FYR Macedonia – 2010 Article IV Consultation Concluding Statement

Overview

1. Economic prospects in Macedonia have improved over the past year. Although the recovery of growth has been slower than expected, the improvement in external conditions and sound balance sheets in the banking system provide a solid platform for a more robust upturn in 2011. External risks remain high, in light of the unusual levels of uncertainty regarding the economic and financial outlook in Europe. Against this background, the authorities’ macroeconomic policies should strike an appropriate balance between supporting economic recovery and guarding against risks.

Macroeconomic and financial outlook

2. The mission expects output to grow somewhat more than 1 percent in 2010, as activity is picking up in the second half of the year. We expect consumption to strengthen in the second half, adding to the rebound in exports that has been taking place. This outlook is consistent with the upturn that is visible in indicators such as retail sales and consumer credit. Inflation is expected to be around 1.5 percent. The momentum in the second half of the year should carry over into next year, leading to growth in the 3-3½ percent range in 2011. Factors supporting this outlook include the recovery in the economies of Macedonia’s trading partners, lower interest rates, growing bank deposits, and ample liquidity in the banking system. Inflation in 2011 is expected to rise to around 2.5 percent, due in part to higher food and fuel prices.

3. The mission expects the current account deficit to narrow to 3½-4 percent of GDP in 2010, due both to a smaller trade deficit and to strong private transfers. This is a rapid adjustment from the large deficit of two year ago and has supported a stabilization of foreign exchange reserves. For 2011 and over the medium term, the mission expects continued growth in exports, which should be supported by strong metals prices and higher capacity resulting from past foreign direct investment. Import growth is also expected pick up as the economy recovers. The mission expects the current account deficit to widen modestly next year to 4½-5 percent of GDP and to stabilize over the medium term at levels that can be financed largely by foreign direct investment.

4. The banking sector appears to be in sound shape. Capital ratios have remained above 16 percent, well over the regulatory minimum, with tier 1 capital at over 13 percent. Non-performing loans have risen during the past two years but have been largely provisioned. Loans are funded through domestic deposits, which are a relatively stable source of financing, and reliance on foreign financing is low. Finally, bank liquidity is strong, which together with ample capital and growing deposits, puts the banking system in a good position to increase lending to the economy.

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