Today, the National Bank of the Republic held its eighth session, where the latest macroeconomic developments were presented.

Skopje, 3 August 2011

Press release of the NBRM

Today, the National Bank of the Republic held its eighth session, where the latest macroeconomic developments were presented.

During the first quarter of the year, real growth of the gross domestic product of 5.1% was accomplished. Key drivers of the growth were private and investment consumption, amid faster growth of imports relative to the exports. For the second quarter, it is estimated that these trends will continue, providing a higher annual growth of the gross domestic product by 4.3% compared to that projected in April of 3.3%. 

The annual inflation rate in the second quarter stabilized at the level of 4.7%. The realized rate of inflation is lower than that projected in April (from 5 to 5.5%) due to the slower growth in food prices and the reduction of excise duty on oil derivatives. 

Movements in the balance of payments were within expectations. In the second quarter of 2011, the current account deficit is estimated at 0.9% of the gross domestic product (1% in the April projection) amid positive developments in the trade balance (smaller deficit) in services (estimated greater surplus) and in income (estimated smaller deficit). Net inflows from private transfers registered more negative trends due to the sharper annual decline in the net-purchase of cash of 12.2% as opposed to 9.5%, according to the April projection. Simultaneously, capital net-inflows are expected to be lower than the April projection (0.3% of GDP) and to amount to 0.04% of GDP mainly due to lower foreign direct investment in conditions of repatriation of dividend by foreign shareholders, lower net-borrowing abroad, and increased demand of households for foreign currency from the banking sector. 

The achievements in monetary and credit aggregates corresponded to the April projection, whereby the growth rate of M4 money supply and total loans of banks to the private sector was identical and amounted to 8.6% annually, with faster growth of their Denar components relative to the expectations. 

Within the regular revision of the macroeconomic developments, during the third quarter of the year the annual growth of the gross domestic product is estimated to amount to 2.7% given the favorable expectations for growth of the private consumption (intensification of the labor market, employment growth, decelerated decline in real wages), further growth of investment activity and exports. The annual growth rate of gross domestic product for 2011 was subject to moderate upward revision of the projection to around 3.5% (3% in April). The risks concerning the growth are declining and are primarily connected with the debt crisis in the peripheral countries of the eurozone, with potential consequences on foreign demand, exports, investments and expectations. 

In the third quarter of the year, inflation is expected to decelerate to 4.4% due to slower growth in world food prices and stabilization of oil prices. The growth of prices will continue to be mostly a result of the factors on the supply side and for the entire 2011 an average inflation rate of 4.5% is expected (on the lower end of the interval from April) due to weaker performances and downward revisions to world prices. Core inflation in 2011, is expected to be stable and equal around 1.2%. Risks to the inflation projection are assessed as predominantly downward and connected with possible slower growth in foreign prices of food and energy.  

In the third quarter of 2011, the balance of payments current account is expected to achieve a positive balance of 0.6% of the gross domestic product, which is the usual seasonal dynamics. However, on annual basis, the current account surplus will shrink by 0.6 percentage points of GDP, mainly due to the assessment for lower net inflows from current transfers (by 1 percentage point of GDP), while the trade balance is expected to achieve minor annual improvement. The capital and financial account during the third quarter expect net-outflows of 0.4% of the gross domestic product. 

By the end of 2011, the balance of payments current account deficit is expected to be 5.5% of GDP, which represents a downward adjustment of 0.6 percentage points of gross domestic product compared to the April projection. Under the assumption of additional government borrowing, the capital and financial account expects net-inflows of 9.4% of the gross domestic product, as opposed to 8.8% of GDP according to the April projection.

By the end of 2001, the foreign reserves are expected to increase at a faster pace compared to the April projection, ensuring 4-month export-import coverage of the next year.  

In the third quarter of the year, money supply M4 is expected to continue enhancing (11.9% annual growth in September 2011, compared to the projected growth of 12.2% of the total deposits), and accelerate its annual credit growth rate up to 10% in September.

Moderate upward revision of monetary and credit aggregates was made for the entire 2011, compared to April projection, with the pace of monetary growth being faster. Money supply M4 is expected to increase by 11.4%, on annual basis, compared to 10.7% in the April projection. The credit growth is expected to equal 12.5% on annual basis, compared to 12% in the April projection. 

Risks surrounding the projected monetary and credit growth are mainly related to the pace of recovery of the real economy and risk assessments made by the banks, with the inflation dynamics remaining additional risk factor (although with lower significance compared to the April projection) in the next period. 

Favorable macroeconomic developments are expected to continue in the second half of 2011 and to create constructive monetary policy environment. Hence, the NBRM key interest rate remains 4%. Such assessment mainly reflects stabilization of inflation expectations, downward revision of current account deficit, higher projected level of foreign reserves and relatively moderate lending activity of the banks.

Monetary policy risks arise from the debt crisis risk in the Euro area and their potential implications on the domestic economic activity and expectations, the inflation risks and the risks surrounding the expected capital inflows and the level of foreign reserves. 

The National Bank Council discussed and adopted the Report on the Banking System of the Republic of Macedonia in the first quarter of 2011.

The total bank assets kept on increasing, and reached an annual growth rate of 14.0%. On March 31, 2011 they were valued at Denar 308,881 million. Banks' lending activity went up in a faster pace compared to the preceding quarter. All three groups of banks reported credit growth, with the greatest contribution to such growth being made by the group of medium-size banks. The quarterly and annual credit growth rate equaled 2.3% and 8.3%, respectively. Deposits of nonfinancial entities remain the most significant source of funding the banks' lending activity, in spite of their slower quarterly and annual growth of 1.6% and 12.5%, respectively. 

The banks' credit portfolio quality indicators slightly deteriorated compared to the preceding quarter. The share of nonperforming loans in the total loans went up marginally (from 9.3% on December 31, 2010 to 9.4% on March 31, 2011), along with the increase in the share of credit exposure in riskier placement categories (from 7.1% to 7.3%). On the other hand, these two indicators improved annually, by increasing the bank exposure coverage with impairment and special reserve.

The banking system keeps on preserving its liquidity high and stable. At the end of the first quarter of 2011, the liquid assets of the banking system equaled Denar 90,947 million.

Bank solvency and capitalization indicators improved. The capital adequacy ratio of the banking system equaled 16.8% on March 31, 2011, registering a quarterly increase of 0.7 percentage points. Stress test simulations show satisfactory resilience of the banking system to various shocks, with the capital adequacy ratio of all banks exceeding the minimum requirement of 8%. 

In the first three months of 2011, the lower interest income and higher operating costs of some banks made the financial result of the overall banking system negative (Denar 80.5 million). In April 2011, however, the banking system recognized a profit of Denar 111 million.  

At its session today, the Council adopted few regulations concerning the NBRM internal organization and operations, aimed towards its compliance with the new Law on the National Bank of the Republic of Macedonia.

Governor's Office