Forum: Republic of Macedonia Development Forum: Republic of Macedonia Development Strategy and Investment OpportunitiesStrategy and Investment Opportunities

Monetary Policy and Financial System in Monetary Policy and Financial System in the Republic of Macedoniathe Republic of Macedonia

By Ms. Emilija NacevskaBy Ms. Emilija NacevskaVicegovernorVicegovernor

National Bank of the Republic of Macedonia National Bank of the Republic of Macedonia October 19, 2005, LondonOctober 19, 2005, London

Monetary policy stanceMonetary policy stance

Monetary policy oriented towards maintaining Monetary policy oriented towards maintaining price stability, as final monetary policy goal and price stability, as final monetary policy goal and precondition for sustainable economic growth precondition for sustainable economic growth

The result: maintenance of law and stable The result: maintenance of law and stable inflation since 1995, close to the average level of inflation since 1995, close to the average level of inflation in EUinflation in EU

Average inflation rate (in %)

-500

50100150200250300350400

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

pro

j.

Monetary policy stance Monetary policy stance (cont’d)(cont’d)

The maintained price stability is a result of The maintained price stability is a result of successful implementation of the exchange rate successful implementation of the exchange rate targeting strategy targeting strategy – Denar exchange rate as a nominal anchorDenar exchange rate as a nominal anchor

The strategy is supported by the fiscal policyThe strategy is supported by the fiscal policy

Exchange rate - Main nominal anchor in the economyExchange rate - Main nominal anchor in the economy

Denar / EUR

5556575859606162636465

31.I

.200

2

31.I

II.2

002

31.V

.200

2

31.V

II.2

002

30.I

X.2

002

30.X

I.20

02

31.I

.200

3

31.I

II.2

003

31.V

.200

3

31.V

II.2

003

30.I

X.2

003

30.X

I.20

03

31.I

.200

4

31.I

II.2

004

31.V

.200

4

31.V

II.2

004

30.I

X.2

004

30.X

I.20

04

31.I

.200

5

31.I

II.2

005

31.V

.200

5

31.V

II.2

005

Monetary policy stance Monetary policy stance (cont’d)(cont’d)

The price and exchange rate stability contributed The price and exchange rate stability contributed for overall macroeconomic stability and for overall macroeconomic stability and economic growtheconomic growth

GDPGDP- real growth rates -- real growth rates -

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

6%

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

est

im.

2005

pro

j.

Average growth rates:

5.8% in 2000 5.5% in 2001

1.8% in 2002

1.2% in 2003

-0.4% in 2004

1.2% in 2005

proj.

Inflation 2000-2005Inflation 2000-2005

Inflation 2004-2005

-3

-1

1

3

5

7

I.20

04

II III IV V VI

VII

VII

I

IX X XI

XII

I.20

05

II III IV V VI

month / previous monthperiod / the same period of the previous year

Current Account Balance - as % of GDP -

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005*

*projected data for Dec. 2005

Balance of paymentsBalance of payments

Components of the current account - as % of GDP -

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

5.0

10.0

15.0

20.0

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

Trade balance as % of GDP Income as % of GDP Transfers as % of GDP

Services as % of GDP Current Account as % of GDP

In 2004, compared to 2003, the gross FX reserves increased by US Dollar 82 million, or by 9.2%.

Gross foreign exchange reserves of Gross foreign exchange reserves of NBRMNBRM

- In million US Dollars -Apr. 1992 0

Dec. 1992 59.8

Dec. 1995 274.8

Dec. 1998 333.5

Dec. 1999 458.4

Dec. 2000 713.6

Dec. 2001 775.2 Dec. 2002 725.0

Dec. 2003 893.0 Dec. 2004 975.0

Aug. 2005 1002.0

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

IV.1

992

XII

.199

2

XII

.199

3

XII

.199

4

XII

.199

5

XII

.199

6

XII

.199

7

XII

.199

8

XII

.199

9

XII

.200

0

XII

.200

1

XII

.200

2

XII

.200

3

XII

.200

4

VII

I.20

05

Liberalization of current and capital Liberalization of current and capital transactionstransactions

