Skopje, 8 April 2010

Press release of the NBRM

The NBRM Council, at its session held today, adopted the NBRM Annual Report for 2009. The Report recognizes that the monetary policy in 2009 was conducted in conditions of significant risks and permanent uncertainty for the intensity of transmission effects of the global financial and economic crisis on the domestic economy. Monetary consequences of the first effects of the crisis include grave pressures for depreciation of the domestic currency. These pressures were concentrated in the first half of the year, when amidst growing trade deficit and negative expectations of the domestic entities, the demand for foreign currency constantly exceeded the supply. In such environment and fixed exchange rate strategy, in the first five months of the year the NBRM intervened by selling foreign currency on the foreign exchange market. Although the NBRM interventions on the foreign exchange market made the foreign reserves decrease substantially, they also contributed to the maintenance of the stability of nominal exchange rate. To overcome such events and to preserve the macroeconomic stability, the NBRM increased the basic interest rate and the reserve requirement for banks' liabilities in foreign currency and with FX clause. The monetary measures and the improved forecasts for the global economy since the beginning of the second half of the year had their contribution to major stabilization of the expectations and to resurgence of confidence in the Denar stability. Simultaneously, the external sector also reported significantly improved trends than expected. This, along with the favorable prospects for the future period, provided a room for relaxing the monetary policy. Thus, at the end of November 2009, the NBRM basic interest rate was reduced by 0.5 percentage points. Generally speaking, the timely and proper monetary response in 2009 contributed to considerable correction of the external disequilibrium, stabilization of expectations and rebound of the confidence of economic agents. Consequently, the exchange rate stability as a nominal anchor and the macroeconomic stability were successfully preserved. 

The global crisis spilled over the real sector of domestic economy, and according to the data of the State Statistical Office, registered a real GDP fall of 0.7%. After the substantial decrease in the exports at the beginning of the year, caused by the fall in external demand, the remaining part of the year witnessed considerable downward adjustment of the domestic demand, and hence, of the imports. The restraint of households and corporate sector due to the great uncertainty, and the significantly lower credit support are some of the factors that account for such trends. The stagnation of personal consumption and the decrease in investments, together with the fall in the external demand, caused major downward correction of the imports, making the contribution of the net exports to the economic activity positive. 

The global recession interrupted the "price boom" phenomenon primarily of food and energy prices, causing major downward correction of the global inflation in 2009.  The fall in import prices triggered the disinflation process in the Macedonian economy as well, typical for both the overall and the core inflation. Thus, after the high average inflation registered in the preceding year of 8.3%, in 2009, the consumer prices went down by 0.8%. The average growth in core inflation slowed down significantly, reflecting the secondary effects of the fall in the food and energy component. The negative output gap made additional contribution to the downward trajectory of domestic prices.

The favorable developments on the labor market continued in 2009, in spite of the deteriorated real economy. Thus, in 2009, the employment rate equaled 38.4%, compared to 37.3% in the preceding year, whereas the unemployment rate reduced from 33.8% in 2008 to 32.2%. Employment growth could primarily be explained with the larger number of employees in the trade and in the public administration and defense, the education and the health sectors. One of the potential reasons why the labor market still has not been adjusted is the time lag of its response to the change in the stage of economic cycle. This is partially demonstrated by the fact that the first signal for potential adjustment of the labor market in Macedonia is the deceleration of the quarterly growth of the employment in the third quarter of the year, and its decrease in the fourth quarter. Additional factor could be the uncertainty surrounding the intensity and duration of the effects of global crisis, which brought about temporary interruption of the employees' engagements. However, taking into account the features of the Macedonian economy (high level of informal economy and high share of the long-term i.e. structural unemployment in the overall unemployment), it is exceptionally difficult to identify the actual reasons behind the positive developments on the labor market in environment of deceleration of the economic activity.

In 2009, the current account deficit of the balance of payments totaled Euro 483.3 million, or 7.3% of GDP, compared to the current account deficit of 13.1% of GDP in 2008. The current transactions deficit of 5.8 percentage points of GDP narrowed mostly due to the substantial drop of the negative gap in the foreign trade of 3.5 percentage points of GDP and the growth in the net inflows based on private transfers of 1.9 percentage points of GDP. During the year, however, the developments in external sector were changing, with the existence of two subperiods being relevant to mention. The first period pertains to the first quarter of the year, when the crisis led to a fast and rapid fall in the external demand and deteriorated expectations of the economic agents for the stability of domestic currency. The deteriorated trade deficit (faster fall of the exports, and slower response of the imports), along with the negative income and the lower private transfers resulted in double broadening of the negative gap in the current account in this period, compared to the same period of 2008. The trends started reversing in the second quarter when the import demand started adjusting to the fall in the domestic and the global economic activity and when the psychological pressures significantly alleviated and made the private transfers growing.

The lower global liquidity and the restraint from new investments, in general, decreased the capital inflows by 33% on annual basis. In the first five months of the year, capital inflows accounted for 1.1% of GDP, and were not sufficient to cover the negative gap in the current account, which led to a considerable decrease in the foreign reserves of 5.2% of GDP. At the end of the second quarter of the year, the considerable decrease in the current account deficit and the stabilization of the economic agents' expectations abated the pressures on the foreign exchange market. Additionally, this period also witnessed higher inflows from the capital and financial account (total net inflows of 7% of GDP from June to December 2009), ensuring a growth of the foreign reserves of 6.3% of GDP in the June - December period. Decomposition of net inflows shows that they mostly come from direct investments, trade credits, government borrowing on the international capital market of Eurobonds, the funds provided by SDR distribution from the IMF quota, and additional inflows were also created from the net borrowing from abroad.

Developments on the deposit and credit market segment in 2009 were under significant influence of the uncertainty caused by the crisis, and the changes in the real and the external sector. Thus at the end of the year, the annual growth of the broadest money supply M4 equaled 6%, which is the lowest growth rate over the last six year. The total deposits (including demand deposits) increased by 7.1% on annual basis (12.4% in the preceding year). The slowdown of the money supply growth was particularly dramatic in the first half of the year, which corresponds with the contracted economic activity, the balance of payments position in this period and the still present uncertainty and lower propensity to save in the banking system. Simultaneously, currency portfolios structure kept on changing, thus increasing the importance of foreign exchange savings. The second half of the year witnessed significant stabilization of expectations, narrowing of the current account deficit and higher capital inflows. These positive trends also meant reacceleration of the growth of money supply and banks' deposit potential, and moderate change in the currency structure, particularly in the last quarter of 2009. The credit market reported a downward adjustment of credit supply (given the substantial narrowing of the sources of funding, evident banks' perceptions for higher risk and deteriorated credit portfolio quality) and lower credit demand (given the lower propensity to new borrowing, amidst uncertain future income and restraint from consumption). Thus, the annual credit growth rate reduced to only 3.5% (34.4% at the end of 2008). As the macroeconomic environment improved at the end of the year, this market segment registered signs of recovery.

                                                                                                                                                Governor's Office