Press Release No. 16/207

Press Release No. 16/207
May 10, 2016

On May 6, 2016, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation¹ with the Republic of San Marino.

San Marino’s economy remains in transition following the implosion of its offshore banking model in the aftermath of the global crisis. These shocks resulted in the loss of a third of output since 2008. Nonperforming loans increased to very high levels. The largest bank in the system has required 13 percent of GDP in 2012–14, and a new support operation equivalent to 3 percent of GDP is ongoing. A sound fiscal starting position allowed San Marino to use public finances to support the economy, while deficits and debt remained at sustainable levels. The country also made important progress toward improving the business environment and international cooperation.

After six years in recession, the economy is bottoming out, reflecting the improved relations with Italy and stable bank deposits. As a consequence, modest positive growth is expected this year and over the medium-term. However, risks remain, as a weak financial sector continues to cloud the outlook.

Executive Board Assessment²

Executive Directors welcomed the recent recovery in economic activity, and noted that while the outlook is improving, significant challenges remain. To turn the current recovery into sustainable growth, they encouraged the authorities to press ahead with efforts to strengthen the banking sector, solidify fiscal buffers, and transition San Marino’s economy toward a new, more diversified growth model.

Directors emphasized the importance of rehabilitating the banking system and addressing the very large stock of nonperforming loans. They endorsed a comprehensive strategy based on stronger provisioning, asset quality reviews, and recapitalization, where needed, to help banks strengthen their balance sheets and place them in a stronger position to support the economic recovery. At the same time, Directors supported further efforts to address regulatory, legal, and tax impediments to facilitate the faster resolution of nonperforming loans.

Directors noted the repeated efforts at recapitalizing Cassa di Risparmio della Repubblica di San Marino (CRSM), and stressed the need to restore its soundness and profitability, including by making its current recapitalization contingent on a deeper reorganization of the bank that quickly brings the bank back to profitability.

Directors welcomed the authorities’ progress toward rebuilding fiscal buffers that have served the country well in the past. They considered a strategy aiming for a further fiscal adjustment of 1 percent of GDP over the next 4 years as appropriate to put public debt on a clear downward path while creating space to deal with adverse shocks. With a view to making room for higher capital expenditure, they supported measures to increase revenue, including through the introduction of a VAT system. In addition, efforts to contain the public sector wage bill and reform the pension system were encouraged. Directors shared the view that exploring external financing options could help break the bank-sovereign link, diversify funding sources, and provide an additional fiscal buffer.

Directors commended the authorities for their focus on improving international cooperation, the imminent completion of the AML-CFT national risk assessment, and the exchange of tax information starting in 2017. They noted that continuing and deepening recent efforts to improve the business environment and labor markets would help attract domestic and foreign investments that are needed to rebalance San Marino’s economy and promote robust growth.

San Marino: Selected Economic and Social Indicators, 2012–16

GDP per capita (2013): 56,112 U.S. dollars  Life expectancy at birth (2010): 83.2 years Population (December 2013): 31,460 persons     Literacy, adult (2008): 96 percent       Projection   2012 2013 2014 2015 2016   Activity and Prices           Real GDP (percent change) -7.5 -4.5 -1.0 1.0 1.1 Domestic demand -4.6 -2.9 … … … Final consumption 0.0 -1.4 … … … Fixed investment -13.0 -8.4 … … … Net exports (contribution to growth) -4.1 -2.3 … … … Exports -9.8 -6.6 … … … Imports -8.9 -6.1 … … … Employment (percent change) -2.6 -1.3 -0.8 … … Unemployment rate (average; percent) 6.9 8.1 8.7 … … Inflation rate (average; percent) 2.8 1.3 1.1 0.4 0.9 Nominal GDP (millions of euros) 1401.5 1357.1 1343.5 1363.3 1392.1 Public Finances (percent of GDP) 1/           Revenues 20.4 20.3 22.1 21.5 21.5 Expenditure 23.0 21.8 23.2 22.7 22.8 Overall balance -2.7 -1.5 -1.1 -1.1 -1.2 Government debt 15.4 21.6 22.9 23.7 24.4 Loans 7.1 14.3 14.9 15.8 16.7 Net account payables 8.3 7.3 8.0 7.9 7.8 Government deposits (millions of euros) 72.9 55.9 40.4 45.0 45.0 Money and Credit           Deposits (percent change) -6.3 -6.5 … … … Private sector credit (percent change) 11.4 -8.7 … … … Net foreign assets (percent of GDP) 38.4 47.1 … … … Commercial banks 21.9 31.8 … … … Central bank 16.5 15.2 … … … External Accounts (percent of GDP)           Balance of goods and services 21.6 21.7 … … … Exports 178.7 171.4 … … … Imports 157.1 149.7 … … … Gross international reserves (millions of U.S. dollars) 308.6 539.3 … … … Exchange Rate (average)           Euros per U.S. dollar 0.78 0.75 0.75 … … Real exchange rate vis-à-vis Italy 98.0 100.0 … … … Financial Soundness Indicators (percent) 2/           Regulatory capital to risk-weighted assets 8.8 13.6 13.0 … … Bad loans to total loans 9.6 13.9 15.3 … … Loan loss provision to total loans 3/ 13.3 11.5 11.8 … … Return on equity (ROE) -77.0 -7.5 … … … Liquid assets to total assets 16.1 15.3 16.5 … … Liquid assets to short-term liabilities 31.7 42.8 46.6 … …   Sources: International Financial Statistics; Sammarinese authorities; World Bank; and IMF staff calculations.   1/ For the central government. Does not include possible costs of future bank recapitalization. 2/ For 2014, latest available.           3/ Based on total loan loss provision, which covers nonperforming and performing loans.