With the acceptance of Article VIII of the IMF With the acceptance of Article VIII of the IMF Articles of Agreement (June 1998) complete Articles of Agreement (June 1998) complete liberalization of current transactions; partial liberalization of current transactions; partial liberalization of capital transactions;liberalization of capital transactions;

In line with the implementation of the Stabilization In line with the implementation of the Stabilization and Association Agreement with EU, in October 2002, and Association Agreement with EU, in October 2002, new Law on Foreign Exchange Operation was adopted new Law on Foreign Exchange Operation was adopted with further liberalization of capital transactions.with further liberalization of capital transactions.

Liberalization of Capital TransactionsLiberalization of Capital Transactions

Complete liberalization of foreign direct investments;Complete liberalization of foreign direct investments; Complete liberalization of credit and loan transactions; Complete liberalization of credit and loan transactions; Investments in securities:Investments in securities:

– For residents trading abroadFor residents trading abroad authorized banks only; Deposit Insurance Fund, insurance authorized banks only; Deposit Insurance Fund, insurance

companies, pension and investment funds only in line with companies, pension and investment funds only in line with laws governing their operations;laws governing their operations;

after the expiration of the phase I of the SAA with EU, after the expiration of the phase I of the SAA with EU, other residents will be able to trade foreign securities other residents will be able to trade foreign securities abroad.abroad.

– For non-residents trading domesticallyFor non-residents trading domestically authorized to issue and introduce securities on the domestic authorized to issue and introduce securities on the domestic

market up to three-year maturity; may trade domestic market up to three-year maturity; may trade domestic securities through authorized participants.securities through authorized participants.

-10

20

50

80

110

140

170

200

230

260

290

320

350

1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 20040.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

FDI as % of CA FDI as % of GDP

FDIFDI

Banks’ Interest RatesBanks’ Interest Rates

0

5

10

15

20

25

30

Jan.

96

Jul.9

6

Jan.

97

Jul.9

7

Jan.

98

Jul.9

8

Jan.

99

Jul.9

9

Jan.

00

Jul.0

0

Jan.

01

Jul.0

1

Jan.

02

Jul.0

2

Jan.

03

Jul.0

3

Jan.

04

Jul.0

4

Jan.

05

Jul.0

5

Banks' lending interest rates Banks' deposit interest rates

Monetary Policy InstrumentsMonetary Policy Instruments

Reserve requirementsReserve requirements On domestic currency On domestic currency On foreign currencyOn foreign currency

Open market operationsOpen market operationsIssuance of CB billsIssuance of CB billsCredit operations (credit auctions)Credit operations (credit auctions)

Standing facilitiesStanding facilitiesLombard creditLombard credit

Reserve RequirementsReserve Requirements

Reserve requirements ratiosReserve requirements ratios10.0%10.0% - to banks, for reserve requirements in - to banks, for reserve requirements in

domestic and foreign currencydomestic and foreign currency2.5%2.5% - to saving houses, for reserve - to saving houses, for reserve

requirements in domestic currency depositsrequirements in domestic currency depositsRemuneration of reservesRemuneration of reserves

In domestic currency: holdings of required In domestic currency: holdings of required reserves are remunerated at reserves are remunerated at 2%2%

In foreign currency: holdings of required reserves In foreign currency: holdings of required reserves are not remuneratedare not remunerated

Open Market OperationsOpen Market Operations

Credit operations (credit auctions)Credit operations (credit auctions) Not used since 2000Not used since 2000

Issuance of 28-day NBRM billsIssuance of 28-day NBRM billsFor sterilisation purposes, through volume For sterilisation purposes, through volume tender auctions (unlimited amount) carried tender auctions (unlimited amount) carried out twice a week; Current interest rate – out twice a week; Current interest rate – 10.0%10.0%

