Macedonian economy during the global crisis and challenges ahead Aneta Krstevska Chief Economist Skopje, January 13
Content: The impacts of the crisis on Macedonian economy and latest macroeconomic forecasts for 13-14; Monetary policy of the NBRM; Banking sector indicators; Indicators for Macedonian economy according to the Macroeconomic Imbalances Procedure Scoreboard of the EC.
I. GDP - developments and forecast After GDP decline in 9, a moderate recovery in the next two years; Stagnation of economy in 1; Gradual recovery in 13 and 14: expectations for recovery of the domestic demand, particularly investments, expectations for positive effect of structural changes; Strong impact of foreign demand developments. 4 3.8 GDP (annual growth rates, in %) 3..6 3.4 1-1 Foreign effective demand (annual growth rates, %).8 -.1 1.4 1-1 - -1.. - -3-4 - -4.6-1.4-3 9 1 11 1 13 14-6 9 1 11 1 13 14 July 1 October 1 July 1 October 1
The impacts of the crisis Crisis spillover effects mainly due to strong trade linkages Fall in exports, mainly due to reduced external demand, and lower but continuous capital inflows 11 11 1 1 9 9 8 8 GDP levels before and during the crisis (8=1) ALB B&H CRO MKD MNE SRB 8 9 1 11 Source: WEO Database October 1 4 3 1 Foreign direct investment 6.1 4. 4.. 3.. 1.3 8 9 1 11 1 13 14 millions of EUR as % of GDP (right scale) 7 6 4 3 1
Some structural issues Economic recovery after 9, largely supported by FDI based entities prior to the crisis; New export destinations and more diversified export structure, reflecting higher flexibility and some structural improvements, with positive countercyclical effect. Structure of the exports, by groups of products, in % 1 9 8 7 6 4 3 1 4.6 7.9 9.8 11. 16.8 16. 1 11 I-IX.1 Others Cloths Machinery and transport equipment Iron and steel Chemical Products Mineral fuels, lubricants Crude materials, except fuels Beverages and tobacco Food 7 6 4 3 1 Macedonian export destinations, % of the total export 6 7 8 9 1 11 EU Bulgaria Germany Greece Italy Serbia Kosovo Other developing countries
Balance of payments developments and forecast During the crisis, a moderate current account deficit; Expected deterioration of current account and trade balance in 14, considering the import pressures from new FDIs and expected GDP growth; Net inflows of private transfers increase high confidence in the domestic currency, but expectations for gradual stabilization of their share in GDP; Current account deficit financed by capital inflows, mainly from FDIs and external borrowing, therefore foreign reserves are maintained around 4months of imports coverage; External debt increase (around 6% of GDP). % of GDP 9 1 11 1 13 14 Current account balance -6.8 -. -3. -.8-3.8 -.9 of which: Trade balance -3.3 -. -.3 -. -.3-3.9 Current transfers, net 16.9 19.4 19.7. 18.9 18.6 Capital flows, without official reserves 6.. 6.8.7 4.1 7.1
Inflation developments and forecast Average inflation in 1 was 3.3%, for 13 it was projected at 3.% (currently a downward revision is expected), and.6% in 14; Lack of demand pressures amid negative output gap by mid-14; Risks related to the world oil and food prices. 6 4 3 1-1 - -3-4 Output gap and inflation (in %) 1 11 1 13 14 Output gap Inflation
I.8 I.9 I.1 I.11 I.1 I.13 II. Monetary Policy Response Considering supply-side driven inflation, as well as sound foreign reserves, from end-9 onwards a gradual decrease of the main policy interest rate to historically lowest level of 3.% in January 13; In addition, during 1: - no reserve requirements on long term deposits (January 1); - more flexible operational monetary framework (April 1); - lower basis for reserve requirements for the amounts of new credits allocated to the export and energy sector (effective from January 13). 1. 9. 8. 7. 6.. 4. 3.. 1.. Interest rate on Central Bank bills (%) 3.
