Interview: Dimitar Bogov, Governor of the NBRM, "Kapital", December 27, 2013

Aleksandar Janev, "Kapital", December 27, 2013

"Next years, when the EU will rise by 2%, we will need to grow by 5-6%. The higher growth rates the better. But, to achieve this, it is necessary to raise the potential growth rate of the Macedonian economy. Therefore, it is necessary to have policies in place to attract foreign investment, improve business environment, infrastructure investments, diversify production, conquer new non-European markets. If we did not have Johnson Matthey, Kemet, TeknoHose, Van Hool, Draexlmaier, Kromberg & Schubert and other new companies today in Macedonia, now we would not have a growth of 3.3%."

There are no good or bad issues, officials must respond to all dilemmas of journalists for the public to know the reality, said the Governor of the National Bank, Dimitar Bogov, before this interview. When you meet someone with these words, you have carte blanche to ask anything and know that they are ready to respond every question. The Governor explains why he is the most optimistic of all others in terms of economic recovery next year, talks about restraint of bankers to increase lending and the challenge of some smaller banks to merge in order not to be "eaten" by the big ones.

Mr. Bogov, the National Bank announced the most optimistic forecasts for the next year, according to which economic growth will reach 3.7%. What will stimulate economic activity and what are potential threats? What are your forecast for 2014 in terms of economics and finances?

- Exactly two years ago, the National Bank came up with the most pessimistic projections for 2012. We warned about the slowdown in 2012, at a time when even the international financial institutions such as the IMF, the World Bank and the EBRD had quite optimistic projections. And so it happened. For 2013, we were the most optimistic, and the performance will prove to be even better than our last year's forecasts. It is not because we are the best and brightest. Certainly, analytical centers of international financial institutions have more human and material resources than us, but we should be aware that they have no special model for the Macedonian economy. Macedonia is one of hundreds of small economies for which they do not pay much attention in their global models. On the other hand, the National Bank has a model with most complete and up-to-date information on the Macedonian economy, monitors the domestic economy developments daily, has high-quality analysts and therefore, it is logical to have high-quality projections. 

Growth this year was driven by foreign investments and public investments. We expect them to continue to drive economic growth in 2014, as well. Additionally, the slight recovery of the economy of the European Union, which is our major trading partner, will spur growth in other traditional export- oriented industries, and the recovery of private consumption will have a positive impact on the services sector. Overall, the recovery will continue in 2014 with greater intensity. Certainly, our projections are based on certain input assumptions in the models that we use. If any of these assumptions change, higher or lower performances are possible. At this point, the greatest risks are still coming from the resolution of the debt and banking crisis in several EU countries.

Recently the media reported that Macedonia has achieved the third highest growth in Europe, but according to GDP per capita, it is the third poorest country. How realistic it is  to compare a developing country like Macedonia with developed countries and how the growth of 3.3% can provide real economic development?

- According to Eurostat indicators, GDP per capita in Macedonia is at the level of 35% of the EU average. By comparison, when the data was first published in 1996, this indicator equaled 26% of the EU average. The convergence process is long and difficult. The Macedonian economy should grow by 3-4 percentage points faster than the growth in the EU to narrow the gap in GDP per capita. This year, with the growth of 3.3% that we expected and the decrease of 0.5% in the European economy, we reduced the difference. Next years, when the EU will rise by 2%, we will need to grow by 5-6%. The higher growth rates the better. But, to achieve this, it is necessary to raise the potential growth rate of the Macedonian economy. Therefore, it is necessary to have policies in place to attract foreign investment, improve business environment, infrastructure investments, diversify production, conquer new non-European markets. If we did not have Johnson Matthey, Kemet, TeknoHose, Van Hool, Draexlmaier, Kromberg & Schubert and other new companies today in Macedonia, now we would not have a growth of 3.3%.

Can it be expected that banks stimulate economic activity with loans the next year, because this year's lending to private firms was almost frozen? Do you see this as your own failure and can you, despite the measures you passed, make banks approve more loans?

