The National Bank Council has held its eleventh session, and adopted the Quarterly Report and the macroeconomic forecasts to the end of 2019
Today, the National Bank Council has held its eleventh session and adopted the Quarterly Report and the macroeconomic forecasts to the end of 2019, concluding that during the third quarter, the policy rate was maintained at 3.25%, amid unchanged assessments for the stability of the economic fundamentals, absence of imbalances in the economy and especially stabilization of the expectations. There were no pressures on the foreign exchange market and the NBRM's interventions in the fist quarter were aimed at purchasing foreign currency. Household savings in the banking system continued to increase during the third quarter. However, the distrust of the economic agents continued due to the political domestic events, although less pronounced, with opinions for greater vigilance in some points. This particularly concerns the deposit potential whose increase was more moderate than expected, as well as the slow increase of the propensity of households to save in domestic currency, which shows that it takes time for sustainable development of the currency preferences. In terms of risk assessments, during the quarter, it was assessed that the uncertainty arising from domestic environment was lower, but still present, whereas risks from the external environment remained current and mainly referred to medium term risks, mainly related to the fragile global recovery, global protectionist tendencies, effects of the Brexit and geopolitical tensions.
The latest October macroeconomic forecasts vintage for the current and following two years points to certain changes compared to the the April forecast. They mainly arise from the performances in the first half of 2017, when the economy registered a decline, which in one part probably reflects the investors’ restraint amid pronounced political instability at the beginning of the year. At the same time, more pronounced import pressures were present in this period. These shifts, assessed as temporary, resulted in downward revision of the expected economic growth for 2017. On the other hand, the assessments of domestic fundamentals and external environment features remain favorable. Hence, the October macroeconomic scenario for 2018 and 2019 still forecasts relatively stable economic and credit growth, absence of significant price pressures and balance of payment position that provides adequate foreign reserves level. These forecasts assume stable environment and full dissipation of the effects of the unfavorable political events.
Certain changes also occurred in the expected movements of the key indicators of external environment in the period between both forecasts. Foreign effective demand is revised upwards for 2017 and 2018 in accordance with the assessments for strengthened economic activity of the most significant trade partners. Moderate acceleration of the foreign demand is expected for 2018 and 2019, with its growth still around 2%. In contrast, the foreign effective inflation is corrected downwards for 2017 and 2018. For 2019, it is expected to accelerate moderately, yet to remain low. In terms of price movements of primary commodities, for 2017, the prices of oil, food and metal are revised downwards, which points to a slight growth compared to the April expectations. Food prices are revised downwards for 2018, thus expecting smaller import pressures on the domestic inflation, whereas other primary commodity prices registered a slight upward correction compared to the previous expectation. Dynamically speaking, despite the general increase of prices in 2017, the prices of most of these products are expected mainly to slow down in 2018 and 2019. Hence, for the next two years, prices in global markets are expected to be primarily low.
The latest forecasts, same as in the April forecasts vintage, show retention of the growth trend in the domestic economy. However, there was a significant downward revision of the expected growth rate from 2.5% to 0.5%, and the rate for 2018 remained unchanged (3.2%). Further moderate acceleration of the growth is expected for 2019. The downward correction of the expected economic growth for 2017 is a reflection of the performances in the first half of the year, when the economic activity registered a decline compared to the expected growth in the April forecast. This deviation is mostly due to the lower investment demand, but also to the more expressed import pressures. However, it is considered that such shift is temporary, and by the second half of the year, with the gradual exhaustion of the uncertainty of the domestic political events, restored investors’ confidence and improved expectations of economic agents, GDP is expected to increase. Assuming stable domestic environment and more favorable path of external factors, the growth is expected to accelerate in the following two years, with expectations for faster grow of the domestic economy than that of the trading partners. The main growth factors, as in the previous forecasts cycle, still include activities of the new foreign export-oriented facilities, public investments in road infrastructure, whose pace is expected to accelerate after the deceleration in 2017, as well as stable household expectations. Bearing this in mind, the growth structure remains similar to that expected in the April forecasts cycle. Among the individual expenditure components of GDP, export of goods and services is expected to make the highest positive contribution to the growth in 2018 and 2019, and such assessments are based on the expectations for increased activity of the new foreign facilities, improvement of the global environment and recovery of part of the traditional export sectors. Besides the exports, the growth in the following two years will be supported by investment, amid sable environment and prolonged positive influence of the fundamental factors of the investment activity i.e. growth of foreign investments and continuation of the public capital investment cycle. Favorable economic environment is expected to encourage further growth of private consumption through increase of private sector wages and employment, with further effect of the banks’ credit support. The growth of domestic demand components and exports is expected to increase imports, but it is assessed that imports will increase in line with the fundamentals, without disturbing the external balance.
