## 1smrea2024002-print-pdf

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---

### Executive summary
- Notwithstanding important progress in increasing liquidity and reducing NPLs, San Marino’s banking system remains vulnerable and faces near-term challenges from recognizing legacy losses.
- The EU association agreement will subject the banks to higher compliance costs and increased competition from Italian banks, making it key to improve low structural profitability.
- Comparison with Italian regional peers highlights gaps in asset quality, capital adequacy, and cost efficiency.
- Individual banks can boost profits by reducing operating costs and increasing the share of income-generating assets; if within-bank consolidation is insufficient, system-wide consolidation can be considered to achieve economies of scale.

### Background and recent sector developments
- The sector has undergone prolonged deleveraging since the global financial crisis: banks’ total assets have gradually declined below 300 percent of GDP from over 600 percent of GDP in 2009.
- During 2010-14, banks’ gross value added to GDP declined by more than 80 percent and has remained flat.
- Total employment in the banking sector and the number of bank branches have declined by more than 40 percent respectively since 2010.
- Average personnel costs per employee went down to around 90 percent of the regional peers.
- Banking sector made losses until 2021; recent years’ profits are still low compared to other EU countries.

### Peer selection and data scope
- San Marino currently has four banks: BAC, BSI, BSM and CRSM, with assets levels ranging from 0.8 to 1.5 billion euro.
- Major sources of financing are customer deposits; major income sources are interest from customer loans and securities portfolios.
- 27 Italian regional banks were identified as peers; their total assets have a median of 1.5 billion euro and are located mostly within a two-hour drive from San Marino.
- Benchmark comparisons use operating profits that exclude one-off profits such as revaluation of owned real estate.

### Key analytical findings
- Profitability and capital
  - Most San Marino banks are less profitable than Italian peers: three out of four San Marino banks rank the lowest in profitability compared with Italian peers under the operating-profit measures.
  - Italian regional banks generally have higher capital adequacy ratios; combined with higher ROE, this indicates Italian peers have sufficient capital and retained profits to support credit growth, while most San Marino banks are capital constrained.
- Asset quality and income-generating assets
  - Three San Marino banks have the lowest income generating assets over total assets and over total funding compared with peers.
  - Sizable NPLs and fixed assets recovered from NPLs need resolution; deferred tax assets yield little income when bank profits are low.
  - CRSM’s income generating assets include a €455 million state perpetual bond carrying a fixed interest rate of 1.75 percent (while the country’s Eurobond carries a coupon of 6.50 percent).
- Funding costs
  - Funding costs of San Marino banks are largely aligned with Italian peers; confidence improved after the Eurobond issuance in 2021.
  - San Marino issued €340 million Eurobond in 2021 with an interest rate of 3.25 percent; the bond was rolled over in 2023 with a maturity of 3.75 years and an interest rate of 6.50 percent.
- Cost efficiency
  - In terms of intermediation-margin-to-operating-expense ratio, three San Marino banks are near the lower end of the distribution, while the other one is the most efficient bank in the sample.
  - Personnel costs per employee are broadly in line with Italian peers; however, most San Marino banks employ more staff relative to income-generating assets:
    - Three out of four San Marino banks are on the higher end of number of employees to income generating assets.
    - One bank is in the left tail (fewer employees per income-generating asset).
  - Other operating expenses (excluding personnel and credit impairment) are broadly in line with Italian peers, though one San Marino bank is close to the 75th percentile indicating room for improvement.

### Quantified improvement potential
- Targeting cost structures consistent with Italian regional peers can significantly improve profitability:
  - The analysis suggests one Sammarinese bank could improve ROE by more than 8 percent from cost reductions; two other banks could improve ROE by 2 to 3 percent.
- Recommended cost and balance-sheet targets:
  - Reduce personnel costs by 20 to 30 percent for three banks (targets specified per bank in the analysis).
  - Reduce other operating costs by 5 to 15 percent for two banks; remaining banks already have other operating costs below most Italian peers.
  - Increase the share of income-generating assets and improve asset quality to raise net interest income and capital buffers.
- Structural sector adjustment:
  - The number of bank branches needs to be reduced by more than two thirds to reach the EU level of branches per capita.
  - Recent banking sector collective agreements restarted wage growth to achieve cumulative wage growth of 9.5 percent by 2025 (due to the previous agreement expiring and not renewed for 13 years).

### Policy recommendations
- Cost and operational measures
  - Target the ratio of personnel expenses over income generating assets and the ratio of other operating expenses over income generating assets to the corresponding 25th percentile of Italian regional banks.
  - Rationalize staff levels to achieve the suggested personnel cost reductions; note potential near-term severance costs and labor-law constraints.
  - Reduce other operating costs where above peer percentiles; consider selling or renting out branch properties to improve profits and liquidity.
- Balance sheet and capital quality
  - Increase the share of income-generating assets through NPL recovery measures: update the insolvency framework and consider relaxing constraints on nonresident ownership of real estate to facilitate market activity.
  - Remove barriers on shareholding structures to attract external capital.
  - The state should gradually replace the perpetual bond in CRSM with marketable instruments to increase capital quality in line with EU regulations.
- System-level measures
  - Consider system-wide consolidation if within-bank cost reductions are insufficient to restore competitiveness and achieve economies of scale.

### Conclusion (banking sector)
- Improving competitiveness is urgent and should be accomplished well ahead of the 15-year time frame granted by the EU association agreement.
- Main gaps to address: asset quality, capital adequacy, and cost efficiency.
- While income generating assets have shrunk considerably, operating costs—particularly personnel costs—have not adjusted sufficiently; resolving these issues quickly is critical to mitigate potential capital needs from NPL securitization and calendar provisioning in the near-term.
- In the long term, San Marino banks need to be competitive in cost efficiency, grow income generating assets, and manage risks to take advantage of the opening of the financial market.

### Balance sheet data and accounting adjustments
- Italian and Sammarinese banks’ balance sheet data is sourced from Fitch Connect.
- Due to difference in accounting rules, Sammarinese banks’ other operating expense includes value adjustments related to financial leasing assets which are treated as interest expense by Italian banks.
- Adjustment approach:
  - Data adjusted to be consistent with accounting practices in Italy, using value adjustments of financial leasing assets recorded in annual reports.
- Definitions used:
  - Return on equity:
    - Computed as the ratio of operating profit over total equity.
    - Operating profit from Fitch Connect excludes non-recurring income and non-recurring expense.
    - Operating profit = net interest income + total non-interest operating income − loan and credit impairment charge.
  - Income generating assets:
    - “Total Earning Assets” from Fitch Connect.
    - Defined as the sum of net loans, loans and advances to banks, total securities, insurance assets, investments in property and other earning assets.
  - Total funding:
    - “Total Funding” item from Fitch Connect.
    - Defined as the sum of total deposits, money-market and short-term funding, total long-term funding, derivatives liabilities and trading liabilities.