7:M1 7:M3 7:M 7:M7 7:M9 7:M11 8:M1 8:M3 8:M 8:M7 8:M9 8:M11 9:M1 9:M3 9:M 9:M7 9:M9 9:M11 1:M1 1:M3 1:M 1:M7 1:M9 1:M11 11:M1 11:M3 11:M 11:M7 11:M9 11:M11 1:M1 1:M3 1:M 1:M7 1:M9 III. Banking sector support to the economy A slowdown in the credit growth, although still being moderate; Deposits as a main source of financing, with a trend of reduced euroization; There is a room for additional financial support of the economy, considering declining credit / deposit ratio; The deteriorated portfolio quality and the weak economy constrain a stronger credit growth; Potential risk to the credit growth: deleveraging of the foreign parent banks could impose additional constraints to subsidiaries. 4 3 3 1 1 Credits growth and credits/deposits ratio 1 8 9 1 11 1 1 98 96 94 9 9 88 86 84 Credits to deposits ratio, % (right hand scale) Total credits growth, % 48 46 44 4 4 38 36 34 3 3 Denar deposits on households/total deposits of households, %
The financial stability has been maintained Sound capitalization and traditional banking operations strongly contributed to banking sector s resilience; However, the worsened economic outlook triggered a rise in NPLs and therefore worsened profitability. 4 Banking sector indicators, % 3 3 7 8 9 1 11 Q3.1 1 1 CAR Liquidity ratio NPLs ROE
6 7 8 9 1 11 3 4 6 7 8 9 1 11 1998 1999 1 3 4 6 7 8 9 1 11 1998 1999 1 3 4 6 7 8 9 1 11 IV. Indicators for Macedonian economy according to the MIP Scoreboard of EC 8 CURRENT ACCOUNT BALANCE (% of GDP, 3 years moving average ) NET INTERNATIONAL INVESTMENT POSITION (end of year, % of GDP) 6 4 indicative upper threshold -1 - - -4 indicative lower threshold -3-4 -6-8 -1 - -6 1 REAL EFFECTIVE EXCHANGE RATE (3 years percentage change) SHARE OF WORLD EXPORT (at current prices, years percentage change) 1 indicative upper threshold 4 3-1 -1 indicative lower threshold -1-1 -
1997 1998 1999 1 3 4 6 7 8 9 1 11 4 6 7 8 9 1 11 3 4 6 7 8 9 1 11 1 3 4 6 7 8 9 1 11 Indicators for Macedonian economy according to the MIP Scoreboard of EC/ 3 NOMINAL UNIT LABOUR COST (3 years percent change) 1 HOUSE PRICES (annual change in %, deflated by final consumption price index) 1 1 8 6 1 4 - - -1-4 -1-6 16 PRIVATE SECTOR CREDIT FLOW (% of GDP) 18 PRIVATE SECTOR DEBT (% of GDP) 14 1 1 8 6 4 16 14 1 1 8 6 4
1 3 4 6 7 8 9 1 11 1998 1999 1 3 4 6 7 8 9 1 11 Indicators for Macedonian economy according to the MIP Scoreboard of EC/3 7 6 CENTRAL GOVERNMENT DEBT (% of GDP) 4 3 UNEMPLOYMENT RATE (3 years moving average) 3 4 3 1 1 1 18 16 14 1 1 8 6 4 FINANCIAL SECTOR LIABILITIES (annual precent change) 7 8 9 1 11 - Within external indicators: the issue of the IIP (with arguments against imbalances); - Within internal indicators: unemployment rate.
Main challenges ahead Growth acceleration and redefining the growth model a common challenge for the region; Keeping sound public finance and taking care on the level of the external debt; Enhancing structural reforms and strengthening competitiveness; Conventional monetary policy in combination with unconventional measures and stimulating credit growth, while maintaining banking sector soundness.