Revision of the macroeconomic projections

- October 2015 -

November, 2015

Anita Angelovska BezoskaVice Governor

CONTENTS

Macroeconomic projections for the period 2015 - 2017

• Key exogenous assumptions for the projections

• Baseline macroeconomic scenario for the period 2015 – 2017

External environment

Slower global growth than expected due to slow-down in the economic activity in the emerging countries and slower than expected recovery in advanced countries.

Downward risks to the projected growth more pronounced compared to April projection, mainly related to:

• Higher risk aversion and increased volatility in the global financial markets • Sharp and unexpected changes in primary commodities prices • The risks for stagnation and persistent low inflation in advanced countries still present

-0.3

-0.2

-0.1

0

0.1

0.2

0.3

-6

-4

-2

0

2

4

6

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Global growth and growth in the euro zone (annual changes in %)

World changes in p.p. (right scale) EA changes in p.p. (right scale)

World October 2015 EA April 2015

World April 2015 EA October 2015

Foreign demand

Foreign effective demand growth rate in 2015 unchanged compared to April

Slight downward revision for 2016, on the backdrop of the weaker prospects for the Greek economy

The expectations for gradual recovery of the foreign demand unchanged

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2013 2014 2015 2016 2017

Decomposition of foreign effective demand growth(weighted contributions to annual foreign effective demand growth rates)

Slovenia

Croatia

Bulgaria

Serbia

Netherlands

Italy

Spain

Greece

Germany

Belgium

-0.2

0.8

1.31.8

-0.1

0.8

1.31.4 1.5

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2013 2014 2015 2016 2017

Foreign effective demand(annual growth rates, in %)

April 2015 October 2015

Foreign effective inflation

Foreign effective inflation forecast – minor downward correction relative to the April forecast

Lower pressures on domestic prices than previously expected

1.9

0.0 0.0

1.51.9

0.0-0.1

1.4

1.7

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2013 2014 2015 2016 2017

Foreign effective inflation(annual rates, in %)

April 2015 October 2015 -1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

3.0

2013 2014 2015 2016 2017

Decomposition of foreign effective inflation(contributions to annual foreign effective inflation rates)

Bulgaria

Austria

Slovenia

Serbia

Italy

Croatia

Greece

Germany

France

World prices of primary products

The environment of low commodity prices persists further, with prices of primary commodities lower than expected in April

Lower import pressures on domestic prices in 2015-2016 compared to the previous forecast

Terms of trade picture more mixed: lower energy and food prices –favorable change; lower metal prices – adverse shock for the terms of trade

-40

-30

-20

-10

0

10

20

30

40

2010

2011

2012

2013

2014

2015

2016

Price of Brent Crude Oil, in EUR(annual growth rates, %)

October 2015

April 2015

-30

-10

10

30

50

70

2010

2011

2012

2013

2014

2015

2016

Wheat price, in EUR

(annual growth rates, %)

October 2015

April 2015

-60

-40

-20

0

20

40

60

80

100

2010

2011

2012

2013

2014

2015

2016

Corn price, in EUR(annual growth rates, %)

October 2015

April 2015

-20

-10

0

10

20

30

40

50

60

2010

2011

2012

2013

2014

2015

2016

Copper prices, in EUR(annual growth rates, %)

October 2015

April 2015

-20

-10

0

10

20

30

40

50

60

2010

2011

2012

2013

2014

2015

2016

Nickel prices, in EUR(annual growth rates, %)

October 2015

April 2015

GDP

The assumptions on the fundamentals in the growth forecast unchanged: continuation of the strong government

investment incentive positive effects of the existing and

expected FDI-based facilities continuation of the positive trends in the

labor market solid credit support

Moderate acceleration of growth over the forecasting period (2015-2017) More growth conducive external

environment Further positive effects of the structural

changes on the export sector More stable domestic environment

4.14.5

3.23.5

4.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2010 2011 2012 2013 2014 2015 2016 2017

GDP(annual growth rates, in %)

April 2015 October 2015

Economic growth for 2015-2016 has been revised downwards due to the worsen global prospects and higher uncertainty in the domestic economy connected with the political instability…

…yet, we expect solid growth over the forecasting period ranging from 3.2% in 2015 to 4% in 2017

GDP expenditure components

GDP growth driven mainly by export and investments, and private consumption in addition

Moderate growth in public consumption in 2016-2017, in accordance with the medium term fiscal strategy

Higher exports and domestic demand will result in increase in imports over the projection period leading to negative contribution of net exports in 2016-2017.

