The National Bank of Republic of Macedonia Council held its fourth session today at which the Annual Report for 2012 and the Report on the Banking System of the Republic of Macedonia in 2012 were adopted.
The Annual Report has determined that the monetary policy was conducted in accordance with the achievement of the basic monetary goal - price stability maintenance, through maintaining stable foreign exchange rate against the Euro, also in 2012. The environment for implementation of the domestic monetary policy was relatively favorable seen from the monetary aspect, although with significant risks that were associated with the possible deterioration of the external environment. However, during 2012, the movements in the domestic economy and projections for the following period indicated a possibility to loosen the monetary conditions. The relaxation of the monetary policy was made in the first half of the year, which among other things, contributed to release additional liquidity into the system. The measures were aimed at providing incentive for greater movement on the credit market and supporting the weak economic activity, in conditions of maintenance of the reserves at adequate level, consistently high propensity of the entities to have national currency available and stable inflation.
In terms of the main macroeconomic parameters, the re-actualization of the European debt crisis and the mounting uncertainty and risks, in 2012, the performances of the domestic real sector deteriorated. The economy during the entire year was below potential, showing insufficient utilization of the capacities. Thus, after two years of relatively stable economic growth of about 3%, in 2012 the Macedonian economy registered a slight decline of 0.3%. The adverse developments in the real sector and the high uncertainty about the economic recovery pace were transmitted to the credit market, as well. Although the banks financial support endured also in 2012, the increase in the new loans, however, is lower compared to the previous year. In conditions of no growth in the domestic economy, the budget deficit in 2012 increased, but the fiscal policy succeeded to remain prudent. This policy was directed towards providing support to domestic demand and aimed at providing a fiscal stimulus on the total economy, with intensity similar to the stimulus in 2009.
The weak recovery pace of the domestic economy reflected also on the external position of the economy, causing moderate deterioration of the current account deficit, which equaled 3.9% of GDP, given a slight deterioration in the trade deficit and further growth of private transfers in conditions of high confidence in the domestic currency. Despite the moderate net inflows through foreign direct investment, in environment of capital outflows to parent companies, external debiting, the foreign exchange inflows of the pension funds, as well as decrease in the net foreign currency position of the domestic banks, ensured funding of the current account, as well as additional increase in the foreign reserves. At the end of the year, the foreign exchange reserves amounted to Euro 2,193 million and they are still around the adequate level.
Observed from the viewpoint of the NBRM objectives, in 2012 the monetary policy conduct was appropriate and the objectives were successfully achieved. The total average annual inflation in 2012 of 3.3% is inflation dynamics that is acceptable and under control.
In such conditions, and in conditions of constant net purchase of foreign currency and increase in the foreign reserves beyond the expectations, at the beginning of 2013, the National Bank adopted a decision on further reduction of the key interest rate. At the same time, at the beginning of the year, the changes regarding the reserve requirements took effect, referring to additional monetary relaxation, but primarily targeted and directed towards sectors that reduce external vulnerability of the economy.
The Report on the Banking System of the Republic of Macedonia in 2012 indicated the same challenges contained in the Annual Report. It is determined that the economic conditions in the country and abroad were not favorable environment for conducting banking activities. The economic conditions in the country were mainly influenced by the growing risks the real sector was facing with. The poor demand for goods and services of the corporations in traditional sectors, together with the capital outflows of part of the domestic companies with foreign capital contributed to the larger caution of the commercial banks when lending.
In addition to these specific factors, the systemic factors were also important, mainly the financial pay off of the parent banks and their conservative strategies at the level of the group, which have restricted lending activity of some domestic commercial banks with dominant, foreign capital, as well as the European debt crisis in general.
The most important positive development in 2012 was the increased propensity of the bank clients to keep their funds in national currency, which allows improvement of the deposits currency structure. As a result of the changes, as of June 2012, the Denar deposits took up the leading position in the currency structure of deposits of non-financial entities. The commercial banks used the total deposit growth mainly to strengthen their liquid assets, which led to a moderate increase in credit assets. The end-result of such prudent behavior is stable and high liquidity of banks, which was increasing during the year.
The most significant challenge in 2012 was the growth of the non-performing loans, as a result of unfavorable environment, as well as the weakened creditworthiness of the corporate sector. However, the full coverage of non-performing loans with the total impairment covers the risk of reduction of the banks' own funds, given hypothetical total non-collectability of these loans. Other risks, primarily currency risk and interest rate risk in the banking book, are still low.
The banking system in 2012 remains solvent, measured by the basic solvency measure, the capital adequacy ratio, which is 17.1% and is twice higher than the prescribed minimum of 8%.
The projections of the National Bank indicate moderate credit growth acceleration in 2013 and 2014, driven by expectations for strengthening of the global economy, as well as the changes in the monetary policy of the National Bank. Also, during 2013 and 2014, further strengthening of the capital base of commercial banks, and hence solvency, is expected, mainly because of the macro-prudential regulatory measures taken by the National Bank.
The Council considered also other matters within its competence.