- Poor lending is a common feature in all of Europe, despite all supporting measures passed by the central banks. Measures that many central banks, including the European Central Bank, take are really intense and innovative. Still, there is no credit activity. The reasons include the troubled balance sheets of companies and banks, the new banking regulation that banks must dynamically adjust to and the surrounding uncertainty. Let us not go deeper into Europe. Looking at the credit growth data in the region from Slovenia to Greece, Macedonia had the highest credit growth in 2013. After all, most countries in our region reported negative credit growth rates. The measures of the National Bank also made certain contribution to this performance. I'm not saying that we are happy with it, but we must bear in mind the global environment because Macedonia is a small and open economy with strong ties to European economies. Next year, we expect slight acceleration of the credit growth of just over 6%. Our banking sector has the potential to achieve a higher growth rate. Still, it will mostly depend on the banks themselves. The National Bank can improve the environment for lending, as we do. The stability of prices and the Denar exchange rate amid favorable developments in the balance of payments allowed us, for the first time in twenty years of monetary autonomy, to enact measures aimed to encourage lending. Yet, the central banks are not invincible.

The main excuse of the bankers for the weak lending is the growth of bad loans, but the capital adequacy of the banking sector is extremely high and their stability is not in danger, whatsoever. Is the restraint from lending justified and what do you think is the reason for the freeze of lending to companies?

- The reticence of banks was partly justified last year when the EU was in recession, the uncertainty was high, our economy stagnated and the bad loans to total loans ratio had an increasing trend. A significant contribution to this behavior was also made by reasons specific to individual banks. But, in early 2013, the economy began to recover. In July, the upward trend of bad loans stopped, although it takes time to say that the trend has definitely changed. It can be said that there are less reasons for restraint. The results of our last survey on banks' lending activity conducted in the third quarter shows slight positive shift in the banks' expectations. I believe it will materialize in higher growth rates of lending.

How do the government affect the volume of lending through its policy of increased borrowing from the banks on the domestic market? Do you fear that it will further slow down lending and what do you suggest to overcome it?

- In the past, the government was satisfying its needs for funding on the foreign market and was getting serious objections from the IMF and recommendations for developing the domestic market. In the last two years, the government has made more balanced financing of its needs on the domestic and foreign markets. This balance should be preserved in the future. As long as there is no dominant domestic funding, there is no danger of crowding out lending. If viewed from the perspective of banks, investments in government securities is not a substitute for lending. Usually, the banks maintain highly liquid instruments such as government securities and CB bills in their balance sheets. If they have too few of those instruments, they will suffer liquidity problems, if they have too much of them, they will face a profitability problem due to the significantly lower interest rate than that on loans. 

How the expansionary fiscal policy limits the National Bank to conduct a looser monetary policy? Do you coordinate with the Government on how best to set economic policies?

- Fiscal and monetary policies aim to maintain balance in the economy, and adjust depending on the phase of its cycle. Specifically in the Macedonian economy, they need to maintain price stability through stable Denar exchange rate, while not hindering the achievement of potential economic growth. In the past, when economic growth was far below the potential, there was a space for the two policies to be looser without compromising the stability of prices and the Denar exchange rate. The revival of private sector and the bringing of the economic growth close to the potential level in the next two years is taken properly into account in the fiscal strategy which envisages a gradual tightening of fiscal policy in order to maintain balance in the Macedonian economy. Monetary policy will be regularly customized to the situation and react accordingly if we consider that it is not sufficient. I have excellent cooperation with the Minister of Finance, we regularly communicate and inform each other about the risks, challenges and opportunities in the Macedonian economy that we see in the coming months. 

Both your predecessors, after the end of their terms, sent a troubling message that the state is in serious difficulty. Why the governors shy away from criticizing while they are in a position to change things? And how is this function really independent of pressures from the government? You are now in this position and you have all the data and information about the financial condition of the government. Is the criticism of your predecessors justified?

