Skopje, 15 June 2008

Press release of the NBRM

The National Bank of the Republic of Macedonia Council adopted the Report on Financial Stability for 2007 on the session held today. This is the second such report, which encompasses analyses and assessment of the financial stability in the Republic of Macedonia, with risks in the financial system being emphasized. The main conclusion is that the financial stability in the Republic of Macedonia in 2007 was satisfactory. Certain risks show upward trend, although no deterioration in the financial system functioning on a short-term basis is expected. Compared to 2006, the macroeconomic risks and other risks arising primarily from the sector "households" become more important. The risks generated directly from the individual segments of the financial system, generally, are within controlled frames. 

In 2007, the growth of the financial system assets continued. The total assets of the financial system, on December 31, 2007 equaled Denar 247,139 million and in comparison with 2006 they went up by Denar 51,299 million, or 26.2%. Also, they represent 72.9% of the gross domestic product, which is rise by 9.9 percentage points compared to 2006. The banks, as the dominant segment in the financial system, encompass 90.5% of the total assets. The second most important segment is the insurance companies, with a share of 4.5% in the financial system assets.

As a result of the undertaking of several financial institutions (mainly from the insurance and banking sector) by strategic investor and establishment of new financial institutions (mainly in the sector of "leasing", brokerage houses, investment funds management companies) by foreign entities, the role of the foreign capital increased, as well as the significance in the ownership structure of individual financial institutions. At the end of 2007, the foreign capital participated with approximately 70% in the ownership structure of the banks and investment funds and more than 95% with the leasing companies. In comparison with the end of 2006, the largest growth in the share of the foreign capital of 13% is registered in the banks' ownership structure.

The banking system of the Republic of Macedonia continued to develop dynamically and in 2007 it preserved the stability and resisted to the external factors. At the end of 2007, the total assets of the banking system reached Denar 226,545 million and compared to the end of 2006 it surged by 28.4%. The increment in the banks' activities was not followed by significant worsening of their risk profile. The credit risk remained to be the dominant risk in the banks' operating. By using contractual protection clauses (currency clause and clause for the so-called adjustable interest rates - interest rates variable according to the decision of competent bank body), the so-called indirect component of the credit risk with banks increased. In 2007, credit risk arising from the significant credit growth with households became apparent, especially in the credit cards domain and allowed overdrafts on current accounts, where first signs of quality deterioration were noticed. Compared to the credit risk, the other risks have relatively smaller significance in the banks' risk exposure structure. The banks' capital position remained relatively high and it covers the identified risks.

In 2007, the contribution of the insurance sector in the total assets of the financial system and the total financial intermediation in the Republic of Macedonia reduced. At the end of 2007, the assets of the insurance sector equaled Denar 11,075 million, or by 24.2% less compared to the end of 2006. For the purpose of overcoming risks with the insurance sector, inter alia, it is necessary to additionally establish a supervisory function. Without that, the identification and measurement of the risks present in this segment of the financial system is hampered.

The fastest growing segments of the financial system in 2007 were the leasing companies, pension funds and brokerage houses. Despite the rise in the assets of the sector "leasing" of 82%, its share in the total assets of the financial system remained low and equaled 2%. The value of the concluded leasing contracts represent of 1% of GDP.

The total assets of the pension funds at the end of 2007 amounted to Denar 3,124 million, which is annual rise of 151.5%. This rise is primarily due to the increase in the number of insured, i.e. members of the pension funds of 27.0% annually. The share of the pension funds in the financial system is still low and it equals 1.3%. In terms of higher inflation, the pension funds still face with the challenge to protect the real value of their assets.

The movement on the capital market in the Republic of Macedonia in the several previous years continued also in 2007. Significant rise in the stock exchange turnover, as well as increase in the market capitalization was registered, new brokerage houses were established and first investment funds were founded as resident portfolio investors. However, the capital market is still characterized with underdevelopment of the primary market, limited liquidity on the secondary market, high concentration and high sensitivity to the investors' decisions the regarding economic and noneconomic developments on regional and international plan. These characteristics become apparent at the end of 2007 and in the beginning of 2008, when significant decrease in the turnover was recorded, as well as downwards price correction and additional decrease in the liquidity on the Macedonian stock exchange.

Governor's Office