The credit activity of the banking sector during the forecast horizon is expected to be an important factor in supporting the growth of private consumption and investments. In 2017, given the decelerating growth pace of deposits, as the main source of financing credit activity, and prolonged uncertainty, the credit growth moderately decelerated, at a slightly weaker than expected pace. Thus, in 2017, loans to the private sector were corrected slight downward in accordance with the performances from the beginning of the year, whereby the credit growth is forecasted to be 4.6% compared to 5.2% in the April forecasts. The credit growth for 2018 remained almost unchanged, namely, it is assessed to be 7.2% (April: 7.1%). The growth pace of credit activity in 2019 is expected to accelerate to 7.6%. This forecast is based on estimations for sound solvency and liquidity of banks, exhaustion of the uncertainty in the domestic environment, as well as expectations for rapid growth of the deposit base. On the deposit side, in 2017, given the weaker performances, the deposit growth is forecast at 3.6% (4.2% in the April forecast). However, given the further stabilization of expectations of the economic agents and the increase of economic activity in the next two years, the potential and the propensity to save in banks is expected to increase, thus accelerating the deposit base growth by about 6% both in 2018 and in 2019.
Regarding the future path of price movements in the domestic economy, the latest forecasts point to maintenance of environment of stable prices and absence of significant inflation pressures. In 2017 and 2018, the inflation rate is expected to amount to 1.3% and 2.0%, respectively, same as in the previous forecast horizon, and the growth pace of the domestic price of around 2.0% is expected to continue in 2019. These estimates reflect the price movements in the previous period, as well as the expected movement of import prices of food and energy, and the foreign effective inflation. Moderate pressures on inflation are also expected from the domestic demand, when the output gap is estimated as moderately positive during the entire forecast horizon.
The latest October forecasts for the external sector show retention of the estimates for moderate current account deficit of around 2.0% of GDP, with sufficient financial flows for its financing and additional increase of foreign reserves in the period 2017-2019. Thus, within the latest balance of payments estimates, the current account deficit was corrected moderately downwards, mainly reflecting the expectations for lower primary income deficit. Current account deficit of 2.0% is expected for 2017, and for 2018 and 2019, the estimated current account deficit is 1.8% of GDP, respectively. In the forecast horizon, the balance of goods and services is expected to improve moderately, primarily reflecting the increased utilization of the potential of the new foreign-owned production facilities. In this regard, risks are assessed as upwards, since the assumptions within the forecasts are relatively moderate. Positive shifts are also expected in some traditional sectors. After the growth in 2017, the secondary income surplus is expected to decline moderately, amid absence of shocks that would hit the dynamics of this component. The present path, balance and structure of current account deficit do not suggest imbalances in the economy in the next three years. Analyzing the financial account, in this two-year period, the current account is expected to be funded through non-debt and debt financial flows i.e. mainly through foreign direct investment and borrowing of the public and private sector abroad. In the period 2017-2019, the current account deficit is expected to be fully covered by financial flows, which will ensure additional increase in the foreign reserves. During the entire forecast horizon, foreign reserves adequacy indicators have ranged within the safe zone.
Overall, recent developments suggest macroeconomic landscape similar to that forecasted in April with assessments for slightly weaker economic growth this year, weaker monetary and credit movements, absence of price pressures and balance of payment position that ensures maintenance of foreign reserves at an adequate level. The risks to this macroeconomic scenario mainly arise from the external environment, with gradual mitigation of the risks arising from the domestic environment, as a result to the stabilization of the political environment in the country. Hence, the National Bank will continue to closely monitor the developments in the period ahead, and if appropriate, make adjustments to the monetary policy aimed at successful pursuit of the monetary policy objectives.