Today, the National Bank of the Republic of Macedonia Council held its eighth session, at which the latest Quarterly Report was discussed.
Press release of the NBRM
Today, the National Bank of the Republic of Macedonia Council held its eighth session, at which the latest Quarterly Report was discussed.
In the period since the April projections, the key macroeconomic parameters in the domestic economy generally moved in line with the expectations. The recovery of the domestic economy continued in the first quarter of 2013, with the gross domestic product registering an annual growth of 2.9%. The achieved growth is slightly faster than expected in the April projection, reflecting the increased investment demand and the stronger positive contribution of net exports. These achievements, along with the available data on the second quarter of 2013, indicate maintaining of the economy in the zone of ??steady annual growth in line with the projected path.
During the second quarter, annual inflation rate of 3.6% was registered, which is in line with the expectations. In terms of the risks for the inflation, they are considered to be balanced and April assessments to be appropriate.
Developments in the external sector in the first quarter did not deviate significantly from projected. In the first three months of the year, the current account registered a slightly higher deficit than expected, due to the higher trade deficit and slightly lower private transfers, amid improved performance in services. Within the capital and financial account, the registered net inflows were higher than projected, largely due to the lower repayments of commercial loans than expected. The latest available data on the balance of payments in the second quarter (April and May) indicate a higher than expected current account deficit, caused by the deterioration of the balance of services and the slightly lower inflows with the transfers. Achievements in income were in line with the projection, and the trade deficit was smaller than expected.
NBRM interventions on the foreign exchange market were aimed at net sales of foreign currency, which was consistent with the expected dynamics. Indicators of adequacy of foreign reserves remain favorable, with estimates for a comfortable level to absorb potential, unforeseen shocks.
Within the monetary sector, the latest available data as of the end of the second quarter indicate a gradual revival of the credit activity and achievement of the projected credit growth. However, despite the favorable developments in recent months, given the still weak economic recovery, on the global and domestic fronts, there are still downward risks to the achievement of the credit growth projected for 2013. It is expected that the pace of lending will continue to be under great influence of the quality of banks' loan portfolio and the conservative strategies of some banking groups that have their subsidiaries in the domestic market.
In order to alleviate some of the existing risks in the economy, to encourage lending and to ensure an increased influx of long-term foreign capital into the domestic economy, in July NBRM made changes in the reserve requirement. It is also expected that changes in this instrument will contribute to maintaining the propensity to save in Denars.
Having in mind the estimates that macroeconomic indicators remain within the projected frames, in July further monetary easing was made, by lowering the key interest rate by 0.25 percentage points. Thus, the maximum interest rate on CB bills was reduced to the lowest historical level of 3.25%.
At the session, the Report on the risks to the banking system in the first quarter of 2013 was also discussed. The Report concludes that against the background of a moderate recovery of the domestic economy and continuing decline of activity in the euro zone, in the first quarter of 2013, the slowdown of the overall activities of the banking system of the Republic of Macedonia continued. Slowdown was registered also in the growth of deposits of non-financial entities that have the greatest significance for funding the banking system, but they still form more than two-thirds of the total sources of funds. Moreover, also in 2013 there was a propensity to save in the long run and in domestic currency.
Generator of the credit growth in the first quarter of the year were the loans to households and the loans in Denars, which corresponds to the trend of "denarisation" of the banks' deposit base. This trend of faster growth in Denar loans continued in the second quarter of 2013. In the next period, further increase in credit growth to non-financial entities is expected, under the influence of the signals of recovery of the domestic economy and expectations for more stable environment. The changes in the operational framework of the National Bank's monetary policy, as well as the additional changes that the National Bank made in the reserve requirement in the first half of 2013, support this expectation for the next period.
In the first quarter of 2013, credit risk in banks increased, primarily due to the risks coming from the corporate sector. The growth of non-performing loans accelerated, and their share in total loans reached 11.9% as of March 31, 2013. However, non-performing loans are still fully covered with the total estimated impairment, which mitigates the effects of accelerating growth of these loans. Also, the high capitalization of the banking system allows preserving the capital adequacy of the banking system and of the individual banks even amid hypothetically fully uncollectible non-performing loans.
The liquidity of the banking sector is stable and on a high level, due to the continuous growth of liquid assets. High coverage of household deposits and short-term liabilities of banks with liquidity is an important pillar for the reliability and stability of the banking system, as confirmed by the stress-test of the resilience of the banking system to liquidity shocks.
The capital adequacy ratio of the banking system is twice the statutory minimum and equals 17.3%, compared with 17.1% as of December 31, 2012. The capital position of the banking system is expected to further strengthen, as a result of completing the process of reinvestment of profits for 2012, which began in the first quarter of the year and the announcements for new investments in subordinated instruments in banks. High capital adequacy, i.e. strong solvency position of the banking system is the basis for its stability and resistance to the simulated shocks.
At today's session, the Council discussed other issues within its jurisdiction.