Standing FacilitiesStanding Facilities

Lombard creditLombard creditOvernight standing facilityOvernight standing facility AvailabilityAvailability: on banks’ request at the end of : on banks’ request at the end of

the daythe dayInterest rateInterest rate: 13.0%: 13.0%

Recent undertaken activities in order to Recent undertaken activities in order to foster the financial market developmentsfoster the financial market developments

in April 2005, in the absence of Code for good practices, the regulatory framework in April 2005, in the absence of Code for good practices, the regulatory framework for OTC trading - Rules for the Manner and the Procedure for Trade in and for OTC trading - Rules for the Manner and the Procedure for Trade in and Settlement of Securities Transactions on the Over-the-counter Markets, was set up.Settlement of Securities Transactions on the Over-the-counter Markets, was set up.

Starting from April 2005, services for settlement of securities are provided free of Starting from April 2005, services for settlement of securities are provided free of charge in order to promote secondary trading and introduction of repurchase charge in order to promote secondary trading and introduction of repurchase agreements, agreements,

In July 2005, an electronic trading platform with information on securities prices In July 2005, an electronic trading platform with information on securities prices and real time information on trades in foreign exchange was established in order to and real time information on trades in foreign exchange was established in order to enhance competition and increase transparencyenhance competition and increase transparency

Market maker agreement with the major participants on the FOREX market was Market maker agreement with the major participants on the FOREX market was signed in August 2005 signed in August 2005

Master Repurchase Agreement with commercial banks was signed in September Master Repurchase Agreement with commercial banks was signed in September 20052005

Beginning from October 2005, repo transactions for intra day credit and lombard Beginning from October 2005, repo transactions for intra day credit and lombard credit were introducedcredit were introduced

Core priorities of NBRM in the area of further Core priorities of NBRM in the area of further developments of financial markets in RMdevelopments of financial markets in RM

Reducing the NBRM reliance on CB bills (its own Reducing the NBRM reliance on CB bills (its own securities) and introducing Treasury bills for monetary securities) and introducing Treasury bills for monetary policy purposes, as a start up measure for switching to open policy purposes, as a start up measure for switching to open market operations with government securitiesmarket operations with government securities

Finalizing all legal and accounting requirements to start use Finalizing all legal and accounting requirements to start use repo operations as main instrument of the monetary policyrepo operations as main instrument of the monetary policy- replacing CB bills auctions with reverse repo auctionsreplacing CB bills auctions with reverse repo auctions- replacing collateralized credit auctions with repo replacing collateralized credit auctions with repo

auctionsauctions Setting the criteria for choosing market makers for Setting the criteria for choosing market makers for

government securitiesgovernment securities

Structure of the Banking System of the Structure of the Banking System of the Republic of MacedoniaRepublic of Macedonia

as of June, 2005as of June, 2005

20 Commercial Banks – 98.6% of the total 20 Commercial Banks – 98.6% of the total assets of the banking systemassets of the banking system• 15 banks - full operating license (all financial 15 banks - full operating license (all financial

activities including domestic banking operations and activities including domestic banking operations and activities abroad)activities abroad)

• 4 banks - limited operating license (only domestic 4 banks - limited operating license (only domestic banking operations and limited activities abroad)banking operations and limited activities abroad)

• 1 state owned bank – specialized in development and 1 state owned bank – specialized in development and promotionpromotion

15 Savings Houses (operating license mainly 15 Savings Houses (operating license mainly covers the activities with citizens)covers the activities with citizens)

Main indicators of the banking system Main indicators of the banking system as of June, 2005as of June, 2005

Total assets – 132.2 billion denars (2.2 billion Total assets – 132.2 billion denars (2.2 billion EUR) EUR)

Credit portfolio growth – 33.8% for the last 3 yearsCredit portfolio growth – 33.8% for the last 3 years Average level of credit portfolio risk – 8.9%Average level of credit portfolio risk – 8.9% Banking assets in GDP – 50%Banking assets in GDP – 50% Total deposits 94 billion denars (1.5 billion EUR)Total deposits 94 billion denars (1.5 billion EUR) Total capital – 21.3 billion denars (0.35 billion Total capital – 21.3 billion denars (0.35 billion

