Revision of macroeconomic forecasts

- November 2017 -

Dimitar Bogov

Governor

2 November 2017

Contents :

Change in risks between the two forecasts

External assumptions

Macroeconomic scenario for 2017-2019

2

Change in risks between the two forecasts

Unfavorable risks estimated to be lower than in the April forecasts...

...particularly risks arising from the domestic environment whose effects are assessed to be completely exhausted in the period ahead...

...external risks associated with the global economy are balanced in the short term, but still assessed as unfavorable in the medium term - uncertainty associated with the new US policies, increased protectionism, worsened conditions in the global financial markets, effects of the Brexit, as well as geopolitical turbulences

However, in this scenario, there are favorable risks that are mainly associated with the possible larger positive effects of the operations of the new export-oriented companies

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Key assumptions underlying October forecasts

Assumption about stable environment and exhausted effects of the domestic political crisis for 2018 and 2019

Maintaining the assessments of sound economic fundamentals of the domestic economy

Fundamental factors similar to the April forecasts - gradual improvement of the external environment, further contribution of foreign export-oriented facilities, expectations for continuation and acceleration of public infrastructure investments and increase of foreign investments, increased confidence of domestic entities and acceleration of credit growth

Assumption about gradual fiscal consolidation, same as in the April forecast, in line with the budget revision for 2017 and the fiscal strategy for 2017-2019

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Downward correction of the foreign effective inflation for 2017 and 2018 to 1.8% and 1.4% (April forecast: 1.9% and 1.6%, respectively), and in 2019, expectations for accelerated price growth in our major trading partners and forecasts for foreign inflation of 1.7%

Analyzing primary commodities, slower increase in oil price in 2017 and stabilization in the next two years, divergent movements in food and metal prices

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-1.0

-0.5

0.0

0.5

1.0

1.5

-2.0

-1.0

0.0

1.0

2.0

3.0

Q1

2014

Q3 Q1

2015

Q3 Q1

2016

Q3 Q1

2017

Q3 Q1

2018

Q3 Q1

2019

Q3

Foreign effective inflation(annual rates in %)

changes in p.p. (right axis)

CF March 2017

CF September 2017

Upward revision of foreign demand for 2017 and 2018 - growth of 2.2% and 2.1%, respectively (April: 1.8% and 1.9%, respectively), mainly reflecting the expectations for faster growth of Germany

For 2019, there are expectations for slight slowdown in the economic activity of our trading partners and forecasts for foreign demand growth of 1.8%

6 -0.5

0.5

1.5

2.5

3.5

-0.5

0.5

1.5

2.5

3.5

Q12014

Q3 Q12015

Q3 Q12016

Q3 Q12017

Q3 Q12018

Q3 Q12019

Q3

Foreign effective demand

(annual changes in %)

changes in p.p. (right axis)CF March 2017CF September 2017

Macroeconomic scenario 2017-2019

GDP forecast

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Downward correction of the forecast for economic growth for 2017, and retained estimates for growth in 2018, same as in April

After the modest movement of 0.5% in 2017, there are expectations for reversal to the previous growth path for 2018 and 2019, at expected rates of 3.2% and 3.5%, respectively

In 2018-2019, the economic growth is expected to be export driven, with additional impetus from investment and private consumption

2.5

3.2

0.5

3.23.5

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

GDP(annual growth rates, in %)

Apr.17 Oct.17-12

-9

-6

-3

0

3

6

9

12

15

18

2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Growth decomposition(contributions to annual growth rate, in p.p.)