### The EU Association Agreement: main implications for San Marino
- Nature and status:
  - The EU Association Agreement is a treaty regulating San Marino‘s participation in the EU Single Market.
  - Negotiations started in 2015 and concluded successfully in December 2023.
  - With only a few pending technical issues, the agreement is expected to be ratified and to enter into force next year.
  - The agreement promotes the free movement of goods, services, capital, and people.
- Institutional framework and adaptations:
  - The agreement sets legal provisions, dispute resolution procedures, and independent supervision of various markets.
  - Incorporates specific adaptations — transitional periods and tailored implementations — recognizing the unique characteristics of small states.

- Free Movement of Goods:
  - San Marino is already highly integrated in the EU goods market due to Cooperation and Customs Union Agreement, 1991.
  - Expected benefits: reducing red tape and transaction costs, facilitating certifications and legal dispute resolution, allowing San Marino products to circulate freely without discrimination.
  - San Marino can set its own product certification bodies recognized by the EU.
  - Adaptation negotiated: state-owned utility company to maintain the monopoly on the supply of electricity and gas until end 2030 (after 2030 the adaptation can be extended).

- Freedom to Provide Services:
  - Legal provisions will increase access to the EU market and improve Sammarinese service-regulatory institutions.
  - Required administrative improvements: create a digital one-stop shop, ensure rights to information, implement the Internal Market Information System (IMI).
  - Transition periods: 1½ to 3 years for administrative/authorization changes.

- Integration of Financial Services:
  - San Marino must transpose EU financial services regulation and supervision practices within 15 years at the latest.
  - Authorities consider the majority of financial sector segments will benefit from opening to the European single market in a considerably shorter time.
  - Integration can occur at different times across banking, insurance and reinsurance, asset management, and securities market segments.
  - Agreed transition process:
    - San Marino identifies which segments will be integrated gradually and which immediately.
    - San Marino submits a road map to meet the conditions for integration for each market to the European Commission (EC).
    - The EC will assess transposition and application of EU norms and supervisory infrastructure and decide on proceeding.
  - Conditions for integration (three conditions):
    - i) full transposition and application of relevant normative;
    - ii) the existence of good supervisory capabilities and arrangements;
    - iii) MoUs on supervisory cooperation, exchange of information and consultation between the San Marino and the EU supervisory authorities (EBA, ESMA, EIOPA, Authority for AML/CFT).
  - Expected outcome: resource intensive process that will strengthen San Marino’s financial system.

- Free Movement of Capital:
  - Can facilitate FDI and foster the real estate market in San Marino.
  - San Marino has no capital controls on financial flows; the agreement can streamline regulation for mergers and acquisitions.
  - Current real estate rule: nonresidents’ purchases beyond two real estate units need official authorization provided they have underlying interests in the country. Streamlining can help attract foreign investors to acquire up to two units.

- Free Movement of People:
  - Will allow Sammarinese citizens to settle in the EU; new non-national residents in San Marino will increase gradually.
  - A quota system for permanent residents will be set and reviewed every 10 years to preserve national identity.
  - Annual increase in residence permits for EU citizens = 3 percent of the active EU residents in San Marino in the previous year.
  - Table: Republic of San Marino: Quotas System for New Resident Permits
    - 2024: EU citizens residents in San Marino 3,335; Δ residents permit (3 percent quota) ...
    - 2025: EU citizens residents in San Marino 3,435; Δ residents permit (3 percent quota) +100
    - 2026: EU citizens residents in San Marino 3,538; Δ residents permit (3 percent quota) +103
    - 2027: EU citizens residents in San Marino 3,644; Δ residents permit (3 percent quota) +106
  - Free movement of workers:
    - San Marino labor market already relatively liberalized for cross-border workers; foreign worker flows expected to remain stable.
    - Recognition of professional qualifications: San Marino will recognize EU professional qualifications, and San Marino qualifications will be recognized by the EU.
    - Temporal adaptation: 2-year period negotiated on the recognition of professional qualifications to align with EU standards of administrative cooperation through the IMI System.
    - Government agencies monitoring implementation of EU provisions related to free movement of workers will need integration.

- Horizontal provisions and administrative implications:
  - Required transpositions include:
    - Competition: apply EU norms on public procurement, intellectual, industrial, and commercial property.
    - Social policy: transpose EU-legislation on health and safety in the workplace, work posting, secondments, and work through temporary agencies. Transition periods of 1-5 years.
    - Corporate law: amend corporate registers regulations, digitalize, and connect them with EU registers. Transition period granted: 2 years for connecting business registers to EU registers.
  - Government capacity:
    - Obligation to communicate new draft legislation to the European Commission and receive new draft EU legislation from the Commission.
    - Departments (including foreign affairs and justice) have hired additional staff to work on incoming EU legislation.
  - Overall conclusion: the EU association will improve Sammarinese institutions, help mobilize domestic reforms including strengthening the financial sector, and is expected to increase confidence in the San Marino economy. Concerted efforts across government will be needed to ensure EU standards are adopted so firms and citizens can maximize benefits.

