Forum: Republic of Macedonia Development Strategy and Investment Opportunities

1. 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

2. 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

4. 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

5. Exchange rate - Main nominal anchor in the economy

6. Monetary policy stance (cont’d) • The price and exchange rate stability contributed for overall macroeconomic stability and economic growth

7. GDP- real growth rates -

8. Inflation 2000-2005 Average growth rates: 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.

9. Balance of payments

11. Gross foreign exchange reserves of NBRM - In million US Dollars - 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 In 2004, compared to 2003, the gross FX reserves increased by US Dollar 82 million, or by 9.2%.

12. 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.

13. 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.

14. FDI

15. Banks’ Interest Rates

16. 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

17. 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

18. 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%

19. Standing Facilities Lombard credit Overnight standing facility Availability: on banks’ request at the end of the day Interest rate: 13.0%

20. 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

21. 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

22. Structure of the Banking System of the Republic of Macedoniaas 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)

23. 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%

24. Share of foreign capitalas 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)

25. Structure of the Banking System of the Republic of Macedoniaas of June, 2005

26. Concentration of the banking system of the Republic of Macedonia • Large banks – assets above 15 billion denars • Medium banks – assets between 2-15 billion denars • Small banks – assets lower than 2 billion denars

27. 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

28. 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

29. Enhancement of the banking supervision of the NBRM • Supervisory Development Plan - Risk based supervision

30. 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