San Marino: Selected Economic and Social Indicators, 2012–16     GDP per capita (2013): 56,112 U.S. dollars  Life expectancy at birth (2010): 83.2 years Population (December 2013): 31,460 persons     Literacy, adult (2008): 96 percent       Projection   2012 2013 2014 2015 2016   Activity and Prices           Real GDP (percent change) -7.5 -4.5 -1.0 1.0 1.1 Domestic demand -4.6 -2.9 … … … Final consumption 0.0 -1.4 … … … Fixed investment -13.0 -8.4 … … … Net exports (contribution to growth) -4.1 -2.3 … … … Exports -9.8 -6.6 … … … Imports -8.9 -6.1 … … … Employment (percent change) -2.6 -1.3 -0.8 … … Unemployment rate (average; percent) 6.9 8.1 8.7 … … Inflation rate (average; percent) 2.8 1.3 1.1 0.4 0.9 Nominal GDP (millions of euros) 1401.5 1357.1 1343.5 1363.3 1392.1 Public Finances (percent of GDP) 1/           Revenues 20.4 20.3 22.1 21.5 21.5 Expenditure 23.0 21.8 23.2 22.7 22.8 Overall balance -2.7 -1.5 -1.1 -1.1 -1.2 Government debt 15.4 21.6 22.9 23.7 24.4 Loans 7.1 14.3 14.9 15.8 16.7 Net account payables 8.3 7.3 8.0 7.9 7.8 Government deposits (millions of euros) 72.9 55.9 40.4 45.0 45.0 Money and Credit           Deposits (percent change) -6.3 -6.5 … … … Private sector credit (percent change) 11.4 -8.7 … … … Net foreign assets (percent of GDP) 38.4 47.1 … … … Commercial banks 21.9 31.8 … … … Central bank 16.5 15.2 … … … External Accounts (percent of GDP)           Balance of goods and services 21.6 21.7 … … … Exports 178.7 171.4 … … … Imports 157.1 149.7 … … … Gross international reserves (millions of U.S. dollars) 308.6 539.3 … … … Exchange Rate (average)           Euros per U.S. dollar 0.78 0.75 0.75 … … Real exchange rate vis-à-vis Italy 98.0 100.0 … … … Financial Soundness Indicators (percent) 2/           Regulatory capital to risk-weighted assets 8.8 13.6 13.0 … … Bad loans to total loans 9.6 13.9 15.3 … … Loan loss provision to total loans 3/ 13.3 11.5 11.8 … … Return on equity (ROE) -77.0 -7.5 … … … Liquid assets to total assets 16.1 15.3 16.5 … … Liquid assets to short-term liabilities 31.7 42.8 46.6 … …   Sources: International Financial Statistics; Sammarinese authorities; World Bank; and IMF staff calculations.   1/ For the central government. Does not include possible costs of future bank recapitalization. 2/ For 2014, latest available.           3/ Based on total loan loss provision, which covers nonperforming and performing loans. 1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. 2 At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm.