FEDERATION OF EURO-ASIAN STOCK EXCHANGES
ANNUAL REPORT JUNE 2012
MACEDONIAN STOCK EXCHANGE
CAPITAL MARKET DEVELOPMENT AND ECONOMIC OUTLOOK
Overview
1. The economy has strengthened over
the past year, but now faces a worsening
external environment that has created new
risks and headwinds to growth. Sound overall
macroeconomic policies, low public debt, and
limited cross-border financial linkages should
help shield Macedonia from the impact of
adverse external conditions. Nonetheless, the
authorities should be prepared to respond to
slowing growth and heightened risks.
Macroeconomic and financial outlook
2. The mission expects growth to be 3
percent in 2011, based largely on the strong
performance in the first half of the year. Weak
growth in trading partners and heightened
financial stress in the euro area are expected to
weigh on prospects for growth in 2012. These
factors are expected to reduce demand for
Macedonia’s exports and contribute to tighter
domestic financial conditions. The mission
expects growth to be 2 percent in 2012, with
risks tilted clearly to the downside. Inflation is
expected to decline to 2 percent in 2012, as the
effects of higher food and commodity prices
fade and in response to slowing domestic
demand.
3. The mission expects the current account
deficit to be around 5 1 / 2 percent of GDP in
2011 and 6 to 6 1 / 2 percent of GDP in 2012.
This reflects a slowing of both exports and
imports next year in response to weaker growth
externally and in Macedonia. Foreign direct
investment and external borrowing by the
government are expected to provide adequate
financing, allowing a modest accumulation of
international reserves. Over the medium term
the current account is expected to stabilize at
levels that can be financed largely by foreign
direct investment.
4. Financial sector indicators continue to
suggest sound overall conditions. The capital
adequacy ratio has climbed to nearly 17
percent, with tier one capital at 14 percent.
Non-performing loans rose somewhat in the
third quarter of this year, but remain below their
post-crisis peak and are fully covered by bank
provisions. Profitability is low but positive, and
profits are being used largely to strengthen
capital buffers. Loans continue to be financed
predominantly by local deposits, with limited
reliance on external financing.
Risks
5. The possibility of an accelerated economic
downturn and intensification of financial stress
in the euro area poses significant risks for
Macedonia. In such circumstances, demand
for Macedonian exports would contract sharply
and external financing for the public and private
sectors, including foreign direct investment,
could become more scarce. The inflow of
private transfers, which are an important source
of support to the economy, could also be
affected. In such a scenario, economic growth
could fall considerably below the mission’s
baseline projections, and balance of payments
pressures could arise. Several factors could
help shield Macedonia from adverse external
developments. First, the lack of reliance on
external financing for the banking and corporate
sectors reduces the likelihood of bank funding
pressures or deleveraging. Moreover, bank
credit has grown moderately over the past two
years, so is less vulnerable to a rapid slowdown
than in the run-up to the 2008 crisis. Second,
the current account deficit is much lower than
in 2008, lessening the magnitude of needed
adjustment in the event of external shocks.
Further, a strong pipeline of projects that are
planned or already underway will provide a base
for foreign direct investment in the coming year.
Fiscal policy.
6. The mission views the government’s deficit
target of 2 1 / 2 percent of GDP in 2012 as
appropriate in light of economic prospects.
This fiscal stance strikes a balance between
supporting output and employment, and the
need to keep deficits in line with available
financing and maintain debt ratios at moderate
levels. Over the medium term, it will be
important to reduce deficits to preserve debt
sustainability and to maintain space to respond
to future economic cycles.
7. The expected slowdown in economic growth
will translate into a reduction in revenues relative
to the 2012 budget assumptions. The mission
welcomes the authorities’ intention to respond
by reducing expenditure if necessary to achieve
the deficit target in the 2012 budget. In this
context, it recommends that the authorities plan
at an early stage how best to reduce spending
relative to budgeted amounts in response to
anticipated revenue shortfalls.
8. The mission encourages the authorities to
continue with their efforts to strengthen their
public debt management strategy and increase
the size of the domestic debt market. This
is needed to reduce the reliance on external
debt markets, which can be volatile and
unpredictable as a result of events outside of
Macedonia. Compared to other countries in
the region and elsewhere, the size of domestic
public debt is small, suggesting there is
significant room for growth. Moreover, the
ample liquidity of the domestic banking system,
including significant holdings of central bank
debt instruments, points to room for increased
domestic public debt without crowding out
private investment. A deeper domestic debt
market, with longer-term maturities, will also
help to build domestic yield curve, which will
support development of private debt markets.
In this context, the recent auction of a five-year
treasury bond is a welcome development. As
the government lengthens its debt maturities
over time, including further issuance of five-year
bonds, it should respond to changing market
conditions and offer higher interest rates if
necessary. The mission also encourages the
authorities to access private external debt
markets at an early stage to pre-finance its
borrowing needs, to address the risk that
conditions could worsen and markets become
more closed.
Monetary Policy and Financial Stability
9. The National Bank of the Republic of
Macedonia (NBRM) has kept its reference
interest rate unchanged at 4 percent over the
course of 2011. The mission views this as
an appropriate stance. International reserves
are at broadly adequate levels, there is little
evidence of significant pressures in the balance
of payments, inflation is contained, and growth
of bank credit and domestic demand has been
moderate. Looking forward, the NBRM should
be alert to the possibility of balance of payments
pressure that could result from adverse external
developments and should be prepared to
respond promptly.
10. Conservative and independent regulation
and supervision by the NBRM has contributed
to the stability of the banking system. The
authorities should be prepared for the risk
of adverse external developments. This calls
for continued vigilance in monitoring capital
ratios, trends in deposits, loan quality, and
bank liquidity, and for contingency planning for
risk scenarios. The mission welcomes recent
actions to facilitate bank access to liquidity
from the NBRM and to the initiation of regular
meetings of the Financial Stability Committee.
It encourages the authorities to complete their
agenda of legal changes to ensure they are fully
equipped to respond to any future pressures.
This includes further widening the class of
assets that banks may use to access NBRM
liquidity to include bank loans; addressing
the risk of court challenges to decisions on
licensing, administration, or closing of banks;
and closing gaps in the authority to impose fit
and proper requirements on bank managers
and owners.
Conclusion
11. Macedonia should be prepared for weak
growth in its trading partner, with downside
risks, in the coming year. A record of sound
macroeconomic and financial policies and
limited imbalances provide important buffers.
Nonetheless, the authorities should plan in
advance for a slowdown in growth and remain
vigilant to heightened risks.
Key Information Contacts
Central Securities Depository www.cdhv.org.mk
Securities & Exchange Commission www.sec.gov.mk
National Bank of the Republic of Macedonia www.nbrm.gov.mk
Ministry of Finance www.fin.gov.mk
PAGE 83