in 2015-2016 compared to the previous forecast 2011 The environment of low commodity prices persists further, with prices of primary commodities lower than expected in April 2010 Economic growth for 2015-2016 has been revised downwards due to the worsen global prospects and higher uncertainty in the domestic economy connected with the political instability… …yet, we expect solid growth over the forecasting period ranging from 3.2% in 2015 to 4% in 2017 The assumptions on the fundamentals in the growth forecast unchanged: continuation of the strong government investment incentive positive effects of the existing and expected FDI-based facilities continuation of the positive trends in the labor market solid credit support Moderate acceleration of growth over the forecasting period (2015-2017) More growth conducive external environment Further positive effects of the structural changes on the export sector More stable domestic environment GDP (annual growth rates, in %) 5.0 4.1 4.5 4.0 3.0 3.2 3.5 4.0 2.0 1.0 0.0 -1.0 2010 2011 2012 2013 April 2015 2014 2015 2016 October 2015 2017 GDP growth driven mainly by export and investments, and private consumption in addition Moderate growth in public consumption in 2016-2017, in accordance with the medium term fiscal strategy Higher exports and domestic demand will result in increase in imports over the projection period leading to negative contribution of net exports in 2016-2017. FORECAST COMPARISON CONTRIBUTIONS TO ANNUAL GROWTH CONSUMPTION INVESTMENTS EXPORTS IMPORTS GOVERNMENT CONSUMPTION Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 2015 2016 2017 1.4 1.6 2.2 2.2 2.2 0.7 2.8 2.1 2.7 2.9 1.6 2.9 2.0 2.7 3.1 -1.1 -4.0 -2.5 -3.7 -3.8 0.6 0.2 0.2 Apr.15 0.2 0.2 Domestic demand Net export GDP Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 2.7 4.6 4.5 5.1 5.3 0.5 -1.1 -0.5 -1.0 -0.7 3.2 3.5 4.0 Apr.15 4.1 4.5 Consolidated Budget of Central Government and Funds Budget expenditures structure (in %) 90% 80% 14.3 1.9 9.6 1.8 10.7 2.2 11.9 2.3 12.0 2.7 10.4 2.9 61.3 63.2 10.5 3.0 11.7 3.3 11.9 3.5 8.6 3.8 50% 55.6 60.7 60.9 60.8 63.5 61.3 60.7 63.7 3.0 60.9 0% 5.0 Interest payments 0.0 -5.0 30% 10% Capital expenditures Transfers 40% 20% (in % of GDP) 12.8 70% 60% Budget deficit financing 10.0 100% 13.4 11.6 10.3 9.4 9.4 9.3 9.2 10.3 10.6 9.9 10.1 14.9 16.3 15.9 15.6 14.6 14.1 13.7 13.5 13.4 14.0 13.2 Goods and services Wages and salaries -4.2 -3.6 -3.3 -3.0 -10.0 2014 act. 2015 proj. domestic debt principal repayment government securities foreign loans budget balance 2016 proj. 2017 proj. external debt principal repayment government deposits privatization receipts Shares of real GDP components (in %) 90.0 79.4 80.0 77.1 77.4 71.7 72.8 72.4 70.5 71.3 70.0 60.0 57.09 50.36 53.48 50.0 40.0 30.0 56.68 42.0 35.8 25.4 31.0 25.8 61.52 43.0 36.8 23.8 27.7 59.50 53.94 40.7 30.0 25.1 46.0 27.3 58.75 46.1 Gross fixed capital formation structure by type of ownership 69.6 60.64 69.1 60.76 47.3 47.4 27.1 70.0 60.0 29.0 29.8 80 50.0 74 76 66 34 40.0 30.0 20 24 26 2008 2009 75 72 71 73 29 28 25 27 2011 2012* 2013* 2014* 20.0 10.0 20.0 10.0 (in current prices, in %) 80.0 16.5 16.5 14.4 15.4 15.3 15.7 15.7 2012 2013 14.9 15.0 14.7 0.0 2008 2009 2010 2011 Private cons. Government cons. Export Import 2014 2015 Investment 2016 2017 0.0 2007 2010 state private *Data prepared according to ESA 2010. Source: SSO. Contributions of individual sectors of activities to the total number of employees change in the period 2015-H1/2008 (in p.p) (in %) 35 14.7 16.0 Unemployment rate other sectors of activities* 34 financial intermediation 33 transport and communications 32 hotels and restaurants 31 8.0 trade 30 6.0 construction 29 4.0 industry 14.0 12.0 10.0 28 27 agriculture 2.0 total economy (in %) 0.0 26.8 26 25 employed *Оther sectors of activities include: public administration and defence, compulsory social security, education, health and social work activities, activities of households as employers, as well as activities of extraterritorial organisations and bodies. Productivity and ULC (annual growth rates, in %) Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 2008 2009 2010 2011 2012 2013 2014 2015 Source: State Statistical Office, Labor Force Survey Gross-wages and number of employees (annual growth rates, in %) 4.5 4.0 3.0 2.5 2.0 1.5 1.0 0.5 0.0 -0.5 -1.0 -1.5 -2.