Private consumption Investment

Government consumption Imports

Exports GDP (in %)

GDP forecast

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Fundamental growth factors same as before - exports as generator of growth, with additional impetus from private consumption and investment:

Exhaustion of the adverse effects of the political crisis and GDP growth in the second half of 2017, driven particularly by the solid growth of exports and private consumption, amid gradual recovery of investment

On average for the three years, exports are expected to be the generator, driven by the new production facilities, as well as recovery of some of the traditional sectors and continued growth of the global economy

Positive contribution of the private consumption, given the favorable developments in the disposable income and solid credit support

Growth stimulated by investment - following the decrease in 2017, assessments for their growth supported by public and foreign investment, as well as improved investment environment for domestic investors

Regarding the growth structure, in the medium term, domestic demand is expected to continue to

make the greatest contribution to the growth, with the exception of 2017, when growth will be driven primarily by net exports

GDPDomestic

demand

Net

exports

% % p.p. % p.p. % p.p. % p.p. % p.p.

2017 0.5 2.9 1.9 -5.4 -1.7 8.1 4.4 5.4 -4.0 -0.6 -0.1 0.1 0.4

2018 3.2 2.1 1.5 5.0 1.4 10.1 6.1 7.7 -5.8 0.0 0.0 2.9 0.3

2019 3.5 2.5 1.7 6.4 1.7 6.5 4.1 5.0 -4.0 0.0 0.0 3.5 0.0

contrib. in p.p.

Private

consumption

Gross capital

formation

Exports of goods

and services

Imports of goods

and services

Public

consumption

Inflation forecast

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The current pace of inflation generally follows the April forecasts

Unchanged expectations about the price movement compared to April - expectations for normalization of inflation from 1.3% in 2017 to around 2% in 2018 and 2019, amid mild positive output gap, upward movements of some import prices and higher foreign inflation

Risks to the forecast inflation trajectory mainly attributed to the uncertainty about import prices

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-1

0

1

2

3

Q12014

Q3 Q12015

Q3 Q12016

Q3 Q12017

Q2 Q12018

Q2 Q12019

Q2

Inflation rate(in %)

revisions (in p.p.)

October 2017

April 2017

Moderate current account deficit in the period 2017-2019, averaging about 2% (somewhat lower than the April forecast)

Reduction of the deficit in trade in goods and services, with assessments for further improvement of the performance of the new export facilities, recovery of some traditional export sectors and improved balance of trade in services (similar to April)

Slight decrease in the secondary income and assessments for further widening of the primary income deficit (slightly lower than in April)

Inflows in the financial account in 2017-2018 averaged 2.1% of GDP (slightly lower than expected in April) and assessments for financial inflows of 2.9% of GDP in 2019

Main inflows in the financial account during the forecast horizon: net inflows of foreign direct investment and long-term public sector borrowing

During the entire forecast horizon, foreign reserves adequacy indicators are

maintained in a safe zone

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Forecast of deposit and credit growth

In 2017, amid weaker performances, deposit growth is estimated at 3.6% (4.2% in the April forecast), and with the further stabilization of the expectations and increased economic activity, the growth of deposits is expected to accelerate to around 6 % in 2018 and 2019

For 2017, according to the previous performances, the credit growth was slightly corrected downward to 4.6% (5.2% in the April forecasts), and in 2018 and 2019, credit growth is expected to accelerate to around 7%

The banking system remains stable, liquid and highly capitalized

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0

2

4

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8

10

12

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2011 2012 2013 2014 2015 2016 2017 2018 2019

Credit and deposit growth

Total credit, y-o-y changes, in %

Total deposits, y-o-y changes, in %

Total credit share in GDP, in % (RHS)

Summary

Risks to the latest macroeconomic scenario have been reduced compared to the April forecasts...

...whereas the October forecast incorporates expectations for stable domestic environment and exhaustion of the effects of previous adverse political developments

These projections show the potential for solid economic growth, stable prices, moderate external position, solid deposit and credit growth in 2018-2019

With stable fundamentals, yet present risks at certain points, the NBRM did not make changes in the monetary policy in the third quarter

The NBRM will continue to monitor the developments closely and if necessary, will make appropriate changes in the monetary policy

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Appendix 2: Comparison of GDP and inflation forecasts for Macedonia

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