Today, the National Bank of the Republic of Macedonia Council held its third session, at which the Annual Report for 2016 was adopted, concluding that in 2016 the National Bank successfully achieved its legally defined objectives. The exchange rate remained stable, whereby all foreign reserves adequacy indicators remained in the comfortable zone. In terms of price stability, in 2016, there was an average low and slightly negative change in domestic prices, entirely as a result of the lower import prices of food and energy, i.e. the factors on the supply side. On the other hand, core inflation remained moderate in the positive zone, which corresponds to the constant recovery of the domestic demand and slightly positive output gap.The Macedonian economy grew in 2016, as well, whereby the rate of real growth amounted to 2.4%, which is moderately lower compared to 2015. The structure is similar to that in 2015, i.e. construction was the sector with the highest positive contribution. In 2016, the deficit on the balance of payments' current account remained moderate, not indicating larger imbalance in the external sector. The negative current account balance widened by 1 p.p. and reached 3.1% of GDP, whereby the enlarged primary income deficit and the lower secondary income surplus widened the balance, while the improved results in the exchange of goods and services influenced this widening to remain moderate. The main factors in the improvement were the net exports of the new industrial facilities, the reduction of the negative energy balance, the increased net inflows of several categories of services, as well as the absence of major pressures from the domestic demand on imports.The financial account of the balance of payments recorded significant net inflows of 6.5% of GDP. Direct investment were the most significant source of net inflows in the financial account, which increased by 1.4 percentage points of GDP compared to the previous year and reached 3.6% of GDP. An additional contribution was made by the government borrowing on the international financial markets, by issuing the fifth Eurobond. These financial flows were sufficient to cover the current account deficit and to increase foreign reserves.The international investment position at the end of 2016 is negative, i.e. liabilities prevail, and equals Euro 5,731.6 million, or 58.1% of GDP. Compared with the situation at the end of last year, net liabilities to the rest of the world increased by 2 percentage points of GDP. Regarding the structure of international liabilities, foreign direct investment, as a more stable and long-term source of financing, prevail in 2016, as well. At the end of 2016, the gross external debt stood at Euro 7,253.2 million, or 73.5% of GDP, which is an increase of 4.1 percentage points of GDP, compared with the end of 2015. Overall, the external indebtedness indicators of the national economy show that the gross external debt is in the safe zone. At the end of 2016, net external debt, as an additional indicator of the external position of the economy, amounted to Euro 2,669.8 million, or 27.1% of GDP, which is an increase of 2.2 percentage points of GDP, compared to 2015.In May 2016, in response to the speculations on the stability of the exchange rate and the banking system, the National Bank tightened the monetary policy by raising the policy rate by 0.75 percentage points, i.e. from 3.25% to 4.00%. In late 2016 and early 2017, amid a rise in the excess liquidity and calming the situation on the deposit and foreign exchange market, the National Bank started to normalize the monetary policy as a result of the gradual stabilization of the expectations of economic agents and further retention of the estimates for the stability of the fundamentals of the domestic economy. In addition to the increase in the supply of CB bills, the National Bank reduced their interest rate three times, thereby returning the policy rate to the level from before May 2016, i.e. to 3.25%.The National Bank regularly monitors the current developments, present risks and adequately to them, assesses the monetary policy setup and is constantly prepared to take appropriate measures to maintain the price and financial stability in the economy.At the today's session, the National Bank Council adopted also the Report on the risks in the bank operations in 2016, concluding that, in general, despite the strong influence of the unstable political situation in the country, accompanied by speculations on devaluation of the Denar exchange rate and the stability of domestic banks and deposits invested in them, which was especially evident in the first half of the year, the banking system remained stable. Total assets grew by 5%, which is only by not full percentage point less compared to the increase in assets realized in 2015. Deposits from non-financial entities, after the decline in the first half of 2016, in the second half began to move upwards and annually recorded solid growth of 5.4%, although somewhat slower compared to 2015, when it was 6.7%. Deposits from non-financial companies made twice higher contribution to the annual growth of deposits, compared to households. However, household deposits kept the role of individually largest source of financing of the activities of the banking system with a share of 49.7% in the total liabilities. Deposit withdrawal from the banking system, present in the second quarter of 2016, was a real stress test for the volume adequacy of banks' liquid assets, which declined by more than 10% in just one quarter. However, the higher amount of previously accumulated liquid assets and the National Bank instruments to create liquidity successfully offset this crisis in the domestic banking system and even ensured positive credit growth rates, as the main source of income for the banking system. By the end of 2016, the gradual recovery of the deposit activity, combined with the given opportunity for placement of the banks' foreign currency deposits with the National Bank at higher interest rates, compared with the rates obtained from foreign banks, led to a greater propensity of banks to invest in liquid financial instruments. Thus, in 2016, the liquid assets of the banking system increased by 3.5%, compared to the slight decline in 2015, which contributed to the maintenance of liquidity indicators at levels similar to those at the end of 2015, and the indicators of external liquidity of the banking system even registered certain improvement.Volatility in the domestic environment and the turbulence on the deposit market had gradual spillover effects on banks’ credit activity. Bank loans ended the year with growth of just 1.2%, which is significantly weaker performance compared with the previous year when it stood at 9.7%. However, loan movements were largely conditioned by the amendment to the existing regulation by the National Bank that required from banks by 30 June 2016 to "cleanse" the credit portfolios of all claims that have been fully booked for more than two years. If we isolate the effects of these regulatory changes, at the end of 2016 the annual growth rate of banks’ credit activity was 6%, which is again lower compared to 9.7% as it was in 2015. The share of non-performing in the total loans dropped to the level of 6.6% as of 31 December 2016. The threat for the banks' own funds from the possible materialization of the credit risk from non-performing loans is not high due to their high coverage with allocated impairment of 80.9%, but also because of the satisfactory volume and quality of banks' own funds.In 2016, banks showed by one third higher amount of operating profit compared to last year, which allowed to continue the trend of increasing their profit margin, as well as the rates of return on equity and assets. The improvement of banks’ profitability mostly stems from the more substantial reduction of interest expenses, amid only modest growth of interest income. The continuous improvement of the operational efficiency of banks, should also be noted.The solvency and capitalization ratios of the banking system registered a certain decrease, which mostly stems from the faster growth of risk-weighted assets. However, the capital adequacy ratio at the end of 2016 is high and equals 15.2%, versus 15.5% at the end of 2015 and allows enough room to absorb the possible unexpected losses for banks. In order to cover the banks' exposure to the risks of the operation, extremely favorable fact is the dominant share of core capital in the structure of banks' own funds. Despite the favorable performances, domestic risks associated with the uncertainty in the political environment are still present and represent a significant risk factor for the future performances of the banking sector.At today's session, the National Bank Council adopted also the Payment System Oversight Policy, which is a rounding of the framework for payment system oversight within the competence of the National Bank. The responsibility for adopting the Policy arises from the Disclosure Framework and the Assessment Methodology of the Committee on Payment and Settlement Systems at the Bank for International Settlements and the Board of the International Organization of Securities Commissions, which envisages disclosure of the payment system oversight policy.The National Bank Council at today's session adopted the Decision on the authenticity and fitness checking and recirculation of banknotes and coins and the manner of conducting supervision, which further harmonizes the regulations adopted during 2015, and refers to the strategic decision to increase the quality and functionality of currency in circulation. In this regard, the control mechanisms of the National Bank, in the implementation of the activities related to cash operations in those segments where there is a need for appropriate intervention by applying the most modern standards and practices, are further regulated and specified.The Council also discussed other matters within its jurisdiction.
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