### Lessons from Liechtenstein’s experience
- Relevance:
  - Liechtenstein’s EEA integration experience provides valuable insights given similarities: small states, high integration with neighboring economies, manufacturing sectors ~1/3 of GDP, reliance on cross-border workers, past listings as tax heavens, and public administration capacity constraints.
- Key similarities and adaptations:
  - Liechtenstein’s EEA agreement (enacted 1995) featured key adaptations: a quota system for new permanent residents and restrictions on nonresident real estate purchases.
  - Parts of the agreement related to free provision of financial services and free movement of people were the most challenging.
- Observed outcomes in Liechtenstein:
  - Data indicate a spike in real GDP growth shortly after the agreement and an acceleration in employment growth with lag (worker permits liberalized in 1998), though attribution is complicated by globalization and domestic reforms.
  - After 30 years, the EEA agreement is perceived positively; surveys showed:
    - 74 percent of individuals believe the EEA agreement as a success model.
    - 81 percent of individuals believe the agreement is the best option for the country in the coming years.
  - Financial sector adjustments:
    - Significant efforts to align financial services with EU frameworks led to diversification and expansion of banks’ balance sheets.
    - Upgrades included investment funds and OTC derivatives regulations, banking regulation, and adopting EU crisis management and bank resolution frameworks.
    - Result: banks expanded; insurance and investment funds developed, including use by Swiss intermediaries to access the EU single market.
  - Administrative and legal demands:
    - Continual efforts required to transpose and enforce evolving EU single market normative.
    - Initial underestimation of staff required; over time capacity constraints were addressed.
    - Government published progress reports every 5 years to monitor implementation and communicate with businesses and citizens.
- Selected comparative indicators (2022) — Liechtenstein vs San Marino:
  - Area (Km²): 160 (Liechtenstein), 61 (San Marino)
  - Population (thousand): 39.7 (Liechtenstein), 34.0 (San Marino)
  - Nominal GDP (million Euros): 6,988 (Liechtenstein), 1,739 (San Marino)
  - GDP per capita (Euros): 176,126 (Liechtenstein), 51,121 (San Marino)
  - Employment (thousand): 42.5 (Liechtenstein), 22.9 (San Marino)
  - Share of cross-border workers (percent): 56.8 (Liechtenstein), 31.5 (San Marino)
  - Share of Manufacturing in GVA (percent): 36.7 (Liechtenstein), 36.3 (San Marino)
  - Bank assets-to-GDP (percent): 1,099 (Liechtenstein), 244.5 (San Marino)

### San Marino businesses’ expectations: IMF business surveys (July 2024)
- Purpose and methodology:
  - Two online business-surveys conducted in July 2024 to assess qualitative expected impact of the agreement and to identify priority areas for government efforts.
  - Surveys conducted with industrial associations: Associazione Nazionale Industria San Marino (ANIS) and Organizzazione Sammarinese degli Imprenditori (OSLA).
- Survey samples:
  - Manufacturing business survey:
    - Conducted with ANIS.
    - Fifty-eight businesses answered the survey.
    - Sample has a high coverage in terms of employment and turnover.
  - Small services business survey:
    - Conducted with OSLA.
    - Twenty-seven businesses answered the survey.
    - Sample is representative in terms of diversity, but coverage on employment and turnover was modest.
- Survey objectives:
  - i) assess the qualitative expected impact of the agreement;
  - ii) identify areas where government efforts would be a priority to maximize benefits.
- Timing and context:
  - Surveys reflect business expectations in July 2024, when many businesses were still analyzing the agreement.

### Business perceptions: main obstacles and expected remedies
- Firms reported heterogeneous distributions of what they consider the three main obstacles for doing business; this heterogeneity makes identification of single “main” obstacles difficult.
- Overall, the share of firms reporting a main obstacle (red dots in the source figures) is close to the share of firms reporting the obstacle is expected to be addressed with the EU association (blue bars), indicating firms expect the agreement will address obstacles.
- Specific sectoral expectations:
  - Both small services and manufacturing businesses expect the association agreement will address red-tape and funding issues.
  - Only 7 percent of manufacturing firms expect the association agreement will not address obstacles for doing business, compared with 35 percent among small services businesses.
  - Manufacturing firms expect the association agreement to have a moderate role in addressing skilled staff shortages; small services businesses consider the agreement will have a more relevant role for these shortages.
  - Manufacturing businesses expect the agreement to address tax impediments; only a small share of small services businesses expect this.

### Expected overall impact by sector
- Manufacturing businesses:
  - More than half assess the impact of the association will be “positive” or “somewhat positive.”
  - Main positive channels: i) increasing confidence in the country, ii) improving the quality of Sammarinese institutions, iii) improving the tax system, and iv) reducing red-tape burden.
  - 75 percent of manufacturing companies expect a positive (or “somewhat positive”) impact on the tax system.
- Small services businesses:
  - Less than 50 percent expect a “positive” or “somewhat positive” impact across most areas; overall assessment tends toward neutral.
  - Main positive channels: i) increasing confidence in the country, ii) reducing red-tape burden, iii) reducing other cost (beyond funding and labor), and iv) improving the quality of Sammarinese institutions.
  - Only 40 percent expect a positive (or “somewhat positive”) impact on taxes; about 31 percent expect the EU association will have a negative impact on the tax system.

### Government priorities and recommended sequencing
- Manufacturing businesses prioritize aligning the tax system with the EU (related to moving forward with VAT and streamlining taxes reporting systems).
- Small services businesses prioritize upgrading registers, labor regulation, digitalization, and enhancing Sammarinese government offices to adopt EU standards.
- Recommended government approach: prioritize addressing gaps that can generate more employment or more fiscal revenue in the near term to create maneuver space while addressing remaining gaps.

### A nowcasting tool for estimating San Marino’s quarterly and annual GDP — overview
- Purpose: provide lower-frequency (annual) and high-frequency (monthly/quarterly) estimates of real GDP before official figures are released, using high-frequency indicators (HFIs).
- Methodological choice: Dynamic Factor Models (DFMs) following Mariano and Murasawa (2003), Giannone, Reichlin and Small (2008), Bańbura and Modugno (2014), and related literature.
- Core assumption: comovements in HFIs are driven by a small number of unobserved common factor(s) representing the general state of the economy.

### DFM structure, data and processing
- Measurement equation: Y_t = Λ F_t + ε_t.
- State equation: F_t = A F_{t-1} + η_t.
- Estimation: cast model into state space form and use the Kalman Filter; unknown parameters Λ and A estimated by maximum likelihood.
- Total series considered: 30 series in the vector of observable variables.
- Frequencies and samples (selection):
  - Annual: Real GDP (2015 € Million), 2002 − 2022.
  - Quarterly: Purchasing Managers Index (Index), 2010Q1 − 2023Q4; Credit Card – SMR, Financial Institutions (2015 € Million), 2018Q1 − 2024Q2; Credit Card – SMR, Merchants (2015 € Million), 2020Q1 − 2024Q2.
  - Monthly indicators (many series) with samples up to Aug 2024 or July 2024 as specified (e.g., Unemployment Rate Jan 2002 − July 2024; Tourism: Arrivals Jan 2002 − Aug 2024; Tax Revenues Jan 2017 − Aug 2024; etc.).
- Data processing:
  - Current-euro series deflated by SMR CPI.
  - Annual/quarterly data interpolated to monthly using Cholette's (1984) modification of Denton (1971); quarterly confidence indicators from Italian regions interpolated without benchmarks.
  - Monthly series transformed to stationarity: level series → first difference of natural log × 100; unemployment rates → absolute year-on-year differences in percentage points; all changes calculated YoY.
  - Additional transformations: demean log-differences (no constant in measurement equation) and extract principal components of selected groups to reduce dimensionality.
- Final model input: demeaned YoY growth rates (in percent) or absolute changes (in percentage points) of GDP and 17 monthly indicators.