FORECAST COMPARISONCONTRIBUTIONS TO ANNUAL GROWTH

Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 Apr.15 Oct.15 Apr.15

2015 1.4 2.2 0.7 2.7 1.6 2.7 -1.1 -3.7 0.6 0.2 2.7 5.1 0.5 -1.0 3.2 4.12016 1.6 2.2 2.8 2.9 2.9 3.1 -4.0 -3.8 0.2 0.2 4.6 5.3 -1.1 -0.7 3.5 4.52017 2.2 2.1 2.0 -2.5 0.2 4.5 -0.5 4.0

CONSUMPTION GDPINVESTMENTS EXPORTS IMPORTSGOVERNMENT CONSUMPTION

Domestic demand

Net export

Consolidated Budget of Central Government and Funds

-4.2 -3.6 -3.3 -3.0

-10.0

-5.0

0.0

5.0

10.0

2014 act. 2015 proj. 2016 proj. 2017 proj.

Budget deficit financing (in % of GDP)

domestic debt principal repayment external debt principal repaymentgovernment securities government depositsforeign loans privatization receiptsbudget balance

14.9 16.3 15.9 15.6 14.6 14.1 13.7 13.5 13.4 14.0 13.2

13.4 11.6 10.3 9.4 9.4 9.3 9.2 10.3 10.6 9.9 10.1

55.6 60.7 60.9 60.8 61.3 63.2 63.5 61.3 60.7 63.7 60.9

1.91.8 2.2 2.3 2.7 2.9 3.0 3.3 3.5

3.83.0

14.3 9.6 10.7 11.9 12.0 10.4 10.5 11.7 11.9 8.6 12.8

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Budget expenditures structure (in %)

Capitalexpenditures

Interestpayments

Transfers

Goods andservices

Wages andsalaries

Macroeconomic projectionsStructural changes

79.4 77.1 77.471.7 72.8 72.4 71.3 70.5

69.6

69.1

16.5 16.515.4 15.3 15.7 15.7 14.9 15.0 14.7

14.4

25.4 25.8 23.827.7

30.025.1 27.3 27.1 29.0

29.8

35.831.0

36.842.0 43.0

40.746.0

46.1 47.347.4

57.0950.36

53.48 56.68 61.5253.94

59.50 58.75 60.6460.76

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Shares of real GDP components (in %)

Private cons. Government cons. Investment

Export Import

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

2007 2008 2009 2010 2011 2012* 2013* 2014*

2024 26

3429 28 25 27

80 76 74 66 71 72 75 73

Gross fixed capital formation structure by type of ownership

(in current prices, in %)

state private

*Data prepared according to ESA 2010. Source: SSO.

Labour market

14.7

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

employed

Contributions of individual sectors of activities to the total number of employees change in the period 2015-H1/ 2008 (in p.p)

other sectors of activities*

financial intermediation

transport and communications

hotels and restaurants

trade

construction

industry

agriculture

total economy (in %)

*Оther sectors of activities include: public administration and defence, compulsory social security, education, health and social work activities, activities of households as employers, as well as activities of extraterritorial organisations and bodies.

26.8

25

26

27

28

29

30

31

32

33

34

35

Q12008

Q3 Q12009

Q3 Q12010

Q3 Q12011

Q3 Q12012

Q3 Q12013

Q3 Q12014

Q3 Q12015

Unemployment rate (in %)

Source: State Statistical Office, Labor Force Survey

-2.0-1.5-1.0-0.50.00.51.01.52.02.53.0

2010 2011 2012 2013 2014 2015 2016 2017

Productivity and ULC(annual growth rates, in %)

Productivity ULC

Source: State Statistical Office and NBRM calculations

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2010 2011 2012 2013 2014 2015 2016 2017

Gross-wages and number of employees(annual growth rates, in %)

Nominal wages Employees

Source: State Statistical Office and NBRM projections

Inflation

Inflation forecast for 2015 and 2016 has been revised downward to around 0% and 1,5%...