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 2010 2011 2012 2013 Productivity 2014 2015 ULC Source: State Statistical Office and NBRM calculations 2016 2017 0.0 2010 2011 2012 2013 2014 Nominal wages Source: State Statistical Office and NBRM projections 2015 Employees 2016 2017 Inflation forecast for 2015 and 2016 has been revised downward to around 0% and 1,5%... …amid lower initial conditions and downward adjustments in the key exogenous assumptions Inflation is expected to gradually pick-up in 2016 and 2017. The point forecast for the 2016 and 2017 stands at around 1.5% and 1.6%, respectively… …driven by the import prices and the recovery in aggregate demand Output gap and inflation (in %) 6 Inflation rate (in %) 6.0 5 5.0 4 4.0 3 3.0 2 2.0 1 1.0 0 0.0 -1 -1.0 revisions (in p.p.) -2 -2.0 Inflation (October 2015) Output gap (October 2015) -3 Inflation (October 2015) -4 2011 2012 2013 2014 2015 2016 2017 -3.0 Inflation (April 2015) -4.0 2011 2012 2013 2014 2015 2016 Lower current account deficit, compared to the previous forecast, being a result of all of its components Moderate current account deficit in the following three year period of bellow 2% of GDP on average Decline in 2015, amidst lower energy deficit, positive impact of the new facilities, while the traditional segments were worse off Mild widening of the current account within the next two years Reduction of the relative share of private transfers in GDP Larger primary income deficit No major changes in the trade deficit Current account of the balance of payments (% of GDP) 30.0 October 2015 30.0 20.0 20.0 10.0 10.0 0.0 0.0 -2.4 -3.9 -10.0 -0.4 -2.0 -3.2 -1.7 -0.8 -0.5 -1.9 -1.6 -2.4 -3.1 -10.0 -6.8 -6.9 -7.9 -2.5 April 2015 -12.7 -20.0 -20.0 -30.0 -30.0 2003 2004 2005 2006 2007 Trade balance of goods and services 2008 2009 2010 Primary income 2011 2012 2013 Secondary income 2014 2015 2016 2017 Current account deficit 2015 2016 0.0 Relatively stable trade deficit, with… …larger import pressures, driven by investments mainly and export-related imports, but also… …diverse performances of the traditional export sector, but general recovery expected - positive impact of structural changes to be kept and strengthen further - more conducive global environment Trade balance* (% of GDP) -12.7 -18.0 -18.6 -15.0 -14.3 -14.1 April 2015 October 2015 0.0 -12.6 -12.2 -12.6 -12.7 -12.7 -5.0 -5.0 -10.0 -10.0 -15.0 -9.6 -7.5 -11.0 -20.0 -25.0 -11.6 -8.5 -6.6 -6.7 -6.5 -19.3 -19.2 -21.5 -22.5 -24.4 -25.1 -20.6 -19.2 -25.0 2008 6.6 6.9 19. 1 20. 0 -30.0 Non-energy trade balance 2007 13. 1 -25.7 -29.0 -35.0 -15.0 -20.0 -6.5 -22.3 -30.0 -10.0 -9.0 12. 5 2009 * According to foreign trade statistics 2010 Energy trade balance 2011 2012 Trade balance 2013 2014 -35.0 2015 2016 2017 2015 2016 Export diversification by products and trading partners Export by the new companies in the technological industrial development zones (share of total export, in %) 45,0 Share of export by trading partners in total export (in percent) 45,0 40,0 40,0 35,0 35,0 30,0 30,0 25,0 20,0 25,0 15,0 20,0 2011 2014 51,6 4,1 34,7 9,6 I-VIII 2015 100% 90% 2014 2013 80% 2012 70% 2011 23,5 4,4 22,5 4,7 27,6 5,7 70,4 7,1 10,9 11,5 2010 50% 2009 40% 2008 30% 44,6 20% 2006 2005 10% 2004 0% 0,0 Traditional export products 20,0 40,0 Energy 60,0 80,0 High value added export products 100,0 Other 40,0 4,6 3,9 4,8 2007 18,7 19,4 7,9 9,9 21,4 5,9 19,2 18,2 7,8 5,0 6,8 7,4 7,8 2007 2008 28,5 29,6 27,5 25,9 11,4 7,5 7,7 6,4 10,5 2009 16,7 16,9 8,7 6,4 6,4 6,6 9,8 8,3 8,5 2010 2011 2012 7,7 24,2 24,0 19,3 Chemical products 6,3 17,1 13,3 21,2 60% Average 2004-2010 Serbia Share of export by categories in total export (in percent) Export structure (share in total export, %) Average 2011-2015 Kosovo * Starting from 2013 Croatia is included in the EU countries. Other countries 2010 2013 Bosnia and Herzegovina 2009 2012 I-VIII 2015 Other EU countries Q2 VII+VIII Q1 2015 Q4 Q3 Q2 Q1 2014 Q4 Q3 Q2 Q1 2013 Q4 Q3 Q2 Q4 Q1 2012 Q3 Q2 Q4 Q1 2011 Q3 Q2 Q1 2010 0,0 Croatia 5,0 Greece 0,0 Germany 10,0 Bulgaria 5,0 Italy 10,0 15,0 18,8 19,5 2,5 6,5 21,1 2013 21,4 1,8 5,4 15,8 2014 Miscellaneous manufactured articles other transport equipment Road vehicles Electrical machinery, apparatus and appliances, n.e.s., and electrical parts thereof 22,7 1,2 5,3 10,2 I-VIII 2015 The structure of capital inflows in the 2015-2017 period, mainly a combination of foreign investment and borrowing of the public sector After the growth of the gross external debt in 2014, a stabilization expected in the period ahead Expected increase in foreign reserves in the next three years with adequacy ratios remaining in the safe zone 14.0 Financial account, net flows (% of GDP) October 2015 12.0 14.0 April 2015 12.0 11.9 10.0 10.0 9.7 9.4 8.0 8.0 7.6 6.0 6.0 4.0 6.0 6.8 6.4 5.1 5.2 4.7 2.0 4.0 4.3 4.1 2.0 2.8 1.8 0.0 0.0 0.8 -0.3 -0.6 -2.0 2003 2004 2005 2006 2007 2008 2009 Direct investment 2010 2011 2012 Financial account 2013 2014 2015 2016 2017 -2.0 2015 2016 Foreign reserves adequacy indicators remain in the safe zone Foreign reserves adequacy indicators October 2015 35,00 5,2 4,9 30,00 25,00 5,00 4,7 4,4 4,3 4,1 4,0 5,1 4,9 4,6 6,00 4,3 4,00 20,00 3,00 15,00 25,0 10,00 1,1 23,6 24,1 0,9 0,9 1,0 2008 2009 2010 22,1 27,4 1,2 28,9 28,6 24,6 1,0 1,1 1,1 26,5 25,1 25,5 1,3 1,3 1,3 2,00 1,00 5,00 ,00 ,00 2007 2011 2012 2013 2014 2015 Stock of foreign reserves (% of GDP) Monthly coverage of following year's imports of goods and services Foreign reserves/ short-term debt, with residual maturity 2016 2017 External debt ratios expected to stabilize in the forthcoming period 80,0 Gross external debt indicators October 2015 200,0 180,0 70,0 160,0 60,0 140,0 50,0 120,0 100,0 40,0 30,0 20,0 45,4 50,2 55,9 45,7 46,6 57,8 61,2 66,1 64,3 70,2 69,0 68,9 69,8 48,8 80,0 60,0 40,0 10,0 20,0 0,0 0,0 2004 2005 2006 2007 2008 2009 Gross external debt/ GDP (left scale) 2010 2011 2012 2013 2014 2015 2016 2017 Gross external debt / Export of goods and services (right scale) Credit support to the private sector proceeded in 2015, albeit at a slightly slower pace compared to the forecast Slower than expected growth in deposits, amidst heightened foreign and domestic risks The downsize of the sources of financing, and the unfavorable balance of risks resulted in lower credit forecast compared to April Yet, the new forecast still envisages solid credit growth of 7.7% and 7.3% in 2015 and 2016 respectively and acceleration 8.3% in 2017 Further increase in financial intermediation: loans/GDP in 2017 around 52.4% (an increase of around 11 percentage points in the crisis period after 2008) The banking system remains stable, with high capital adequacy ratio (16.2% as of June 2015), high liquidity and relatively stable share of non-performing loans (11.5% as of June 2015) *Negative net-percentage is presenting easing of the credit conditions and decreasing credit demand. Positive net-percentage is presenting tightening of the credit conditions and increasing credit demand. – Preventive measures towards Greece: • – In June 2015, NBRM introduced measures for prevention of capital outflows to Greece, that are time-bound (valid for 6 months) and with the role to counter possible contagion risks from Greece. Reserve requirements: • In August 2015, NBRM has modified the reserve requirements setup by decreasing the reserve ratio on households deposits in Denar with contractual maturity over one year from 8% to 0%. Latest macroeconomic scenario for 2015-2017 does not change fundamentally the monetary policy environment: Lower, but still solid economic growth supported by domestic banks’ credit activity Inflation to remain low and stable “Benign” external position assuming moderate increase in CA deficit and adequate level of gross foreign reserves, enabling sufficient buffers against potential unforeseen shocks Risks remain skewed to the downside related to rising global risks and domestic political uncertainties Further monetary adjustments contingent on the external sector developments and the gross foreign reserves dynamics Expected growth for 2015-2016 has been revised downwards due to worsen global prospects and higher uncertainty in the domestic economy connected with the political instability Yet the new forecast continues to envisage strong growth rates, driven by exports and investment Downward adjustment of the inflation projection, due to supply side factors Smaller current account deficit compared to the April projections. After the narrowing in 2015, we retain the assessments for a moderate widening in the next two years (2016-2017) Gross foreign reserves are expected to mildly increase over the 2015-2017 period, and remain at an adequate level Sensitivity of the scenario to possible changes in the global economic environment and potentially rising political instability at home