- The Law on the National Bank of the Republic of Macedonia provides a high level of independence of the governor, so it all depends on the governor whether to exercise that right. We live in a democratic society and the work of the Governor may be the subject of comments and criticism. However, the governor has clearly defined objectives to be achieved (price stability and financial stability rather than compromising them to support economic policies) and therefore great responsibility. Hence, anyone can deliver requested or unsolicited, benevolent or malevolent advice, but the governor is the one who decides what moves to make in order to achieve the goals set by the law, because the responsibility is all his. As for my predecessors, I respect them and do not comment their statements. The public is informed about the current financial condition of the country by the National Bank, through its regular statistical and analytical reports, and by the governor, through his public appearances. In this occasion I would point to the latest World Bank report that was recently publicly promoted. The fact is that we are not satisfied with the economic growth in the last five years and the high structural unemployment. But it is also a fact that Macedonia has one of the best performances in Europe in the last five years in terms of economic growth, rising exports, investments, creation of new jobs, reduction of unemployment, the level of public debt. The fact is that in the contacts with international financial institutions, Macedonia has always been pointed out as a positive example in southeastern Europe, as a country that has maintained macroeconomic stability and created economic growth without producing significant imbalances, in times of stagnation in Europe and the advanced world economies. Therefore, the Macedonian economy must always be viewed in the wider European context because our major trading partners are there. 

Will the government have comfort and convenience to borrow at the same pace in the next few years, considering the debts due for payment?

- The fiscal strategy for the next three years shows that the government is aware of the upcoming challenges and takes measures to stabilize the debt at a sustainable level in the period ahead. I consider it to be a good move aimed towards long-term strengthening of the fundamentals of the Macedonian economy.

Recent foreign reserves data show that annually they declined by Euro 172.8 million, upon which you explained that it is not about market intervention to maintain Denar stability. Do you think that foreign reserves could have been better managed in order to prevent such losses?

After the large interventions in 2008 and 2009, in the last four years, the National Bank rather purchases than sells on the foreign exchange market. The decrease of foreign reserves this year is entirely due to price and exchange rate changes, and the withdrawal of some temporary positions created at the end of 2012. The National Bank is obliged to manage the foreign reserves, observing the principles of safety, liquidity and profitability, in that order. Therefore, safety is paramount. It enforces a policy of passive management of gold portfolio, i.e. we keep the gold portfolio at a stable level. In recent years, when the price of gold increased, we accumulated high revaluation reserves in our balance sheet. Now, that the price of gold goes down, the burden is on the revaluation reserves. We have no ambitions to speculate, trying to guess the direction of gold price or exchange rates. It is known that one cannot constantly win market. For example, hedge funds that made huge gains on the crisis in 2008, incurred ??huge losses last year. Therefore, central banks are typically conservative in their investment strategies.    

Several times you declared that 16 banks, as there are now on the Macedonian market, is too much, but we have not heard announcements of mergers or takeovers. Are foreign bank brands interested in entering our market? Does the National Bank plan to take measures in order to encourage merger by increasing the existing criteria?

- The consolidation in the Macedonian banking sector is inevitable. Competition can be withstood only by those who have powerful financial shareholders and are large and strong enough or are specialized in a specific market segment. The rest have had little choice. They must consolidate through merger, acquisition or sale. It can be either voluntary, while in good condition, or under pressure from the regulator when falling into trouble due to unprofitable operations. In the past two years, there have been several initiatives and negotiations, but most failed due to the too high expectations of sellers. Unfortunately, some shareholders cannot understand that the time before 2008 when they received offers three times the book value of equity will never return. Today, in Europe it is rare a seller to get even the carrying value of equity, and it is often far lower. With each passing day, the value of their capital and cost reduce, and the time when they can voluntarily opt for the sale, slowly depletes. But there are also positive examples and I believe they will soon be realized.