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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.
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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.
There are ongoing downward growth revisions • September IMF WEO revised global growth downwards, including the growth of European Union (our key export partner) • 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 indicators-PMI (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%)
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.
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
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.
Falling inflation... • due to contracted domestic demand and diminishing supply side effects. • driven by the sharp fall of global commodity prices.
Balance of payments effects were phased 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.
Deteriorating external developments called for policy reaction • NBRM intervened on the forex market (4.7% of GDP in 2009) • 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.
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.
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 Considerable decline in the monetary and credit growth in 2009
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.
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
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.
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.
Money and credit growth have picked-up, but remain below pre-crisis period • Uncertain global and domestic developments as well as banks’ conservative risk-pricing policy determine lending pace
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) Banking sector is sound and able to cope with risks
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
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
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
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
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
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.