…amid lower initial conditions and downward adjustments in the key exogenous assumptions Inflation is expected to gradually pick-up in 2016 and 2017. The point

forecast for the 2016 and 2017 stands at around 1.5% and 1.6%, respectively…

…driven by the import prices and the recovery in aggregate demand

-4

-3

-2

-1

0

1

2

3

4

5

6

2011 2012 2013 2014 2015 2016 2017

Output gap and inflation(in %)

Output gap (October 2015)

Inflation (October 2015) -4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2011 2012 2013 2014 2015 2016

Inflation rate(in %)

revisions (in p.p.)

Inflation (October 2015)

Inflation (April 2015)

Balance of payments - current account

Lower current account deficit, compared to the previous forecast, being a result of all of its components

Moderate current account deficit in the following three year period of bellow 2% of GDP on average

Decline in 2015, amidst lower energy deficit, positive impact of the new facilities, while the traditional segments were worse off

Mild widening of the current account within the next two years

Reduction of the relative share of private transfers in GDP Larger primary income deficit No major changes in the trade deficit

-3.9

-7.9

-2.4-0.4

-6.9

-12.7

-6.8

-2.0 -2.5 -3.2-1.7 -0.8 -0.5

-1.9 -2.4

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Current account of the balance of payments(% of GDP)

Trade balance of goods and services Primary income Secondary income Current account deficit

October 2015

-1.6-3.1

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2015 2016

April 2015

Balance of payments – trade balance

Relatively stable trade deficit, with… …larger import pressures, driven by investments mainly and export-related imports, but

also… …diverse performances of the traditional export sector, but general recovery expected - positive impact of structural changes to be kept and strengthen further - more conducive global environment

-12.7 -18.0 -18.6 -15.0 -14.3 -14.1 -12.6 -12.2 -12.6 -12.7 -12.7

-9.6

-11.0 -6.5

-7.5 -10.0 -11.6-9.0 -8.5 -6.6 -6.7 -6.5

-22.3

-29.0

-25.1

-22.5

-24.4-25.7

-21.5-20.6

-19.2 -19.3 -19.2

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Trade balance*(% of GDP)

Non-energy trade balance Energy trade balance Trade balance

October 2015

* According to foreign trade statistics

-12.5

-13.1

-6.6

-6.9

-19.1

-20.0

-35.0

-30.0

-25.0

-20.0

-15.0

-10.0

-5.0

0.0

2015 2016

April 2015

Balance of payments - current account

Export diversification by products and trading partners

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

45,0

Q1

2010 Q2

Q3

Q4

Q1

2011 Q2

Q3

Q4

Q1

2012 Q2

Q3

Q4

Q1

2013 Q2

Q3

Q4

Q1

2014 Q2

Q3

Q4

Q1

2015 Q2

VII

+VII

I

Export by the new companies in the technological industrial development zones

(share of total export, in %)

0,0

5,0

10,0

15,0

20,0

25,0

30,0

35,0

40,0

45,0

Bul

garia

Ger

man

y

Gre

ece

Ital

y

Cro

atia

Oth

er E

U c

ount

ries

Kos

ovo

Bos

nia

and

Her

zego

vina

Serb

ia

Oth

er c

ount

ries

Share of export by trading partners in total export (in percent)

2009 2010 20112012 2013 2014I-VIII 2015

* Starting from 2013 Croatia is included in the EU countries.

70,4

51,6

7,1

4,1

10,9

34,7

11,5

9,6

0,0 20,0 40,0 60,0 80,0 100,0

2004

2005

2006

2007

2008

2009

2010

Average 2004-2010

2011

2012

2013

2014

I-VIII 2015

Average 2011-2015

Export structure(share in total export, %)

Traditional export products Energy High value added export products Other

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011 2012 2013 2014 I-VII I2015

7,4 7,8 10,5 9,8 8,3 8,521,1 15,8 10,2

5,0 6,8

6,47,7

6,4 6,6

6,55,4

5,3

4,87,8

7,5 7,78,7 6,4

2,5

1,81,2

3,94,6

6,3 11,4 16,7 16,9 19,521,4

22,7

44,640,0

28,529,6 27,5 25,9 24,0

19,318,8

4,4 4,75,7

5,9 7,9 9,913,3

21,2 24,2

23,5 22,5 27,6 21,4

18,7 19,4 19,218,2 17,1

Share of export by categories in total export (in percent)

Miscellaneous manufactured articlesother transport equipmentRoad vehiclesElectrical machinery, apparatus and appliances, n.e.s., and electrical parts thereof