### Nowcasting results and uncertainty
- Estimation framework:
  - 95 percent confidence bands obtained from 20,000 bootstrapped samples of empirical distributions of forecast errors.
  - A suite of 23 DFMs constructed incrementally (from two-variable up to the 17-variable DFM used in the main forecast); the average across models provides a robustness check.
- Monthly GDP growth (year-on-year, natural log-differences):
  - 4.1 percent by the end of 2022.
  - Decelerated to 2.8 percent by mid-2023.
  - Further declined to 1.9 percent by September 2024.
- Annual GDP growth (backcasts/nowcasts and uncertainty):
  - 7.6 percent in 2022.
  - 2023 backcast: 2.4 percent.
  - 2024 nowcast (based on data up to August 2024): 1.9 percent.
  - 95 percent confidence intervals:
    - For 2023: lower bound 0.9 percent, upper bound 2.9 percent.
    - For 2024: lower bound 0.0 percent.
    - For 2025: lower bound -0.4 percent.
- Model dispersion and indicator contributions:
  - Single-variable DFMs producing highest forecast profiles for GDP growth in 2023–2025: credit card data, total employment, number of active firms, and the index of economic activity from the Statistics Office of San Marino.
  - Single-variable DFMs producing the lowest forecasts for 2023–2025: total imports, manufacturing employment, manufacturing exports, wage supplementation hours paid, total exports, and electricity consumption (in that order).
  - Sequentially adding indicators (starting from manufacturing exports and employment) pulls forecasts toward negative territory for smaller DFMs (models DFM2B to DFM6B); convergence to the main forecast occurs as more indicators are added up to the 17-variable DFM (DFM17).
  - The average across the 23 DFMs tracks the main forecast closely, indicating robustness despite wide dispersion.
- Interpretation:
  - The wide dispersion and sizeable uncertainty are consistent with San Marino being a very open microstate economy frequently hit by external shocks that propagate more fully than in larger economies.

### Key performance statistics (selected horizons)
- Reported summary statistics by year:
  - 2023
    - Min: -1.4
    - Median: 2.8
    - Average: 2.0
    - Max: 3.2
  - 2024
    - Min: -4.1
    - Median: 2.5
    - Average: 1.2
    - Max: 3.4
  - 2025
    - Min: -3.3
    - Median: 2.2
    - Average: 1.3
    - Max: 3.9

### Model design and sequential DFM development
- 23 different models were considered, including the main 17-variable DFM.
- Sequential DFMs and included variables (selected):
  - DFM2: Total employment and the principal component of 3 unemployment series
  - DFM3: DFM2 series + imports of goods and services
  - DFM4: DFM3 series + exports of goods and services
  - DFM5: DFM4 series + SMaC
  - DFM6: DFM5 series + tax revenues
  - DFM7: DFM6 series + principal component of 3 tourism series
  - DFM8: DFM7 series + wage supplementation data
  - DFM2B: Exports of manufacturing goods and manufacturing employment
  - DFM3B: DFM2B series + imports of goods and services
  - DFM4B: DFM3B series + wage supplementation data
  - DFM5B: DFM4B series + exports of goods and services
  - DFM6B: DFM5B series + consumption of electricity
  - DFM7B: DFM6B series + industrial production
  - DFM8B: DFM7B series + SMaC
  - DFM9: DFM8 series + exports of Italy to San Marino
  - DFM10: DFM9 series + consumption of electricity
  - DFM11: DFM10 series + industrial production
  - DFM12: DFM11 series + Emilia-Romagna confidence indices (principal component)
  - DFM13: DFM12 series + Marche confidence indices (principal component)
  - DFM14: DFM13 series + exports of manufacturing goods
  - DFM15: DFM14 series + manufacturing employment
  - DFM16: DFM15 series + index of economic activity
  - DFM17: DFM16 series + credit card transactions

### Analytical implications and uses
- The tool enables near-real-time assessment of GDP growth for San Marino despite the official data being annual and released with significant lags.
- By sequentially adding indicators (employment, trade, SMaC, tax revenues, tourism, wage supplementation, electricity consumption, industrial production, regional confidence indices, manufacturing indicators, index of economic activity, credit card transactions), the DFM suite offers flexible nowcasting/backcasting frameworks that can be tailored to available data and user objectives.
- The range of models allows for robustness checks and assessment of how additional indicators alter median, average, and extreme projected outcomes across short-term horizons.

*Prepared by Ritong Qu; analysis and data as presented in the content unit.*

### 1. Liechtenstein: Selected Indicators _____________________________________________________ 17

### IMPROVE SAMMARINESE BANKS’ PROFITABILITY: A PEER ANALYSIS WITH ITALIAN REGIONAL BANKS

### Executive summary
- Notwithstanding important progress in increasing liquidity and reducing NPLs, San Marino’s banking system remains vulnerable and faces near-term challenges from recognizing legacy losses.
- The EU association agreement will subject the banks to higher compliance costs and increased competition from Italian banks, making it key to improve low structural profitability.
- Comparison with Italian regional peers highlights gaps in asset quality, capital adequacy, and cost efficiency. Individual banks can boost profits by reducing operating costs and increasing the share of income-generating assets; if within-bank consolidation is insufficient, system-wide consolidation can be considered to achieve economies of scale.

### Background and recent sector developments
- The sector has undergone prolonged deleveraging since the global financial crisis: banks’ total assets have gradually declined below 300 percent of GDP from over 600 percent of GDP in 2009.
- During 2010-14, banks’ gross value added to GDP declined by more than 80 percent and has remained flat.
- Total employment in the banking sector and the number of bank branches have declined by more than 40 percent respectively since 2010.
- Average personnel costs per employee went down to around 90 percent of the regional peers.
- Banking sector made losses until 2021; recent years’ profits are still low compared to other EU countries.

### Peer selection and data scope
- San Marino currently has four banks (BAC, BSI, BSM and CRSM), with assets levels ranging from 0.8 to 1.5 billion euro.
- Major sources of financing are customer deposits; major income sources are interest from customer loans and securities portfolios.
- 27 Italian regional banks were identified as peers; their total assets have a median of 1.5 billion euro and are located mostly within a two-hour drive from San Marino.
- Benchmark comparisons use operating profits that exclude one-off profits such as revaluation of owned real estate.

