Quarterly revision of the macroeconomic projections

GovernorDimitar Bogov

August, 2012

CONTENTS

Macroeconomic projections for 2012 and 2013

Assumptions from the external environment

Basic macroeconomic scenario for 2012 and 2013

Comparison with the previous projection

Projection risks

Effects on the monetary policy

Macroeconomic projections for

2012 and 2013 external assumptions

− During the last three months, the risks on the financial markets

and the problems with the debt crisis in the Euro area increased again;

− The economic prospects for the global economy deteriorated again, emphasizing the downward risks related to the projections;

− New deterioration in the forecasts for the economic performances of the most important trading partners of the Macedonia, in comparison with the preceding projection;

− The foreign demand trajectory for Macedonian products remains the same as in the previous projection – decrease in 2012 and moderate rise in 2013, but now with severer drop in 2012 and smaller rise in 2013.

Foreign effective demand

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2010 2011 2012 2013

Foreign effective demand(annual growth rates, %)

April 2012 July 2012

0.7

-1.0

0.5

-1.2

0.0

0.9

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

2010 2011 2012 2013

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

Croatia

Bulgaria

Serbia

Netherlands

Italy

Spain

Greece

Germany

Belgium

Foreign effective inflation

− The foreign effective inflation is lower compared to the expectations

– estimates for smaller pressures on the domestic prices through the foreign inflation in 2012 compared to the preceding projection;

− Moderate acceleration in 2013, on the backdrop of demand recovery and possible pressures of the food prices – upward revision of the foreign effective inflation for 2013 compared to the previous projection.

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013

Foreign effective inflation(annual rates, %)

April 2012 July 2012

1.3

1.4

2.3

0.8

4.3

2.2

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2010 2011 2012 2013

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

Bulgaria

Austria

U.S.

Slovenia

Serbia

Italy

Croatia

Greece

Germany

France

Commodity prices

− The expectations for worse economic performances create downward pressures on part of the export and import prices;

− Downward revision of oil and metal prices relative to the previous projection;

− Estimations for decrease in the metal prices in 2012 and their stabilization in 2013;

− The oil prices dynamics in 2012 is upwards – the price level is expected to decrease in 2013;

− Large upward correction with the food prices, compared to the preceding projection, because of the negative shock on the supply side.

Commodity prices

annual changes, %

Exchange rate

USD/ EURCrude oil Crude oil

Export metal price index

Nickel price Copper price

(increase = appreciation

of EUR)

(USD per barrel)

(EUR per barrel)

(EUR based, 2005=100)

(USD per metric tonne)

(USD per metric tonne)

Forecast July 2012 2011 5.0 39.3 32.6 5.5 5.0 17.0

2012 -8.8 -4.6 4.6 -4.5 -24.8 -10.2

2013 -1.9 -7.7 -5.9 -0.7 -2.8 -2.3

Forecast April 2012 2012 -3.7 7.5 11.7 -6.6 -20.4 -5.4

2013 0.0 -5.6 -5.6 -1.0 -1.6 0.2

-20.0

-10.0

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

Q1

2011 Q2

Q3

Q4

Q1

2012 Q2

Q3

Q4

Q1

2013 Q2

Q3

Q4

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

July 2012

April 2012

-40.0

-20.0

0.0

20.0

40.0

60.0

80.0

100.0

Q1

2011 Q2

Q3

Q4

Q1

2012 Q2

Q3

Q4

Q1

2013 Q2

Q3

Q4

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

July 2012

April 2012

Foreign interest rate

− Further decrease in the Euribor, in conditions of threats for new

recession in the Euro area;

− Decrease in the ECB interest rate in July 2012;

− Downward revision of the foreign interest rate relative to the preceding projection;

− Expectations for slight increase in the following period, caused by the possible inflationary pressures arising from the monetary loosening undertaken so far.

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

2.0

2010 2011 2012 2013

Euribor - 1 month(quarterly average, in %)

July 2012 April 2012

Macroeconomic projections

for 2012 and 2013 GDP

− Downward revision of the foreign demand and poor performances in the first quarter of the year;

− Downward revision of the GDP projection in 2012 from 2% to about 1%;

− Gradual recovery in 2013 (increase of 3%, compared to 3.7% in April projection), underpinned by the improved environment, structural changes and government investments.

-0.9

1.83.0

2.0

3.7

-1.0

2.83.3

1.0

3.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2009 2010 2011 2012 2013

GDP(annual growth rate, in %)

April 2012 July 2012

Macroeconomic projections for 2012 and 2013

GDP

− Reduced activity of the export sector in 2012 and recovery in 2013, given anticipated large effect of the new capacities activity on the export potential;

− Moderate domestic demand in 2012 and strengthening in 2013, backed by the announced foreign investments and public investments;

− Reduced import pressures in 2012 and their new intensification in 2013, in line with the intensified domestic demand.

