The National Bank of Republic of Macedonia Council held its eleventh session today at which the latest Quarterly Report and the macroeconomic projections for the following period were discussed. 

During the third quarter, the macroeconomic environment provided further relaxation of the monetary conditions through both, the key interest rate and the changes in the reserve requirement instrument. The inflationary pressures gradually trailed away, which was consistent with the projected trends of the inflation and the foreign exchange reserves were consistently on adequate level. The indicators of the real sector indicated a stronger recovery than expected, while the lending activity progressed according to expectations, but with significant downward risks until the end of the year. Under such circumstances, given favorable performance from the aspect of the monetary policy and reduced risks, the monetary policy has been loosened in mid-July by lowering the key interest rate by 0.25 percentage points. Thus, the interest rate on CB bills has reduced to the lowest historical level of 3.25%. Changes in the reserve requirement instrument  that allow release of additional liquidity in the banking system were made, which can be used as financial support to the private sector. The novelties with the reserve requirement contribute also to raise further the attractiveness of Denar savings and to bring the cost of attracting long-term capital from abroad down, thus mitigating the previously identified risks to balance of payments position. In October, amendments to the Decision to managing banks' liquidity risk were made, which create more room for long-term lending, and thus contribute to loose the monetary conditions.

In terms of macroeconomic performances, the positive impact of the entry of new foreign investment, the changes in domestic production structure and the increased exports diversification contributed to achieve a GDP growth of 3.4 % in the first half of the year. The strong fiscal impulse regarding the investments, as well as the solid nominal annual growth of foreign direct investment of 36% also had positive impact on the economic performances. These improvements are supported also by stronger recovery of the private consumption, favorable developments in the labor market and enhanced credit support from banks especially in this market segment.

Having in mind such initial conditions, and the retention of assumptions for further growth support through foreign and public investments, supplemented with the recovery of private consumption, the current assessments indicate GDP growth of 3.3 % for the entire 2013. In 2014 faster economic growth is anticipated, with an expected growth rate of GDP of 3.7%. It is expected that the growth generator will be the export sector again, as a combined effect of increasingly greater utilization of foreign investors' capacities, as well as the recovery of other exporters, in conditions of more stimulating external environment. It is expected that the investment cycle will further strengthen in 2014, largely under the influence of strong fiscal impulse and private foreign capital. Also, it is estimated that the positive developments in the export sector and the strengthening of investment activity will create transmission effects on the labor market and expectations, which will mean further increase in the household consumption. In 2015, it is expected that the rate of economic growth will reach 4.4%, and the sources of growth would be similar to those of 2014.

The economic growth is expected to be underpinned by certain acceleration in the rate of credit growth in the following two years, which arises from the assumptions for solid growth in the basic source of funding (deposits) and improved risk perceptions of banks, in conditions of recovery of the real sector position and the increased foreign exchange inflows.

The trend of the inflation so far indicates that the average inflation for 2013 will stay around 2.8%. According to the new assumptions about import prices and domestic demand, the average annual inflation for 2014 is expected to equal 2.3 % and for 2015, it will be around 2%.

The recent evaluations about the balance of payments position in 2013 indicate current account deficit of 3% of GDP, which is stagnation of the current account deficit, compared to 2012, given a smaller trade deficit, but also a simultaneous reduction of the private transfers. For 2014 and 2015, deepening of the current account deficit, up to 4.6% and 5.7%, respectively, is expected, mainly due to higher import pressures created by increase in the exports dependent on imports, investments and private consumption, in conditions of reduced private transfers. The current path of the current account deficit and its structure does not suggest major imbalances in the economy. In the new balance of payments scenario, however, the current account financing will be provided through capital and financial account. The projected path of the foreign reserves for 2014-2015 is upward, with the indicators of adequacy of reserves being maintained at adequate level.

The risks associated with the materialization of this macroeconomic scenario are still mainly external and related to the possible changes in the recovery dynamics of the global economic growth and the fluctuations in the prices of primary products on the international stock exchanges.

The Council considered also other matters within its competence.

Governor's Office
National Bank of the Republic of Macedonia