EUR)EUR) Capital adequacy ratio – 23.1%Capital adequacy ratio – 23.1%

Share of foreign capitalShare of foreign capital as of June, 2005as of June, 2005

Foreign capital is present in 15 banks (51.6% of Foreign capital is present in 15 banks (51.6% of the total capital)the total capital)• 8 banks are foreign owned banks (foreign 8 banks are foreign owned banks (foreign

capital over 50%)capital over 50%)• 4 banks are subsidiaries of a foreign banks 4 banks are subsidiaries of a foreign banks

(NBG Greece, Alpha Bank Greece, Ziraat (NBG Greece, Alpha Bank Greece, Ziraat bankasi Turkey, Nova Ljubljanska Banka bankasi Turkey, Nova Ljubljanska Banka Slovenia)Slovenia)

Structure of the Banking System of the Structure of the Banking System of the Republic of MacedoniaRepublic of Macedonia

as of June, 2005as of June, 2005

0

10

20

30

40

50

60

Capital Totalassets

Deposits Credits(net basis)

Private bankswith domesticcapital

Banks withforeign capital*

State ownedbank

* Banks with more than 50% foreign capital.

Concentration of the banking system of Concentration of the banking system of the Republic of Macedoniathe Republic of Macedonia

0

10

20

30

40

50

60

70

80

Large banks Medium banks Small banks

Assets

Capital

Credits

Deposits

Large banks – assets above 15 billion denarsLarge banks – assets above 15 billion denars Medium banks – assets between 2-15 billion denarsMedium banks – assets between 2-15 billion denars Small banks – assets lower than 2 billion denarsSmall banks – assets lower than 2 billion denars

Enhancement of the banking Enhancement of the banking corporate governancecorporate governance

Amendments of the Banking Law:Amendments of the Banking Law:– Enhancement of the “fit and proper” criteria for Enhancement of the “fit and proper” criteria for

qualified shareholders;qualified shareholders;– Enhancement of the regulatory power of the NBRM Enhancement of the regulatory power of the NBRM

to revoke previously issued license to qualified to revoke previously issued license to qualified shareholdershareholder

– Introduction of two-tier corporate governance modelIntroduction of two-tier corporate governance model– Widening of the duties and responsibilities of the Widening of the duties and responsibilities of the

management bodiesmanagement bodies– Enhancement of the “fit and proper” criteria for Enhancement of the “fit and proper” criteria for

banks’ board membersbanks’ board members

Enhancement of the banking Enhancement of the banking corporate governance (con’t)corporate governance (con’t)

Amendments of the Banking Law (con’t):Amendments of the Banking Law (con’t):

– Expanding the ground under which the NBRM Expanding the ground under which the NBRM can revoke the license of a board membercan revoke the license of a board member

– More clear definition of duties and More clear definition of duties and responsibilities of Risk management Committee responsibilities of Risk management Committee and Audit Committeeand Audit Committee

– Enhancing the internal audit functionEnhancing the internal audit function– Expanding of the provisions related to Expanding of the provisions related to

accounting, financial reporting and external accounting, financial reporting and external auditaudit

Enhancement of the banking Enhancement of the banking supervision of the NBRMsupervision of the NBRM

Supervisory Development Plan - Risk Supervisory Development Plan - Risk based supervisionbased supervision

Supervisory Development Plan – Supervisory Development Plan – key objectiveskey objectives

– Standardization of the supervision approach;Standardization of the supervision approach;– Efficient allocation of supervisory resources;Efficient allocation of supervisory resources;– Enhanced transparency and consistency of risk Enhanced transparency and consistency of risk

analysis results;analysis results;– Development of supervisory strategies for Development of supervisory strategies for

individual banks and for the whole banking individual banks and for the whole banking sector;sector;

– Use of efficient corrective actionsUse of efficient corrective actions