### Key analytical findings
- Profitability and capital
  - Most San Marino banks are less profitable than Italian peers: three out of four San Marino banks rank the lowest in profitability compared with Italian peers under the operating-profit measures.
  - Italian regional banks generally have higher capital adequacy ratios; combined with higher ROE, this indicates Italian peers have sufficient capital and retained profits to support credit growth, while most San Marino banks are capital constrained.
- Asset quality and income-generating assets
  - Three San Marino banks have the lowest income generating assets over total assets and over total funding compared with peers.
  - Sizable NPLs and fixed assets recovered from NPLs need resolution; deferred tax assets yield little income when bank profits are low.
  - CRSM’s income generating assets include a €455 million state perpetual bond carrying a fixed interest rate of 1.75 percent (while the country’s Eurobond carries a coupon of 6.50 percent).
- Funding costs
  - Funding costs of San Marino banks are largely aligned with Italian peers; confidence improved after the Eurobond issuance in 2021.
  - San Marino issued €340 million Eurobond in 2021 with an interest rate of 3.25 percent; the bond was rolled over in 2023 with a maturity of 3.75 years and an interest rate of 6.50 percent.
- Cost efficiency
  - In terms of intermediation-margin-to-operating-expense ratio, three San Marino banks are near the lower end of the distribution, while the other one is the most efficient bank in the sample.
  - Personnel costs per employee are broadly in line with Italian peers; however, most San Marino banks employ more staff relative to income-generating assets:
    - Three out of four San Marino banks are on the higher end of number of employees to income generating assets.
    - One bank is in the left tail (fewer employees per income-generating asset).
  - Other operating expenses (excluding personnel and credit impairment) are broadly in line with Italian peers, though one San Marino bank is close to the 75th percentile indicating room for improvement.

### Quantified improvement potential
- Targeting cost structures consistent with Italian regional peers can significantly improve profitability:
  - The analysis suggests one Sammarinese bank could improve ROE by more than 8 percent from cost reductions; two other banks could improve ROE by 2 to 3 percent.
- Recommended cost and balance-sheet targets:
  - Reduce personnel costs by 20 to 30 percent for three banks (targets specified per bank in the analysis).
  - Reduce other operating costs by 5 to 15 percent for two banks; remaining banks already have other operating costs below most Italian peers.
  - Increase the share of income-generating assets and improve asset quality to raise net interest income and capital buffers.
- Structural sector adjustment:
  - The number of bank branches needs to be reduced by more than two thirds to reach the EU level of branches per capita.
  - Recent banking sector collective agreements restarted wage growth to achieve cumulative wage growth of 9.5 percent by 2025 (due to the previous agreement expiring and not renewed for 13 years).

### Policy recommendations
- Cost and operational measures
  - Target the ratio of personnel expenses over income generating assets and the ratio of other operating expenses over income generating assets to the corresponding 25th percentile of Italian regional banks.
  - Rationalize staff levels to achieve the suggested personnel cost reductions; note potential near-term severance costs and labor-law constraints.
  - Reduce other operating costs where above peer percentiles; consider selling or renting out branch properties to improve profits and liquidity.
- Balance sheet and capital quality
  - Increase the share of income-generating assets through NPL recovery measures: update the insolvency framework and consider relaxing constraints on nonresident ownership of real estate to facilitate market activity.
  - Remove barriers on shareholding structures to attract external capital.
  - The state should gradually replace the perpetual bond in CRSM with marketable instruments to increase capital quality in line with EU regulations.
- System-level measures
  - Consider system-wide consolidation if within-bank cost reductions are insufficient to restore competitiveness and achieve economies of scale.

### Conclusion
- Improving competitiveness is urgent and should be accomplished well ahead of the 15-year time frame granted by the EU association agreement.
- Main gaps to address: asset quality, capital adequacy, and cost efficiency.
- While income generating assets have shrunk considerably, operating costs—particularly personnel costs—have not adjusted sufficiently; resolving these issues quickly is critical to mitigate potential capital needs from NPL securitization and calendar provisioning in the near-term.
- In the long term, San Marino banks need to be competitive in cost efficiency, grow income generating assets, and manage risks to take advantage of the opening of the financial market.

*Prepared by Ritong Qu; analysis and data as presented in the content unit.*

### conclusions. The Italian and Sammarinese banks’ balance sheet data is sourced from Fitch Connect.

### 1smrea2024002-print-pdf - conclusions

### Balance sheet data and accounting adjustments
- Italian and Sammarinese banks’ balance sheet data is sourced from Fitch Connect.
- Due to difference in accounting rules, Sammarinese banks’ other operating expense includes value adjustments related to financial leasing assets which are treated as interest expense by Italian banks.
- Adjustment approach:
  - I adjust Sammarinese banks’ balance sheet data from Fitch Connect to be consistent with accounting practices in Italy, using value adjustments of financial leasing assets recorded in annual reports.
- Definitions used in the paper:
  - Return on equity:
    - Computed as the ratio of operating profit over total equity.
    - Operating profit from Fitch Connect excludes non-recurring income and non-recurring expense.
    - Operating profit = net interest income + total non-interest operating income − loan and credit impairment charge.
  - Income generating assets:
    - “Total Earning Assets” from Fitch Connect.
    - Defined as the sum of net loans, loans and advances to banks, total securities, insurance assets, investments in property and other earning assets (other financial assets that are designed to make a return, which do not fall into any other category).
  - Total funding:
    - “Total Funding” item from Fitch Connect.
    - Defined as the sum of total deposits, money-market and short-term funding, total long-term funding, derivatives liabilities and trading liabilities.

### The EU Association Agreement: main implications for San Marino
- Nature and status:
  - The EU Association Agreement is a treaty regulating San Marino‘s participation in the EU Single Market.
  - Negotiations started in 2015 and concluded successfully in December 2023.
  - With only a few pending technical issues, the agreement is expected to be ratified and to enter into force next year.
  - The agreement promotes the free movement of goods, services, capital, and people.
- Institutional framework and adaptations:
  - The agreement sets legal provisions, dispute resolution procedures, and independent supervision of various markets.
  - Incorporates specific adaptations — transitional periods and tailored implementations — recognizing the unique characteristics of small states.