Chemical products

Balance of payments - financial account

The structure of capital inflows in the 2015-2017 period, mainly a combination of foreign investment and borrowing of the public sector

After the growth of the gross external debt in 2014, a stabilization expected in the period ahead

Expected increase in foreign reserves in the next three years with adequacy ratios remaining in the safe zone

5.1

7.6

9.4

6.0

9.7

11.9

6.4

2.8

6.8

4.7

0.8

5.2

-0.6

1.8

4.1

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Financial account, net flows(% of GDP)

Direct investment Financial account

October 2015

-0.3

4.3

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

2015 2016

April 2015

Foreign reserves

Foreign reserves adequacy indicators remain in the safe zone

25,022,1 23,6 24,1

27,4 28,9

24,628,6

26,5 25,1 25,5

4,0

4,94,6

4,1

4,95,2

4,3

5,1

4,74,4 4,3

1,1 0,9 0,9 1,01,2

1,0 1,1 1,1 1,3 1,3 1,3

,00

1,00

2,00

3,00

4,00

5,00

6,00

,00

5,00

10,00

15,00

20,00

25,00

30,00

35,00

2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Foreign reserves adequacy indicators

Stock of foreign reserves (% of GDP)

Monthly coverage of following year's imports of goods and services

Foreign reserves/ short-term debt, with residual maturity

October 2015

Gross external debt

External debt ratios expected to stabilize in the forthcoming period

45,450,2

45,7 46,6 48,855,9 57,8

61,266,1 64,3

70,2 69,0 68,9 69,8

0,0

20,0

40,0

60,0

80,0

100,0

120,0

140,0

160,0

180,0

200,0

0,0

10,0

20,0

30,0

40,0

50,0

60,0

70,0

80,0

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Gross external debt indicators

Gross external debt/ GDP (left scale) Gross external debt / Export of goods and services (right scale)

October 2015

Credit growth Credit support to the private sector proceeded in 2015, albeit at a slightly

slower pace compared to the forecast Slower than expected growth in deposits, amidst heightened foreign and domestic

risks The downsize of the sources of financing, and the unfavorable balance of risks resulted

in lower credit forecast compared to April Yet, the new forecast still envisages solid credit growth of 7.7% and 7.3% in 2015 and

2016 respectively and acceleration 8.3% in 2017 Further increase in financial intermediation: loans/GDP in 2017 around 52.4% (an

increase of around 11 percentage points in the crisis period after 2008) The banking system remains stable, with high capital adequacy ratio (16.2% as of

June 2015), high liquidity and relatively stable share of non-performing loans (11.5% as of June 2015)

*Negative net-percentage is presenting easing of the credit conditions and decreasing credit demand. Positive net-percentage is presenting tightening of the credit conditions and increasing credit demand.

Monetary policy and macro-prudential measures during 2015

– Preventive measures towards Greece:

• In June 2015, NBRM introduced measures for prevention of capital outflows to Greece, that are time-bound (valid for 6 months) and with the role to counter possible contagion risks from Greece.

– Reserve requirements:

• In August 2015, NBRM has modified the reserve requirements setup by decreasing the reserve ratio on households deposits in Denar with contractual maturity over one year from 8% to 0%.

Monetary policy implications

Latest macroeconomic scenario for 2015-2017 does not change fundamentally the monetary policy environment:

Lower, but still solid economic growth supported by domestic banks’ credit activity

Inflation to remain low and stable

“Benign” external position assuming moderate increase in CA deficit and adequate level of gross foreign reserves, enabling sufficient buffers against potential unforeseen shocks

Risks remain skewed to the downside related to rising global risks and domestic political uncertainties

Further monetary adjustments contingent on the external sector developments and the gross foreign reserves dynamics

Summary

Expected growth for 2015-2016 has been revised downwards due to worsen global prospects and higher uncertainty in the domestic economy connected with the political instability

Yet the new forecast continues to envisage strong growth rates, driven by exports and investment

Downward adjustment of the inflation projection, due to supply side factors

Smaller current account deficit compared to the April projections. After the narrowing in 2015, we retain the assessments for a moderate widening in the next two years (2016-2017)

Gross foreign reserves are expected to mildly increase over the 2015-2017 period, and remain at an adequate level

Sensitivity of the scenario to possible changes in the global economic environment and potentially rising political instability at home