Handle and manage the foreign exchange reserves


Handle and manage the foreign exchange reserves


Primary functions of the foreign reserves are to provide a support in the conduct of monetary policy and the exchange rate regime, to secure the domestic economy from external shocks, to ensure regular repayment of the external public debt and to preserve credibility of the domestic economy international-wide. In this light, according to the IMF definition, foreign reserves are "external assets available to and managed by the monetary authority for direct funding of payment imbalances, for indirect regulating of the magnitudes of such imbalances through intervention in the exchange markets to affect the currency exchange rate, and/or for other purposes".

As specified by the Law on the National Bank of the Republic of Macedonia, the National Bank manages and handles the foreign reserves of our country. Besides the legal provisions, foreign reserves management and handling are closely regulated by the Policy for managing and handling the foreign reserves of the Republic of North Macedonia as adopted by the National Bank Council, specifying instruments and methods of placing foreign reserves, observing the safety, liquidity and profitability criteria. The Governor of the National Bank has adopted special regulations for placing and holding foreign reserves, defining, in more details, the instruments in which foreign reserves are being placed, as well as the method of managing and monitoring the credit, currency, liquidity and interest rate risk.

According to the monetary strategy of nominal exchange rate targeting, the Euro has a dominant share in the foreign reserves. On the other hand, taking into account the currency structure of the government's external credit liabilities, and the need to maintain current liquidity in the international payments, the foreign reserves currency structure, besides the Euro, also includes US Dollar and several other currencies (Australian and Canadian Dollar, Swiss Franc, Danish, Norwegian and Swedish Crown, British Sterling, Japanese Yen and the Special Drawing Rights). 

The National Bank performs foreign reserves management by means of three portfolios: liquidity portfolio, investment portfolio and gold. The gold portfolio is aimed to ensure security and liquidity of foreign reserves through investment diversification, taking into account that the gold is a significant asset amidst global economic or political instability of markets. Liquidity portfolio fulfills the needs for liquid assets of the National Bank for interventions on the foreign exchange market and for execution of international payments of the government, whereas the investment portfolio provides stable and predictable income and maintain the level of foreign reserves, investing them on a longer run. 

Considering that our country, as a small and open economy, is highly dependent on global financial flows, having no power to influence the global market prices, the financial market developments could generate several types of risks to the foreign reserves management. Hence, an integral part of the foreign reserves management process is the risk management when investing funds in various financial instruments.

The National Bank manages the credit risk, as a risk of decreasing the foreign reserves value due to illiquidity, insolvency and downgrading of credit ratings of countries, financial institutions or security issuers, by placing foreign reserves in consistence with selection criteria and exposure limits to countries, financial institutions and security issuers.

The National Bank manages the liquidity risk, as a risk of unavailability of ample liquid assets, by maintaining adequate level of liquidity portfolio, placed in short-term instruments with equal maturity distribution, and by placing the investment portfolio in market and liquid instruments.

The National Bank manages the interest rate risk, as a risk of decreasing the foreign reserves value due to shift in market prices of instruments in which foreign reserves are being placed, by determining and maintaining the target modified duration of the investment portfolio, as a strategic objective which reflects the optimal level of expected return on foreign reserves investment, having defined acceptable risk level.

Currency risk is a risk of decreasing foreign reserves value due to the movements in foreign currencies in which foreign reserves are placed and held. The part of foreign reserves in Euro is not exposed to currency risk, due to the strategy of de facto fixed exchange rate of the Denar against the Euro. There is a foreign reserve exposure to currency risk in a part of foreign reserves placed and held in other currencies and gold, which is limited by determining shares of other currencies in the foreign reserves portfolio. 

Besides the quantitative limitation of currency and interest rate risk, the National Bank further measures the foreign reserves exposure to these market risks by using the Value-at-Risk concept.  

The National Bank regularly discloses the results from foreign reserves management and handling in its semiannual and annual reports.