- Free Movement of Goods:
  - San Marino is already highly integrated in the EU goods market due to Cooperation and Customs Union Agreement, 1991.
  - Expected benefits: reducing red tape and transaction costs, facilitating certifications and legal dispute resolution, allowing San Marino products to circulate freely without discrimination.
  - San Marino can set its own product certification bodies recognized by the EU.
  - Adaptation negotiated: state-owned utility company to maintain the monopoly on the supply of electricity and gas until end 2030 (after 2030 the adaptation can be extended).

- Freedom to Provide Services:
  - Legal provisions will increase access to the EU market and improve Sammarinese service-regulatory institutions.
  - Required administrative improvements: create a digital one-stop shop, ensure rights to information, implement the Internal Market Information System (IMI).
  - Transition periods: 1½ to 3 years for administrative/authorization changes.

- Integration of Financial Services:
  - San Marino must transpose EU financial services regulation and supervision practices within 15 years at the latest.
  - Authorities consider the majority of financial sector segments will benefit from opening to the European single market in a considerably shorter time.
  - Integration can occur at different times across banking, insurance and reinsurance, asset management, and securities market segments.
  - Agreed transition process:
    - San Marino identifies which segments will be integrated gradually and which immediately.
    - San Marino submits a road map to meet the conditions for integration for each market to the European Commission (EC).
    - The EC will assess transposition and application of EU norms and supervisory infrastructure and decide on proceeding.
  - Conditions for integration (three conditions):
    - i) full transposition and application of relevant normative;
    - ii) the existence of good supervisory capabilities and arrangements;
    - iii) MoUs on supervisory cooperation, exchange of information and consultation between the San Marino and the EU supervisory authorities (EBA, ESMA, EIOPA, Authority for AML/CFT).
  - Expected outcome: resource intensive process that will strengthen San Marino’s financial system.

- Free Movement of Capital:
  - Can facilitate FDI and foster the real estate market in San Marino.
  - San Marino has no capital controls on financial flows; the agreement can streamline regulation for mergers and acquisitions.
  - Current real estate rule: nonresidents’ purchases beyond two real estate units need official authorization provided they have underlying interests in the country. Streamlining can help attract foreign investors to acquire up to two units.

- Free Movement of People:
  - Will allow Sammarinese citizens to settle in the EU; new non-national residents in San Marino will increase gradually.
  - A quota system for permanent residents will be set and reviewed every 10 years to preserve national identity.
  - Annual increase in residence permits for EU citizens = 3 percent of the active EU residents in San Marino in the previous year.
  - Table: Republic of San Marino: Quotas System for New Resident Permits
    - 2024: EU citizens residents in San Marino 3,335; Δ residents permit (3 percent quota) ...
    - 2025: EU citizens residents in San Marino 3,435; Δ residents permit (3 percent quota) +100
    - 2026: EU citizens residents in San Marino 3,538; Δ residents permit (3 percent quota) +103
    - 2027: EU citizens residents in San Marino 3,644; Δ residents permit (3 percent quota) +106
  - Free movement of workers:
    - San Marino labor market already relatively liberalized for cross-border workers; foreign worker flows expected to remain stable.
    - Recognition of professional qualifications: San Marino will recognize EU professional qualifications, and San Marino qualifications will be recognized by the EU.
    - Temporal adaptation: 2-year period negotiated on the recognition of professional qualifications to align with EU standards of administrative cooperation through the IMI System.
    - Government agencies monitoring implementation of EU provisions related to free movement of workers will need integration.

- Horizontal provisions and administrative implications:
  - Required transpositions include:
    - Competition: apply EU norms on public procurement, intellectual, industrial, and commercial property.
    - Social policy: transpose EU-legislation on health and safety in the workplace, work posting, secondments, and work through temporary agencies. Transition periods of 1-5 years.
    - Corporate law: amend corporate registers regulations, digitalize, and connect them with EU registers. Transition period granted: 2 years for connecting business registers to EU registers.
  - Government capacity:
    - Obligation to communicate new draft legislation to the European Commission and receive new draft EU legislation from the Commission.
    - Departments (including foreign affairs and justice) have hired additional staff to work on incoming EU legislation.
  - Overall conclusion: the EU association will improve Sammarinese institutions, help mobilize domestic reforms including strengthening the financial sector, and is expected to increase confidence in the San Marino economy. Concerted efforts across government will be needed to ensure EU standards are adopted so firms and citizens can maximize benefits.

### Lessons from Liechtenstein’s experience
- Relevance:
  - Liechtenstein’s EEA integration experience provides valuable insights given similarities: small states, high integration with neighboring economies, manufacturing sectors ~1/3 of GDP, reliance on cross-border workers, past listings as tax heavens, and public administration capacity constraints.
- Key similarities and adaptations:
  - Liechtenstein’s EEA agreement (enacted 1995) featured key adaptations: a quota system for new permanent residents and restrictions on nonresident real estate purchases.
  - Parts of the agreement related to free provision of financial services and free movement of people were the most challenging.
- Observed outcomes in Liechtenstein:
  - Data indicate a spike in real GDP growth shortly after the agreement and an acceleration in employment growth with lag (worker permits liberalized in 1998), though attribution is complicated by globalization and domestic reforms.
  - After 30 years, the EEA agreement is perceived positively; surveys showed:
    - 74 percent of individuals believe the EEA agreement as a success model.
    - 81 percent of individuals believe the agreement is the best option for the country in the coming years.
  - Financial sector adjustments:
    - Significant efforts to align financial services with EU frameworks led to diversification and expansion of banks’ balance sheets.
    - Upgrades included investment funds and OTC derivatives regulations, banking regulation, and adopting EU crisis management and bank resolution frameworks.
    - Result: banks expanded; insurance and investment funds developed, including use by Swiss intermediaries to access the EU single market.
  - Administrative and legal demands:
    - Continual efforts required to transpose and enforce evolving EU single market normative.
    - Initial underestimation of staff required; over time capacity constraints were addressed.
    - Government published progress reports every 5 years to monitor implementation and communicate with businesses and citizens.

