Skopje, 6 May 2004

Press release of the NBRM

Today, the National Bank of the Republic of Macedonia Council held its IV session at which it discussed and adopted the Annual Report of the National Bank of the Republic of Macedonia for 2003, the Report on the Banking Supervision and the Banking System of the Republic of Macedonia in 2003 and the Report on Handling and Managing the Foreign Exchange Reserves of the Republic of Macedonia in 2003.

The NBRM Annual Report for 2003 ascertains that the improved economic standing, reflected through acceleration of the overall economic activity, supported with the price stability and stable exchange rate of the domestic currency is a favorable macroeconomic environment for achieving more dynamical economic growth in 2003. After the moderate development of the Macedonian economy in the preceding year (growth of 0.9%, primarily due to the slow revitalization of the adverse effects of the security crisis in 2001), 2003 registered real increase in the gross domestic product (GDP) of 3.2%. The economic growth exceeds the projected real increase of GDP for 2003 (2.8%). Positive developments were registered also in the external sector evident through the drop in the deficit in the current account of the balance of payments, which equaled 6.0% of GDP in 2003 and compared to the previous year it reduced by 3.6 percentage points.

In 2003, the total external debt of the Republic of Macedonia went up by 10.9% and reached US Dollar 1,812.6 million. 84.7% of the increase reflects the effect of the exchange rate differentials due to the permanent depreciation of the US Dollar relative to the Euro on the international foreign exchange markets, while the residue of 15.3% is the real increase in the external debt. The indicators of the external indebtedness show low, i.e. moderate external indebtedness of the Republic of Macedonia given the regular servicing of the liabilities to foreign creditors.

With respect to the monetary policy, the NBRM continued with the successful implementation of the strategy of targeting the exchange rate of the Denar against the Euro. The maintenance of a stable exchange rate contributed to successful preservation of the price stability as a basic and legally determined monetary policy objective (in 2003, the average inflation rate equaled 1.2%, which is under the expected average inflation rate of 1.8%, and at the same time it is by 0.6 percentage points lower than the inflation registered in 2002).

The NBRM interest rate policy in 2003 was directed towards continuous reduction in the interest rates. In 2003, multiple reductions in the discount rate and the interest rate on the Lombard credits were made. Thus with the two-time reduction in the discount rate in February (of 2.7 percentage points) and in April (of additional 1.5 percentage points) it was reduced from 10.7% at the beginning of 2003 to 6.5%. The interest rate on Lombard credits was reduced three times: in February (by 5.5 percentage points), April (by 1.5 percentage points) and November (by 2 percentage points), reducing to 14% (from the initial level of 23%). Such NBRM interest rate policy was a clear signal for the changes in the monetary policy direction and the need of respective adjustment of the banks’ interest rate policy.

In 2003, the monetary policy was conducted in considerably changed environment, compared to the last two years. The successful fiscal consolidation, the significantly lower risk and the stabilized expectations of the economic entities made a room for gradual change in the monetary policy layout. Thus, in 2003, the dynamics of the NBRM interest rates indicates gradual relaxing of the monetary policy. This, in particular, may be perceived through the average weighted interest rate on CB bills (which remained a major monetary regulation instrument), which from 15.2% at the end of the preceding year reduced to 6.2% at the end of 2003. The operative flexibility of the monetary policy was confirmed with the adjustment of the CB bills auctions layout in this year. Thus, in April 2003, the NBRM switched to “volume tender” auctions, with a fixed interest rate of 7%, while in October, the “interest rate tender” auctions were reintroduced, i.e. market based interest rates with bidding by the banks.

In 2003, the banks continued providing additional financial assets for the private sector through accelerated credit activity. Major factors that in 2003 acted towards accelerated lending are:


- lower country risk and lower credit risk;

- lower price of credits;
 
- broader deposit base;
 
- diversified offer of credits;

- possibility for extending foreign exchange credits to all  interested entities.

These factors contributed to annual increase in the total banks’ credits of 18.8% (with simultaneous considerable rise in both the Denar and the foreign exchange credits of 17.6% and 26.4%, respectively). In 2003, the banks’ interest rate policy gradually adjusted to the monetary signals. Such responsiveness led to respective reduction in both the lending and the deposit interest rates of the banks.

