The financial sector is coping well with the risks of the corona crisis and is ready to meet the challenges ahead

Skopje, 27 August 2021 

The financial sector is coping well with the risks of the corona crisis and is ready to meet the challenges ahead

So far, the overall domestic financial sector has been dealing well with the risks from the pandemic and is ready to meet the challenges in the period ahead. The gradual economic recovery, which is underway, has a positive contribution to the stability and mitigates the systemic risks. However, the uncertainty remains, so it is important for the financial institutions to remain cautious and maintain the capitalization and liquidity at an appropriate level. 

These are part of the conclusions from the Financial Stability Report for the Republic of North Macedonia in 2020, adopted by the National Bank’s Council, at the regular session yesterday.

As stated in the Report, despite the pronounced influences by the pandemic, the risks related to “households” sector remained within control, due to the measures for mitigating the effects on the labor market and maintaining the disposable income of households. The increased uncertainty and measures for restricted movement led to a decline in personal expenditures and growth in savings, which households mainly redirected to banks. The household indebtedness in 2020 was moderate and mainly based on loans to domestic banks.  It is important that the households have remained capable of regular debt servicing, which contributed to maintaining the quality of the banks’ credit portfolio.

The corporate sector indebtedness moderately increased in 2021, yet remained moderate and below the vulnerability threshold, which is determined in accordance with the approach of the EU Commission. However, we need to be cautious due to the continued duration of pandemics, which could lead to deterioration of the financial performance of the sector. This segment faced a decline in income and reduced profitability, but the measures undertaken as e response to the pandemic have mitigated the pressure from liquidity shock and prevented its spillover on the sector’s solvency. This reduced the possibility for materialization of the credit risk in balance sheets of domestic creditors, mainly banks.  The corporate sector has increased the equity even in times of pandemics which encouraged growth in debt funding without increasing the indebtedness level as a ratio between debt and equity (finance leverage). Significant part of the companies’ debt is with currency component and variable interest rates, which pronounces the exposure to market risk and currency risk, which is limited due to the strategy for stable exchange rate. COVID-19 pandemic remains a main source of risk for the corporate sector in the forthcoming period. In this context, the risks are more pronounced for the entities with a higher level of indebtedness that will not manage to adjust their operations to the conditions set by the pandemic. As emphasized in the adopted Report, the interdepartmental connection in the financial system and the possibilities of risk spillover are low.

As stated in the Report, the banking sector remained stable and secure in its operations. At the same time, it realized growth in activities and contributed to mitigation of economic consequences from the corona crisis. The growth in funding sources, mainly driven by the growth in households deposits was focused on prolonged lending in the private sector, mostly to households, as well as to the corporate sector, by banks. The solvency of the banking system is stable with further improvement, same as the liquidity. The quality of the banks’ credit portfolio was maintained, and the rate of non-performing loans remained at a relatively low level.  

The Report points that the banks’ cautious behavior has an important role for proper readiness of the banking system in facing shocks, as well as strengthening of the regulation in the post-crisis period, which led to further strengthening of the solvency and liquidity of domestic banks. The measures and decisions undertaken by the National Bank in response to the pandemic aimed at refrain of paying dividends by the banks sent them a clear signal on the need for creating future capital potential, perceived through strengthening of the solvency, mainly due to reinvestment of banks’ profits.

In order to have a more detailed assessment of risks and readiness of the banking sector in dealing with shocks in specific conditions of pandemic, the National Bank widened the stress testing frame of the banking sector.  Besides the regular macro-stress test, a comprehensive and consistent individual stress test of each bank was conducted for the first time. According to both approaches, the results of the stress test showed that the capital buffers previously developed by banks, give appropriate protection from risks and provide further growth in lending to households and corporate sector.

According to the conclusions in the Report, during the fully funded private pension insurance continued to record a growth in accumulated assets and positive rates of return throughout 2020, albeit significantly lower under the influence of the pandemic and volatility of the financial markets. The challenges for the pension funds in the upcoming period depend on the length of the health crisis and effects on the financial markets, especially amid historic lowest interest rates which affect the yield from investment.

Within the insurance sector, the Report notes that the pandemic was mainly reflected through reduced demand for insurance policies, while the risks of investment losses remained limited due to the conservative policy of investments in insurance companies, in less risky and liquid instruments and low exposure on international financial markets.  Besides the unfavorable influences, the insurance sector remained at a stable liquidity and solvency position and realized a positive financial result, due to the measures which were adopted as an answer to the crisis, by the Insurance Supervision Agency, as an authorized supervisor and regulator. The pandemic remains a risk factor for the insurance sector in the following period, with a possible impact on the sales of insurance policies. Pressures on the profitability from low interest rates are possible, which affects the yields from financial investments, and the sector is exposed to risks from climate changes as well.

The Report emphasizes that other financial institutions (savings houses, leasing companies, investment funds and financial companies), continue to perform a small scope of activities and have a very limited importance so far, as a source of systemic risk to financial stability.

At the session, the Council also discussed other matters within its jurisdiction.