- Selected comparative indicators (2022) — Liechtenstein vs San Marino:
  - Area (Km²): 160 (Liechtenstein), 61 (San Marino)
  - Population (thousand): 39.7 (Liechtenstein), 34.0 (San Marino)
  - Nominal GDP (million Euros): 6,988 (Liechtenstein), 1,739 (San Marino)
  - GDP per capita (Euros): 176,126 (Liechtenstein), 51,121 (San Marino)
  - Employment (thousand): 42.5 (Liechtenstein), 22.9 (San Marino)
  - Share of cross-border workers (percent): 56.8 (Liechtenstein), 31.5 (San Marino)
  - Share of Manufacturing in GVA (percent): 36.7 (Liechtenstein), 36.3 (San Marino)
  - Bank assets-to-GDP (percent): 1,099 (Liechtenstein), 244.5 (San Marino)

### San Marino businesses’ expectations: IMF business surveys (July 2024)
- Purpose and methodology:
  - Two online business-surveys conducted in July 2024 to assess qualitative expected impact of the agreement and to identify priority areas for government efforts.
  - Surveys conducted with industrial associations: Associazione Nazionale Industria San Marino (ANIS) and Organizzazione Sammarinese degli Imprenditori (OSLA).
- Survey samples:
  - Manufacturing business survey:
    - Conducted with ANIS.
    - Fifty-eight businesses answered the survey.
    - Sample has a high coverage in terms of employment and turnover.
  - Small services business survey:
    - Conducted with OSLA.
    - Twenty-seven businesses answered the survey.
    - Sample is representative in terms of diversity, but coverage on employment and turnover was modest.
- Survey objectives:
  - i) assess the qualitative expected impact of the agreement;
  - ii) identify areas where government efforts would be a priority to maximize benefits.
- Timing and context:
  - Surveys reflect business expectations in July 2024, when many businesses were still analyzing the agreement.

*Prepared by Ezequiel Cabezon. The Italian and Sammarinese banks’ balance sheet data is sourced from Fitch Connect.*

### 20.      The association agreement is expected to eventually address several of the main

### The association agreement is expected to eventually address several of the main

### Business perceptions of the EU association agreement: main obstacles and expected remedies
- Firms reported heterogeneous distributions of what they consider the three main obstacles for doing business; this heterogeneity makes identification of single “main” obstacles difficult.
- Overall, the share of firms reporting a main obstacle (red dots in the source figures) is close to the share of firms reporting the obstacle is expected to be addressed with the EU association (blue bars), indicating firms expect the agreement will address obstacles.
- Specific sectoral expectations:
  - Both small services and manufacturing businesses expect the association agreement will address red-tape and funding issues.
  - Only 7 percent of manufacturing firms expect the association agreement will not address obstacles for doing business, compared with 35 percent among small services businesses.
  - Manufacturing firms expect the association agreement to have a moderate role in addressing skilled staff shortages; small services businesses consider the agreement will have a more relevant role for these shortages.
  - Manufacturing businesses expect the agreement to address tax impediments; only a small share of small services businesses expect this.

### Expected overall impact by sector
- Manufacturing businesses:
  - More than half assess the impact of the association will be “positive” or “somewhat positive.”
  - Main positive (including “somewhat positive”) channels: i) increasing confidence in the country, ii) improving the quality of Sammarinese institutions, iii) improving the tax system, and iv) reducing red-tape burden.
  - 75 percent of manufacturing companies expect a positive (or “somewhat positive”) impact on the tax system.
- Small services businesses:
  - Less than 50 percent expect a “positive” or “somewhat positive” impact across most areas; overall assessment tends toward neutral.
  - Main positive channels: i) increasing confidence in the country, ii) reducing red-tape burden, iii) reducing other cost (beyond funding and labor), and iv) improving the quality of Sammarinese institutions.
  - Only 40 percent expect a positive (or “somewhat positive”) impact on taxes; about 31 percent expect the EU association will have a negative impact on the tax system.

### Government priorities and recommended sequencing
- Manufacturing businesses prioritize aligning the tax system with the EU (related to moving forward with VAT and streamlining taxes reporting systems).
- Small services businesses prioritize upgrading registers, labor regulation, digitalization, and enhancing Sammarinese government offices to adopt EU standards.
- Recommended government approach: prioritize addressing gaps that can generate more employment or more fiscal revenue in the near term to create maneuver space while addressing remaining gaps.

### A nowcasting tool for estimating San Marino’s quarterly and annual GDP — overview
- Purpose: provide lower-frequency (annual) and high-frequency (monthly/quarterly) estimates of real GDP before official figures are released, using high-frequency indicators (HFIs).
- Methodological choice: Dynamic Factor Models (DFMs) following Mariano and Murasawa (2003), Giannone, Reichlin and Small (2008), Bańbura and Modugno (2014), and related literature.
- Core assumption: comovements in HFIs are driven by a small number of unobserved common factor(s) representing the general state of the economy.

### DFM structure and estimation
- Measurement equation: Y_t = Λ F_t + ε_t, where Λ is the factor loadings matrix and ε_t idiosyncratic errors.
- State equation: F_t = A F_{t-1} + η_t, where A captures autoregressive dynamics and η_t are iid factor innovations.
- Estimation: cast model into state space form and use the Kalman Filter to construct MMSE estimates of F_t and evaluate the Gaussian likelihood; unknown parameters Λ and A estimated by maximum likelihood.
- Once estimated, common factors are used to nowcast target variables leveraging the state equation's predictive power.

### Data used in the nowcasting model
- Total series considered: 30 series in the vector of observable variables (see Table 1 in source).
- Frequencies and samples (selection):
  - Annual: Real GDP (2015 € Million), 2002 − 2022.
  - Quarterly: Purchasing Managers Index (Index), 2010Q1 − 2023Q4; Credit Card – SMR, Financial Institutions (2015 € Million), 2018Q1 − 2024Q2; Credit Card – SMR, Merchants (2015 € Million), 2020Q1 − 2024Q2.
  - Monthly indicators (many series): Unemployment Rate (Percent) Jan 2002 − July 2024; Unemployment Rate Stricter Definition (Percent) Jan 2002 − July 2024; Youth Unemployment Rate (Percent) Jan 2002 − July 2024; Total Employment (Millions of persons) Jan 2002 − July 2024; Employment in Manufacturing Sector (Millions of persons) Jan 2002 − July 2024; Imports of Goods and Services (2015 € Million) Dec 2002 − June 2024; Exports of Goods and Services (2015 € Million) Dec 2002 − June 2024; Exports of Manufacturing Goods (2015 € Million) Jan 2015 − May 2024; SMaC Transactions (2015 € Million) Jan 2015 − July 2024; Tax Revenues (2015 € Million) Jan 2017 − Aug 2024; Tourism: Arrivals (Millions of persons) Jan 2002 − Aug 2024; Tourism: Hotel Nights (Millions of persons) Jan 2002 − Aug 2024; Tourism: Visitors (Millions of persons) Mar 2002 − Aug 2024; Wage Supplementation Hours Paid (Hours) Jan 2014 − June 2024; Wage Supplementation Sum Paid (2015 € Million) Jan 2014 − June 2024; Italian Exports to SMR (2015 € Million) Jan 2010 − May 2024; Consumption of Electricity (KWH) Jan 2007 − May 2024; Economic Activities Number of firms Jan 2004 − July 2024; Industrial Production Index Jan 2014 − May 2024; Economic Activity Indicator Index Dec 2015 − May 2024; Emilia Romagna and Marche Confidence Indices with samples up to Aug 2024.
- Data processing:
  - Current-euro series deflated by SMR CPI.
  - Lower-frequency data (annual/quarterly) interpolated to monthly counterparts using Cholette's (1984) modification of Denton (1971); quarterly confidence indicators from Italian regions interpolated without benchmarks.
  - Monthly series transformed to stationarity: level series → first difference of natural log × 100 (approx. percent growth); unemployment rates → absolute year-on-year differences in percentage points; all changes calculated YoY (relative to same month previous year).
  - Additional transformations: demean log-differences (no constant in measurement equation) and extract principal components of selected groups to reduce dimensionality.
- Final model input: demeaned YoY growth rates (in percent) or absolute changes (in percentage points) of GDP and 17 monthly indicators.