The National Bank of the Republic of Macedonia Council adopted the Report on Banking Supervision and the Banking System of the Republic of Macedonia in 2003. The activities in the area of banking supervision of the National Bank in 2003 may be summarized through the following:

- further promotion of the regulation framework of the banking system and conduct of the banking supervision;

- licensing i.e. issuing founding licenses and approvals for operating banks and savings houses;
 
- supervision, i.e. control of the operations of the banks and the savings houses;

- undertaking corrective measures against the banks and the savings houses.

In 2003, the structure of the CAMELS summary rating of the banks registered an upward trend. Thus in this period one bank got the highest rating “1”, the number of banks that got summary rating “3” increased from 3 to 7, while the number of banks with summary rating “4” reduced from 8 to 4. Such development denotes movement in the structure towards ratings that reflect lower risk degree.


At the end of 2003, the banking system of the Republic of Macedonia consisted of 21 banks and 15 savings houses. Compared to December 31, 2002, the number of banks remained the same, and the number of savings houses declined.


In favor of more adequate analysis of their performances, the banks in the Republic of Macedonia may be classified in three groups according to the total assets size criterion, as follows:

- large banks (with assets of over Denar 15 billion);

- medium-size banks (with assets from Denar 2 to 15 billion);

- small-size banks (with assets up to Denar 2 billion).
 
According to this criterion, as of December 31, 2003, the group of large banks consists of 2 banks, the group of medium-size banks encompasses 6 banks, and 13 banks hold total assets of less than Denar 2 billion and belong to the group of small-size banks.


The most relevant group of banks from the aspect of the financial potential is the group of large banks which covers more than half of the total banking financial potential or 55.5% while the largest group, from the aspect of the number of banks, is the group of small-size banks, encompassing 13 banks. The structural features of the banking system of the Republic of Macedonia by groups of banks generally remain the same at the end of December 2003, compared to December 2002. 
 

The credit risk of the banks in the Republic of Macedonia analyzed through the prism of the basic indicators for development and quality of the level of the portfolio at the end of 2003 registers slight downward trend. Thus the total credit exposure classified in the C, D and E risk categories at the end of 2003 equaled 15.1% which compared to the end of 2002 is an improvement of 0.8 percentage points.
 

At the end of 2003, the banks in the Republic of Macedonia showed positive financial result in aggregate terms in the amount of Denar 448 million. Out of 21 banks in the Republic of Macedonia, 17 banks making up 93.7% of the total financial potential of all banks showed net profit in their balance sheets.
 

The average capital adequacy ratio of the banks in the Republic of Macedonia equals 25.8% as of December 31, 2003 which is a drop of 2.3 percentage points compared to the end of 2002.
 

The relatively high capital adequacy ratio in the group of small-size banks, in particular, is an indicator for stable solvent position of the banks in the Republic of Macedonia, but simultaneously it is an indicator for the poor effectiveness in performing financial intermediation. The challenge for more adequate balancing between the stability and the effectiveness aimed at higher effectiveness is a task that the banks need to fulfill in the future. The fulfillment of this task will inevitably lead to reduction of such high capital adequacy ratio.
 

The National Bank of the Republic of Macedonia Council adopted the Report on Handling and Managing the Foreign Exchange Reserves of the Republic of Macedonia in 2003. Thus the Council ascertained that the foreign exchange reserves of the Republic of Macedonia reached US Dollar 904 million on December 31, 2003, which compared to December 31, 2002 is by US Dollar 169 million higher. Such level of foreign exchange reserves enabled 4.7-month import coverage. Compared to the target established by the IMF, in line with the Stand By Arrangement, which projected a growth in the foreign exchange reserves of US Dollar 7.8 million, the target was exceeded by US Dollar 20.4 million. In addition, the Council ascertained that in 2003, the National Bank adhered to the principles of security, liquidity and profitability in the management of the foreign exchange reserves.


Moreover, the National Bank of the Republic of Macedonia Council adopted several decisions in the foreign exchange and monetary area which are an adjustment to the amendments in the legislation.



                                                                         Governor’s Office