The National Bank of the Republic of Macedonia Council discussed several issues related to its operations at its session held today.

Skopje, 15 October 2009

Press release of the NBRM

The National Bank of the Republic of Macedonia Council discussed several issues related to its operations at its session held today.

The Council discussed and adopted the NBRM Semiannual Report, January-June 2009. The Report presents the macroeconomic trends in the Macedonian economy in the first half of the year and their effects on the monetary policy. The Report indicates contraction of the economic activity in the first half of the year (of 1.2%), with sharper GDP fall in the second quarter, reflecting the transmission effects of the global recession on the domestic and export demand. Along with the contraction of the domestic demand and the significant alleviation of the import price pressures, the inflation pressures were depleted, and in the first six months of 2009, the average annual inflation rate equaled 0.1%. Since the beginning of 2009, the conditions in the external sector continued deteriorating, taking into account that the steep fall in the export demand was not followed by a proportional adjustment on the import side. The capital inflows slowed down, and in environment of higher psychological pressures on the households for conversion of the domestic currency into foreign currency, it created evident pressures on the foreign exchange market for depreciation of the domestic currency. Such developments created a need for the NBRM to sell foreign currencies on the foreign exchange market in the first five months of the year, and to adjust its monetary policy accordingly. Thus, in March the basic interest rate increased from 7% to 9%, along with the increase in the rate of reserve requirement for the banks' liabilities with currency component. The second quarter witnessed certain positive changes in the developments, starting with the downward revision of the import demand and the annual growth of private transfers (suggesting certain stabilization of the expectations).  These changes narrowed the gap between the demand for and the supply of foreign currencies, and consequently, in June, the NBRM made an net-purchase of foreign currencies on the foreign exchange. The transmission effects of the global crisis have mirrored in the banking system through the substantial slowdown in the monetary growth rate (to 1.2% in June, on annual basis, compared to 11.2% in December 2008) and worsening of the expectations of the domestic banks which resulted in tightening of the lending terms and contraction of the credit offer. As a result, the annual growth rate of credits in June slowed down to 14.3%, compared to the annual growth of 34.4% in December 2008.

The Council discussed and adopted the Report on banking system and banking supervision in the Republic of Macedonia in the first half of 2009. In the first half of 2009, the activities of the banks in the Republic of Macedonia were under the influence of the contraction of the domestic economic activity and the still present uncertainty concerning the eventual effects of the global financial crisis on the domestic economy and banks, but also under the influence of the stricter lending terms of the banks and their compliance with the macro-prudential measures undertaken by the National Bank.

In such conditions, the trend of contracting the overall banks' activities continued in the first half of 2009. On June 30, 2009, the total assets of the banking system of the Republic of Macedonia reached Denar 248.3 billion, which is by 0.9% less compared to the end of 2008. Such pace slowed the annual growth rate of the banks' assets to 3%.

Asset reduction resulted from the further contraction of the banks' deposit core, which in the first half of 2009 went down by 2.4%, making the annual change rate negative, i.e. -0.1%. In the first half of 2009, the deposit core's currency structure kept on transforming. The foreign currency deposits registered a semiannual growth of 11.2%, whereas the Denar deposits dropped by -15.1%.

Credits made by banks kept on increasing but in significantly slower pace relative to the preceding periods. On June 30, 2009, the semiannual growth rate of the total credits equaled 1.7%, which is by 32.7 percentage points lower compared to the semiannual growth rate reported on December 31, 2008. Slower growth pace was also typical for the household and corporate credits, which were going up with semiannual growth rates of 2.8% and 1.2%, respectively, compared to the two-digit growth rates typical for the preceding periods.

While the credit policies were conducted with higher level of prudence, the trend of worsening of the banks' credit portfolio quality indicators continued in the first half of 2009. These developments in the banks' credit portfolio primarily reflect the worsened work conditions of the domestic borrowers due to the economic crisis. On June 30, 2009, the average risk level of the banks' credit portfolio relative to the end of 2008 increased by 0.7 percentage points, reaching 6.5%. On June 30, 2009, the exposure classified in higher risk categories (C, D and E) constituted 7.6% of the overall credit portfolio, which is by 1.2 percentage points more compared to the end of 2008.

The end of the first half of 2009 witnessed a holdback of the steady downtrend and certain stabilization of all liquidity indicators, particularly evident in the second quarter of 2009. Such developments are a prudential response of the banks to the unfavorable domestic economic environment and the increased risks in their operations. In this context, the banks' responsibility to comply with the new legal framework in the area of liquidity risk management, the NBRM adopted at the end of 2008, also had its effect.

The banks' solvent position was further strengthened and maintained at relatively high level. The capital adequacy ratio continued with its growth which started in the preceding half of the year, and on June 30, 2009 equaled 16.4% which is by more than twice higher than the required minimum of 8%. Moreover, the regular simulations conducted by the NBRM still indicate that the banking system is highly resilient to various hypothetical shocks.

The banking sector in the Republic of Macedonia keeps on operating profitably. However, the lower volume of overall banks' activities, accompanied with the higher importance of credit risk, adversely affected the earnings. The profit generated by the banks in the first six months of this year in the amount of Denar 646 million was by almost four times lower compared to the first six months of 2008. The rate of return on average assets (ROAA) equaled 0.5%, which is by 1.7 percentage points less compared to June 30, 2008. The rate of return on average equity (RОАЕ) equaled 4.3%, which is by 14.8 percentage points lower compared to June 30, 2008.

Governor's Office