Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

FYR Macedonia – 2011 Article IV Consultation- Concluding Statement of the Mission1

Skopje, December 13, 2011


1. The economy has strengthened over the past year, but now faces a worsening external environment that has created new risks and headwinds to growth. Sound overall macroeconomic policies, low public debt, and limited cross-border financial linkages should help shield Macedonia from the impact of adverse external conditions. Nonetheless, the authorities should be prepared to respond to slowing growth and heightened risks.

Macroeconomic and financial outlook

2. The mission expects growth to be 3 percent in 2011, based largely on the strong performance in the first half of the year. Weak growth in trading partners and heightened financial stress in the euro area are expected to weigh on prospects for growth in 2012. These factors are expected to reduce demand for Macedonia’s exports and contribute to tighter domestic financial conditions. The mission expects growth to be 2 percent in 2012, with risks tilted clearly to the downside. Inflation is expected to decline to 2 percent in 2012, as the effects of higher food and commodity prices fade and in response to slowing domestic demand.

3. The mission expects the current account deficit to be around 5½ percent of GDP in 2011 and 6 to 6½ percent of GDP in 2012. This reflects a slowing of both exports and imports next year in response to weaker growth externally and in Macedonia. Foreign direct investment and external borrowing by the government are expected to provide adequate financing, allowing a modest accumulation of international reserves. Over the medium term the current account is expected to stabilize at levels that can be financed largely by foreign direct investment.

4. Financial sector indicators continue to suggest sound overall conditions. The capital adequacy ratio has climbed to nearly 17 percent, with tier one capital at 14 percent. Non-performing loans rose somewhat in the third quarter of this year, but remain below their post-crisis peak and are fully covered by bank provisions. Profitability is low but positive, and profits are being used largely to strengthen capital buffers. Loans continue to be financed predominantly by local deposits, with limited reliance on external financing.


5. The possibility of an accelerated economic downturn and intensification of financial stress in the euro area poses significant risks for Macedonia. In such circumstances, demand for Macedonian exports would contract sharply and external financing for the public and private sectors, including foreign direct investment, could become more scarce. The inflow of private transfers, which are an important source of support to the economy, could also be affected. In such a scenario, economic growth could fall considerably below the mission’s baseline projections, and balance of payments pressures could arise. Several factors could help shield Macedonia from adverse external developments. First, the lack of reliance on external financing for the banking and corporate sectors reduces the likelihood of bank funding pressures or deleveraging. Moreover, bank credit has grown moderately over the past two years, so is less vulnerable to a rapid slowdown than in the run-up to the 2008 crisis. Second, the current account deficit is much lower than in 2008, lessening the magnitude of needed adjustment in the event of external shocks. Further, a strong pipeline of projects that are planned or already underway will provide a base for foreign direct investment in the coming year.

Fiscal policy

6. The mission views the government’s deficit target of 2½ percent of GDP in 2012 as appropriate in light of economic prospects. This fiscal stance strikes a balance between supporting output and employment, and the need to keep deficits in line with available financing and maintain debt ratios at moderate levels. Over the medium term, it will be important to reduce deficits to preserve debt sustainability and to maintain space to respond to future economic cycles.

7. The expected slowdown in economic growth will translate into a reduction in revenues relative to the 2012 budget assumptions. The mission welcomes the authorities’ intention to respond by reducing expenditure if necessary to achieve the deficit target in the 2012 budget. In this context, it recommends that the authorities plan at an early stage how best to reduce spending relative to budgeted amounts in response to anticipated revenue shortfalls.

8. The mission encourages the authorities to continue with their efforts to strengthen their public debt management strategy and increase the size of the domestic debt market. This is needed to reduce the reliance on external debt markets, which can be volatile and unpredictable as a result of events outside of Macedonia. Compared to other countries in the region and elsewhere, the size of domestic public debt is small, suggesting there is significant room for growth. Moreover, the ample liquidity of the domestic banking system, including significant holdings of central bank debt instruments, points to room for increased domestic public debt without crowding out private investment. A deeper domestic debt market, with longer-term maturities, will also help to build domestic yield curve, which will support development of private debt markets. In this context, the recent auction of a five-year treasury bond is a welcome development. As the government lengthens its debt maturities over time, including further issuance of five-year bonds, it should respond to changing market conditions and offer higher interest rates if necessary. The mission also encourages the authorities to access private external debt markets at an early stage to pre-finance its borrowing needs, to address the risk that conditions could worsen and markets become more closed.

Monetary Policy and Financial Stability

9. The National Bank of the Republic of Macedonia (NBRM) has kept its reference interest rate unchanged at 4 percent over the course of 2011. The mission views this as an appropriate stance. International reserves are at broadly adequate levels, there is little evidence of significant pressures in the balance of payments, inflation is contained, and growth of bank credit and domestic demand has been moderate. Looking forward, the NBRM should be alert to the possibility of balance of payments pressure that could result from adverse external developments and should be prepared to respond promptly.