### Nowcasting results and uncertainty
- Estimation framework:
  - 95 percent confidence bands obtained from 20,000 bootstrapped samples of empirical distributions of forecast errors.
  - A suite of 23 DFMs constructed incrementally (from two-variable up to the 17-variable DFM used in the main forecast); the average across models provides a robustness check.
- Monthly GDP growth (year-on-year, natural log-differences):
  - 4.1 percent by the end of 2022.
  - Decelerated to 2.8 percent by mid-2023.
  - Further declined to 1.9 percent by September 2024.
- Annual GDP growth (backcasts/nowcasts and uncertainty):
  - 7.6 percent in 2022.
  - 2023 backcast: 2.4 percent.
  - 2024 nowcast (based on data up to August 2024): 1.9 percent.
  - 95 percent confidence intervals:
    - For 2023: lower bound 0.9 percent, upper bound 2.9 percent.
    - For 2024: lower bound 0.0 percent.
    - For 2025: lower bound -0.4 percent.
- Model dispersion and indicator contributions:
  - Single-variable DFMs producing highest forecast profiles for GDP growth in 2023–2025: credit card data, total employment, number of active firms, and the index of economic activity from the Statistics Office of San Marino.
  - Single-variable DFMs producing the lowest forecasts for 2023–2025: total imports, manufacturing employment, manufacturing exports, wage supplementation hours paid, total exports, and electricity consumption (in that order).
  - Sequentially adding indicators (starting from manufacturing exports and employment) pulls forecasts toward negative territory for smaller DFMs (models DFM2B to DFM6B); convergence to the main forecast occurs as more indicators are added up to the 17-variable DFM (DFM17).
  - The average across the 23 DFMs tracks the main forecast closely, indicating robustness despite wide dispersion.
- Interpretation:
  - The wide dispersion and sizeable uncertainty are consistent with San Marino being a very open microstate economy frequently hit by external shocks that propagate more fully than in larger economies.

*Source: IMF staff calculations.*

### 22.      This paper presents a simple implementable tool for Backcasting and nowcasting GDP

### 22.      This paper presents a simple implementable tool for Backcasting and nowcasting GDP

### Overview
- The paper presents a simple implementable tool for Backcasting and nowcasting GDP growth in San Marino, which is only available at annual frequency and publicly released with significant lags.
- The tool uses readily available monthly indicators to gauge the state of the Sammarinese economy in real-time or near-real-time, facilitating the decision-making process for policymakers and allowing analysts to make more informed decisions based on the most current information.

### Key performance statistics (selected horizons)
- Time axis shown: 2019 2020 2021 2022 2023 2024 2025 (visual chart context in source).
- Reported summary statistics by year:
  - 2023
    - Min: -1.4
    - Median: 2.8
    - Average: 2.0
    - Max: 3.2
  - 2024
    - Min: -4.1
    - Median: 2.5
    - Average: 1.2
    - Max: 3.4
  - 2025
    - Min: -3.3
    - Median: 2.2
    - Average: 1.3
    - Max: 3.9

### Model design and sequential DFM development
- 23 different models were considered, including the main 17-variable DFM.
- Sequential DFMs and included variables:
  - DFM2: Total employment and the principal component of 3 unemployment series
  - DFM3: DFM2 series + imports of goods and services
  - DFM4: DFM3 series + exports of goods and services
  - DFM5: DFM4 series + SMaC
  - DFM6: DFM5 series + tax revenues
  - DFM7: DFM6 series + principal component of 3 tourism series
  - DFM8: DFM7 series + wage supplementation data
  - DFM2B: Exports of manufacturing goods and manufacturing employment
  - DFM3B: DFM2B series + imports of goods and services
  - DFM4B: DFM3B series + wage supplementation data
  - DFM5B: DFM4B series + exports of goods and services
  - DFM6B: DFM5B series + consumption of electricity
  - DFM7B: DFM6B series + industrial production
  - DFM8B: DFM7B series + SMaC
  - DFM9: DFM8 series + exports of Italy to San Marino
  - DFM10: DFM9 series + consumption of electricity
  - DFM11: DFM10 series + industrial production
  - DFM12: DFM11 series + Emilia-Romagna confidence indices (principal component)
  - DFM13: DFM12 series + Marche confidence indices (principal component)
  - DFM14: DFM13 series + exports of manufacturing goods
  - DFM15: DFM14 series + manufacturing employment
  - DFM16: DFM15 series + index of economic activity
  - DFM17: DFM16 series + credit card transactions

### Analytical implications and uses
- The tool enables near-real-time assessment of GDP growth for San Marino despite the official data being annual and released with significant lags.
- By sequentially adding indicators (employment, trade, SMaC, tax revenues, tourism, wage supplementation, electricity consumption, industrial production, regional confidence indices, manufacturing indicators, index of economic activity, credit card transactions), the DFM suite offers flexible nowcasting/backcasting frameworks that can be tailored to available data and user objectives.
- The range of models allows for robustness checks and assessment of how additional indicators alter median, average, and extreme projected outcomes across short-term horizons.

*Source: 1smrea2024002-print-pdf - 22.*

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_Source: https://www.imf.org/-/media/files/publications/cr/2024/english/1smrea2024002-print-pdf.pdf_