Annual growth rates (in %)

period GDP

Household final

consumption

General government

final consumption

Gross capital

formation Export ImportDomestic demand Net Export

2009 -1.0 -4.7 0.6 0.5 -16.0 -14.1 -2.9 -10.7

2010 2.8 1.4 -2.0 -4.6 23.2 8.9 -0.3 -14.6

2011 3.3 4.1 -2.8 19.5 12.0 14.8 6.1 21.4

2012 1.0 1.7 1.0 -1.3 -2.9 -1.9 0.9 0.4

2013 3.0 1.9 2.5 8.0 12.4 9.9 3.3 4.6

Contributions to annual growth (in p.p.)

period GDP

Household final

consumption

General government

final consumption

Gross capital

formation Export ImportDomestic demand Net Export

2009 -1.0 -3.8 0.1 0.1 -6.9 9.5 -3.6 2.6

2010 2.8 1.1 -0.4 -1.2 8.4 -5.2 -0.4 3.2

2011 3.3 3.2 -0.5 4.5 5.2 -9.1 7.2 -3.9

2012 1.0 1.3 0.2 -0.4 -1.4 1.3 1.1 -0.1

2013 3.0 1.5 0.4 2.1 5.6 -6.6 4.0 -1.0

Macroeconomic projections

for 2012 and 2013 balance of payments’ current account

− High increase in the inflows from the currency exchange market in the first half of 2012 (48% annually) – high confidence in the domestic currency;

− Estimates for gradual private transfers deceleration until the end of 2012 and 2013;

− Stable trade deficit in 2012 and moderate narrowing in 2013;− Minor movements of the current account deficit in 2012 and

2013.

% of GDP 2009 2010 2011 2012 2013

Current account balance -6.8 -2.1 -2.7 -2.9 -3.0

of which:

Trade balance -23.3 -20.8 -22.3 -22.2 -21.5

Current transfers, net 16.9 19.4 19.8 20.0 18.9

Macroeconomic projections

for 2012 and 2013 capital inflows

− Downward revision of the capital inflows in 2012, given lower debt-creating inflows and lower foreign investments;

− Similar level of capital inflows also in 2013, given net repayments of government debt and higher foreign direct investments;

− Moderate increase in the foreign reserves in 2012 and 2013 and their maintenance around the adequate level.

% of GDP 2009 2010 2011 2012 2013

Capital flows, without official reserves 6.2 1.8 6.5 3.4 3.5

of which:

Direct Investments, net 2.0 2.2 4.0 2.0 3.0

Net borrowing of General Government 2.7 0.5 4.9 1.0 -0.4

Macroeconomic projections

for 2012 and 2013 inflation

− The average inflation rate in the first half of 2012 is 2.3%;− The average inflation in 2012 and 2013 is expected to gravitate

around 2.2%;− Absence of demand pressures – prolonged closure of the negative

output gap to the middle of 2014;− Upward pressures of the oil prices in 2012 and their depletion in

2013;− The world food prices move upwards in 2012 and 2013, because of

the supply shock;− Effect of the increase in the regulated prices on the general price

level.

-4

-3

-2

-1

0

1

2

3

4

5

2009 2010 2011 2012 2013

Output gap and Inflation (in %)

Output gap Inflation

Macroeconomic projections

for 2012 and 2013 credit growth

– The credit support in the first half 2012 is larger than expected (7.5% annually, compared to 6.6%), given relaxed monetary conditions and relatively stable risk perceptions by the banks;

– Moderate upward revision of the credit growth to 8% in 2012 and about 10% in 2013, given further deposit growth and disposable foreign sources of funding;

– The banking system continues registering high capital adequacy ratio (17.5%), high liquidity and relatively stable share of the nonperforming placements (9.9%) in the first quarter of 2012.

3.0

4.0

5.0

6.0

7.0

8.0

9.0

10.0

11.0

12.0

2009 2010 2011 2012 2013

Total loans(annual growth rates, in %)

July 2012 April 2012

Comparison with the previous projection

Smaller GDP growth – revision from 2% to approximately 1% for 2012;

revision from 3.7% to 3% for 2013

- weaker initial conditions and worsened foreign demand projections;

- downward correction of all GDP components;

- structural changes and public investments – factor for relatively fast recovery and

smaller dependence of the short-term growth on the situation in Europe;

- the credit support is larger than expected in conditions of relaxed monetary conditions

and stable risk perceptions.

The inflation projection is without larger changes but with

more evident upward risks - higher initial conditions and higher food prices;

- lower world oil prices and deeper negative output gap.

The external position is less favorable – smaller capital inflows - smaller current account deficit because of better private transfers;

- large downward revision to the capital flows, in circumstances of worsened perceptions of

the investors and deteriorated conditions for external financing;

- th - -Foreign reserves remain around the adequate level.

Projection risks

−The projection assumes short-term effects of the deteriorated global environment, which would exhaust in 2013, with certain risks:

- The possible persistence or deepening of the Euro area crisis may reflect on the growth dynamics of the Macedonian economy, as well as on the capital flows dynamics;

- More apparent risks of price shocks on the supply side, with potential transmission effects on the other prices.

Effects on the monetary policy

– Moderate economy growth – the economy will be below the potential in the following two years;

– Instable environment and enduring risks, but with positive impulse from the new private and public investments;

– The inflation is within the acceptable limits, but with present upward risks;

– The external position is stable, with positive effects of the new capacities, feeble domestic demand, solid private transfers and assessment for sufficient capital inflows;

– The foreign reserves are around the adequate level;

– Current monetary conditions are assessed as adequate, i.e. we are retaining the same interest rate;

– The need for further regular monitoring of the economic developments, as well as timely reaction, if needed, remains.