10. Conservative and independent regulation and supervision by the NBRM has contributed to the stability of the banking system. The authorities should be prepared for the risk of adverse external developments. This calls for continued vigilance in monitoring capital ratios, trends in deposits, loan quality, and bank liquidity, and for contingency planning for risk scenarios. The mission welcomes recent actions to facilitate bank access to liquidity from the NBRM and to the initiation of regular meetings of the Financial Stability Committee. It encourages the authorities to complete their agenda of legal changes to ensure they are fully equipped to respond to any future pressures. This includes further widening the class of assets that banks may use to access NBRM liquidity to include bank loans; addressing the risk of court challenges to decisions on licensing, administration, or closing of banks; and closing gaps in the authority to impose fit and proper requirements on bank managers and owners.


11. Macedonia should be prepared for weak growth in its trading partner, with downside risks, in the coming year. A record of sound macroeconomic and financial policies and limited imbalances provide important buffers. Nonetheless, the authorities should plan in advance for a slowdown in growth and remain vigilant to heightened risks.

Table 1. FYR Macedonia: Macroeconomic Framework, 2007−15
(Year-on-year percentage change, unless otherwise indicated)


2007 2008 2009 2010 2011   2012 2013 2014 2015


















Prog Proj.   Proj.













Real GDP

6.1 5.0 -0.9 1.8 3.5 3.0   2.0 3.2 4.2 4.0

  Real domestic demand

9.2 6.7 -3.3 -0.1 4.2 4.0   2.2 3.8 3.9 3.4


7.7 6.9 -4.9 0.5 3.5 3.4   1.4 3.4 3.6 3.5


7.7 6.9 -4.9 0.5 3.6 3.4   1.4 3.4 3.6 3.5


0.2 8.1 0.6 -0.4 2.8 3.0   2.5 3.9 3.4 2.2

   Gross investment

23.2 4.7 -0.6 -2.1 7.3 7.0   5.0 5.0 5.0 4.0











  Exports (volume)

12.0 -7.0 16.0 24.1 16.6 4.7   1.4 5.6 12.1 8.8

  Imports (volume)

16.3 0.0 15.3 11.4 13.9 6.3   2.1 6.0 8.9 6.2











Contributions to growth










  Domestic demand

10.8 8.1 -4.1 -0.1 5.1 4.7   2.7 4.5 4.6 4.1

  Net exports

-4.6 -3.1 3.2 1.9 -1.6 -1.7   -0.7 -1.3 -0.5 -0.1











Central government operations (percent of GDP)











32.2 32.5 30.5 30.1 31.5 30.6   30.7 30.8 30.9 31.0


31.6 33.4 33.2 32.5 34.0 33.2   33.4 33.3 33.1 33.0

  Of which: capital

3.8 4.9 3.3 3.6 5.0 4.3   4.7 5.1 5.1 5.2


0.6 -0.9 -2.7 -2.5 -2.5 -2.5   -2.6 -2.5 -2.2 -2.0











Savings and investment (percent of GDP)










  Domestic saving

17.6 14.0 19.1 23.3 21.7 21.3   21.8 22.5 23.1 23.5


4.4 3.9 0.6 1.1 2.5 1.8   2.1 2.6 2.9 3.2


13.2 10.0 18.5 22.1 19.2 19.5   19.8 19.9 20.2 20.3

  Foreign saving

7.1 12.8 6.8 2.2 4.6 5.5   6.3 6.6 6.0 5.5

  Gross investment

24.6 26.8 25.9 25.4 26.4 26.7   28.2 29.1 29.0 29.0











Consumer prices










Period average

2.3 8.4 -0.8 1.5 2.5 3.9   2.0 2.0 2.0 2.0


6.7 4.1 -1.6 3.0 1.8 2.8   2.0 2.0 2.0 2.0











Memorandum items:




















Current account balance (percent of GDP)

-7.1 12.8 -6.8 -2.2 -4.6 -5.5   -6.3 -6.6 -6.0 -5.5

Gross official reserves (millions of euros)

1,524 1,495 1,598 1,715 1,846 1,975   2,042 2,107 2,420 2,805

  in percent of ST debt

117 110 105 110 104 133   116 119 118 147

  in months of prospective imports

3.6 4.4 4.2 3.6 3.7 4.0   3.7 3.7 4.0 4.4

Gross Central Government Debt (percent of GDP)

24.0 20.6 23.8 24.6 25.7 27.4   29.5 28.6 29.1 29.2

Foreign direct investment (percent of GDP)

8.5 6.1 2.0 2.3 3.5 3.3   2.6 4.5 5.0 5.0

External debt (percent of GDP)

47.6 49.2 56.4 59.5 57.8 60.5   61.8 62.3 63.8 65.6

Nominal GDP (billions of denars)

365 412 411 427 458 456   477 501 534 567

Nominal GDP (millions of euros)





7,483 7,413  






Sources: NBRM; SSO; MOF; IMF staff estimates and projections.

1 This statement presents the preliminary findings and main recommendations of the IMF’s 2011 Article IV consultation mission. Article IV consultations are conducted with all IMF member countries on a regular basis. The IMF mission is grateful to the authorities for their hospitality and cooperation.


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