Following a shallow recession in 2012, a modest recovery is forecast for 2013, with baseline growth expected to reach 2 percent. So far, industrial production has strengthened in February and March, but indicators do not yet point to a solid recovery in domestic demand. Nonetheless, the baseline growth forecast remains feasible, provided that public infrastructure works and foreign investment projects accelerate as planned. The weak external environment and difficult liquidity conditions for the domestic private sector present important downside risks.
Inflation is expected to moderate to 2.5 percent in 2013, as the effects of energy price hikes wear off and food prices decline. Cost side pressures are limited, with nominal wage growth of 0.2 percent in 2012, and 1.2 percent in early 2013. The current account widened to 3.9 percent of GDP in 2012, with the impact of weaker trade partly offset by high private transfers. Private financial flows, particularly FDI flows, have been modest, but public sector net external borrowing has helped build up reserves, which remain adequate.
Weaker revenues and the start of the arrears clearance process widened the 2012 cash deficit to 3.8 percent of GDP. Keeping the cash deficit contained required expenditure compression beyond the ceilings established in the supplementary budget, and the adjustment fell mainly on capital expenditure. Central government debt rose to 33.8 percent of GDP at end-2012.
The deficit for the first quarter of 2013, at 2.4 percent of projected 2013 GDP, already represents two thirds of the annual target of 3.5 percent of GDP. The revenue outturn was dominated by large VAT refunds, in accordance with the authorities’ commitment to clear arrears. On the expenditure side, subsidies and other transfers rose substantially relative to the same quarter of the previous year. While this appears to be an intra-annual reallocation of expenditure, further expenditure compression will likely be needed to meet the deficit target. The authorities were not considering a supplementary budget at the time of the discussions, noting that on current revenue trends the required adjustment could be accommodated within normal buffers.
Substantial net domestic issuance in 2012 as well as in the first quarter of 2013 has helped finance the higher deficits. In line with previous IMF advice, the Treasury has continuously sought to lengthen debt maturities. As a result, longer dated securities currently make up 25 percent of the total debt stock, up from 5 percent at end-2011.
Banking sector indicators suggest that the system is in overall sound shape, but non-performing loans (NPLs) are increasing. As of December 2012, the capital adequacy ratio stood at 17.1 percent, and over 29 percent of total assets were highly liquid. Deposits provide the main funding source. The NPL ratio rose to 11.7 percent in February 2013, but provisions exceed NPLs.
After steadily decelerating in 2012, credit growth is expected to remain subdued in 2013. Loan growth declined from 5.2 percent (year-on-year) in December 2012 to 4.4 percent in February 2013, even as deposit growth accelerated from 4.4 percent to 5.1 percent.
The absence of pressures on the exchange rate allowed the National Bank of the Republic of Macedonia (NBRM) to lower the policy rate by 25 basis points to 3.5 percent in January 2013, and to gradually reduce its stock of outstanding central bank bills (its main sterilization instrument) over the last six months. In addition, in order to stimulate private credit growth, the NBRM lowered reserve requirements by the amount of new loans to domestic net exporters and electricity producers, effective January 1, 2013.
Adoption of amendments to the banking law early this year closed some long standing gaps in the crisis management framework. The amendments ensure that the NBRM is able to impose fit-and-proper requirements on bank management and owners, and pave the way for the central bank to widen the class of collateral that banks may use to access liquidity support.
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Source: International monetary Fund
