Today, the National Bank of the Republic of Macedonia Council held its fifth session.
Today, the National Bank of the Republic of Macedonia Council held its fifth session. At today's session, the Council reviewed the latest Quarterly Report, including the macroeconomic projections by the end of 2017, and it was found that the quarterly performance in the first quarter of 2016 points to a similar macroeconomic environment as in the October projections. Also the implementation of the macro prudential measures adopted by the National Bank in December 2015 commenced, aimed at providing protection against possible future risks to the financial stability and prevent future macroeconomic imbalances. The latest cycle of macroeconomic forecasts for 2016 and 2017 was rounded at the beginning of April and did not indicate major changes in the macroeconomic environment, compared to the October projection. Within the projections, relatively rapid stabilization of the political situation was assumed, without its major effects on the domestic economy.During April 2016, the political situation deteriorated, with more pronounced signals of its impact on the confidence and expectations of the entities being noticed. For these reasons, within this cycle projections, beside the baseline macroeconomic scenario, an alternative macroeconomic scenario has also been developed, which assumes continuation of the political crisis for a certain period, shows the main transmission channels of this crisis on the key indicators of the domestic economy and estimates of the possible effects. The assumptions for the external environment are common for both scenarios.Under the baseline scenario, the registered GDP growth of 3.7% in 2015 and the indicators for the first quarter show slightly better performance compared to October cycle projections. These initial conditions, combined with the expected path of the key external and domestic factors, point to economic growth of 3.5% in 2016 and increasing growth of around 4% in 2017, which is consistent with the October projection. The growth in private consumption and investments will be supported by the banking sector, with annual credit growth of around 7% in 2016 and 2017 being assessed, which is moderate downward revision relative to the October projection. In 2016 a price growth of 0.5% is expected, while the domestic and the international factors will contribute to higher inflation by about 1.6% in 2017, in line with the October projections. The latest estimations for the balance of payments indicate just smaller current account deficit, i.e. 1.2% of GDP for 2016 and 1.4% of GDP in 2017. Cumulatively for 2016 and 2017, the current projection foresees a moderate rise in foreign reserves. Foreign reserves adequacy indicators remain in the safe zone, suggesting a sufficient level of foreign reserves to deal with any unforeseen shocks.The alternative macroeconomic scenario, which assumes continuation of the current political situation for a certain period, shows the transmission channels of the political crisis on the key indicators of the economy and provides an assessment of possible effects. The unstable political context will act on the trust and expectations of the entities and thus the growth of the domestic economy. The alternative scenario shows lower GDP growth in 2016 compared to the baseline scenario by about 2 percentage points, i.e. growth of 1.6% compared to 3.5% in the baseline scenario. The slower growth of disposable income would rise the restraint for greater personal consumption, thus having a neutral effect on growth, while in the baseline scenario this component is one of the sources of the GDP growth. Increased confidence is expected among investors, as well, because of the possibility foreign and domestic investors to postpone their investment decisions to invest in the country.In terms of the balance of payments, the assumption of a prolonged political crisis indicates a slightly larger current account deficit of around 2% of GDP in 2016, compared to 1.2% in the baseline scenario. In circumstances where lower domestic demand creates smaller import pressures and improves the trade balance, the deterioration of the current account deficit is the result of lower private transfers triggered by the usual propensity for holding foreign currency. The larger current account deficit and the challenges for its financing affect foreign reserves, but even in this scenario they are sufficient to cope with possible unforeseen shocks. The duration of the crisis, to a large extent, conditions the fulfillment of one of the two scenarios, where the alternative scenario assumes resolving the political crisis by the end of this year and gradually reduce the possible effects on the economy in 2017.In both scenarios, the risks are associated with the external environment or with the uncertainty arising from the intensity of the global economy recovery, especially the European economy. The National Bank, as until now, will continue to closely monitor the developments in the period ahead, and if necessary it will make appropriate adjustments to the monetary policy conduct for the purpose of successful achievement of its goals.At today's session of the National Bank Council additional measures that enhance the expected effect of the change in the key interest rate were discussed and adopted. Namely, for the purpose of further fostering of the process of denarization of deposits in the domestic banking system, the Council increased the reserve requirement ratio for banks' liabilities in domestic currency with FX clause. Given the negligible market share of these liabilities in the banks' balance sheets, the changes are exclusively for further maintenance of low propensity of the economic agents for placing this type of deposits in domestic commercial banks.In addition, in order to maintain and increase deposits in the domestic banking system, the Council re-examine and improve the conditions for placing foreign currency deposits of domestic banks in the National Bank. Accordingly, starting next week, the banks will be able to place foreign currency deposits at the central bank at higher interest rates compared to current negative interest rates prevailing in the international financial markets. It is expected that this measure will contribute to reduce the cost of domestic banks, which consequently should contribute to higher interest rates on the deposits of their clients, domestic legal and natural persons. The Council also discussed other matters within its jurisdiction.
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