Speech of Emilija Nacevska, Vice Governor of the NBRM, Dialogue on financing and business opportunities in Macedonia and Kosovo, December 08, 2006, Holiday Inn, Skopje
Embassy of Sweden
Holiday Inn, Skopje, Republic of Macedonia
Honorable Ministers,
Your Excellencies,
Respected Investors,
Dear colleagues
Let me first express my gratitude for the given opportunity to participate in the today's event, which tackles one of the most important areas, i.e. Foreign Direct Investments (FDI) as a catalyst for economic growth. Their role as a supplement of domestic funds, as well as the positive externalities they generate through the spillover effects are high assurance of more efficient resource allocation in economies where FDI are present. Nowadays a lot of countries compete in the field of attracting FDI, developing strategies and range of incentives. In broader terms, policymakers usually develop approaches related to targeting fiscal incentives (tax concessions, subsidies), improving domestic infrastructure, skills upgrading, establishment of FDI promotion agencies, improving regulatory framework and reducing the "red tape". Macedonia has recognized the need for growth acceleration and broadening of growth sources, which indeed is a model difficult to be solved. Yet, part of the solution lies in promoting FDI as a stable and high-quality investment. But if you make a screening of the current status of FDI in Macedonia it will indicate that the absorbing capacity for this type of investments is far from being utilized. Thus, 2005 figures are showing FDI to GDP ratio of 1.7%, which is well below the average in the transition countries of 5.5%; FDI per capita in 2005 were 48US$, which is also far from the transition average of 132US$[1]. Hence, there is a wide-range of possibilities for investing in Macedonia, which are strongly enhanced with FDI and profit repatriation not being subjected to any legal constraints, and with profound reforms undertaken to deliver better investment climate.
Nonetheless, one must not be oblivious to the fact that one of the basic prerequisites for attracting and fostering FDI is an appropriate macroeconomic environment, which ensures stability and consistency when making investment decisions. Republic of Macedonia is well known as a country with a high level of macroeconomic stability culture. The overall macroeconomic stability maintained for almost a decade arises from the price and exchange rate stability, and the fiscal discipline. The average level of inflation for 1996-2005 period was 2.2%, and though in 2006 the inflation slightly intensified reaching 3.2% on average as of October, to a large extent it is determined by supply-side factors, with one-off effects that are to fade away in a short run. The maintenance of price stability is underpinned by the current monetary framework of stable exchange rate, which is to contribute to further promotion of price stability. Currency stability has been proven to be a paramount pillar for small and open economies like ours, with a relatively high level of euroization. Hence, the central bank puts a lot of efforts to make a proper combination of its presence on the forex market and its interest rate policy in order to preserve the stability of the exchange rate. In the last two years, the challenges were somewhat different compared to previous years, as like in the most transition countries we have faced a strong capital inflow and appreciation pressures, enabling purchase of foreign currency, building foreign reserves (an important pillar of the stable exchange rate), while successfully sterilizing at the same time, but with interest rate that went down from 10% in 2005 to around 5.8%.
Inflation performances are also a result of the proper monetary-fiscal mix. Thus, fiscal policy is showing strong commitment to being prudent, with a moderate fiscal deficit being projected on a medium term. In the last two years we have also witnessed a strong improvement of the external position, with the current account deficit being narrowed to 1.3% of GDP in 2005, compared to 7.7% of GDP in 2004. Though, to a large extent this result was delivered out of the large private transfers inflows, partly it is also related to the improved trade deficit, thus promising further revival of the economic growth (for 2006 and 2007, growth projections are of around 4% real GDP growth rate, though the projection for 2007 might be on a conservative side).
Still, I would like to put a strong emphasis on the health of the banking system and the evolution of the financial intermediation, as the well developed domestic banking and financial system in general, might be of great importance for providing financial support to foreign investors, once they commence their business activities.
Resembling many transition countries with underdeveloped financial markets, Macedonian banking system comprises the largest part of the total financial system. Having a bank-based financial system puts a large weight on the issue of creating stable, healthy and strong banking system, able to produce financial support, make efficient resource allocation and prevent large fluctuations in the decision-making process of the economic agents. Our banking system can be perceived for sure, as the most advanced and dynamic segment of the economy as a whole. Though it went through the most of the common transition stages, it was able to withstand all transition and external upheavals without any systemic banking crisis. Changes in the ownership structure, internal operational and financial restructuring, creation of proper internal governing procedures, putting more weight on the issue of risk management, as well as perpetual efforts to build solid institutional environment have contributed to a large extent to continuous improvement of all indicators related to the level of financial intermediation and banks' profitability and efficiency. Thus, today we have a banking system consisted of 19 banks, with private capital participating with 93% (98.3%, without MBPR). Foreign investors slowly increase their presence in the banking sector, with a share of foreign capital in total banks' capital equaling 54% as of end-June 2006 (52% as of end-2005). Still, the publicly expressed interest of a few leading foreign banks signals the possibility for significant increase of foreigners in the Macedonian banking sector. The concentration indicators point to a relatively high concentration of the banking system (for example, the first three banks participate with 65.5% in the total assets), which per se does not imply a problem. Even more, it can be a kind of prevention against taking excessive risks by individual banks in their race for a higher market share.
The latest developments in the banking system reveal further strengthening of the financial intermediation, with rapid growth of deposits and credit to the private sector, while the quality of the banks' portfolio is improving, as well as their profitability position. Thus, after 2001, when a huge deposits flow entered banks, due to the euro conversion, banks' deposit base has been widening permanently, reaching 25.9% of GDP in 2005 (compared for instance to 7.7% of GDP in 1999), with this ratio being projected to reach 29.4% in 2006. Though the level of monetization is still lagging behind the more advanced transition countries, still the permanent strong growth of deposits points to a credible and healthy banking system, higher propensity to save and positive expectations. Few years ago, within the research related to credit growth in transition countries, Macedonia was classified in the group of "Sleeping Beauties", which without any doubts does not hold now. Since 2003, our credit market has been extremely active, with banks expanding their assets and credits to GDP ratio reaching 22.4% in 2005 (with 26.1% being projected for 2006). Hence, our banking system seriously took the role of an important source of financing of the corporate and household sector, by increasing credit supply, as well as by widening the range of credit products. Still, what is to be kept in mind is the need to maintain the quality of the credit portfolio, both by enhanced internal procedures and regulatory framework. Although the share of non-performing loans in the total credit portfolio is still rather high (around 10%) compared to the euro zone average of 3.4%, still it must be stressed that it is declining sharply and permanently, indicating improved credit procedures and better risk management. Profitability indicators are also indicating strong positive shift in the banks' balance sheets, with ROAA and ROAE reaching 1.4% and 9.3% (June, 2006), compared to 0.5% and 2.3% in 2003. All these positive shifts enabled a declining trend of banks' interest rates, which currently stand at 10.9% and 4.6% for the domestic lending and deposit rate, and narrowing of the interest rate spread to 6.3 percentage points.
Apparently, Macedonian banking system moves into positive direction, converging to a more mature and modern banking.Still, a lot of reforms are needed and ongoing, focused on further improvement of the stability of the banking sector and its international competitiveness, necessary for its successful integration in the global financial market. These goals should be achieved through further internal reorganization and restructuring, strengthened supervision and complete harmonization with the EU legislative.
Finally, I hope that today we will succeed in drawing your attention to Macedonia as an investment destination, and that today's event will contribute to increased presence of Swedish companies in Macedonia, significantly augmenting the share of Swedish investments (averaging 0.36% in 1997-2005 period) in our FDI.
Thank you.
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[1] EBRD Transition Report, 2006.