Revisions of macroeconomic forecasts

– April 2016 -

Governor

Dimitar Bogov

May 2016

Contents:

Review of risks between the two forecasts

External assumptions

Baseline macroeconomic scenario

Alternative macroeconomic scenario

Review of risks between the two forecasts

Pronounced adverse risks ...

... primarily related to the domestic political crisis...

...as well as with the external environment - slow recovery of the global economy, downward revision of the global growth forecast, geopolitical risks.

Baseline macroeconomic scenario - assumption for rapid stabilization

of the political context.

The deteriorating political environment in the last stages of forecast and the initial spillover effects on the confidence and expectations of economic agents have created a need for an alternative macroeconomic scenario which assumes continuation of political instability until the end of the year.

In this forecast cycle: downward correction of foreign effective inflation...

...amid downward revisions of the expectations for oil prices and prices of cereals.

-1.3

-0.8

-0.3

0.2

0.7

1.2

-2.6

-1.6

-0.6

0.4

1.4

2.4

2013

Q1

Q3 2014

Q1

Q3 2015

Q1

Q3 2016

Q1

Q3 2017

Q1

Q3

Foreign effective inflation

(annual rates in %)

changes in p.p. (right axis)

CF September 2015

CF March 2016

-18

-12

-6

0

6

30

40

50

60

70

80

90

2013

Q1

Q3 2014

Q1

Q3 2015

Q1

Q3 2016

Q1

Q3 2017

Q1

Q3

Brent oil(quarterly average, EUR/Barrel)

changes in EUR

(right axis)October 2015

April 2016

Contrary to the global economic outlook, the foreign effective demand for Macedonian products has been revised upwards, in line with the optimistic growth outlook of some trading partners.

For 2016, the foreign demand is expected to increase by 1.5% (1.4% in October), while for 2017, it was revised upward (from 1.5% in October to 1.9%).

-1.0

-0.5

0.0

0.5

1.0

1.5

-2.0

-1.0

0.0

1.0

2.0

3.0

2013

Q1

Q3 2014

Q1

Q3 2015

Q1

Q3 2016

Q1

Q3 2017

Q1

Q3

Foreign effective demand

(annual changes in %)

changes in p.p. (right axis)

CF September 2015

CF March 2016

Baseline macroeconomic scenario

GDP forecast

During the forecast horizon, the growth rate is expected to remain solid - growth of 3.5% for 2016, and 4% for 2017.

The projected pace and structure of growth remain unchanged compared with the

October forecast. The assumptions about the fundamental growth factors have remained the

same: investment and exports continue being driving forces of growth, with additional impetus from private consumption

- public investment in infrastructure, investment in new facilities by foreign investors,

increased activity of new export facilities, favorable labor market conditions, credit support from domestic banks.

GDPDomestic

demand

Net

exports

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

2016 3.5 2.7 1.9 7.9 2.2 5.9 3.0 6.2 -4.3 3.4 0.5 4.7 -1.2

2017 4.0 2.7 1.9 8.8 2.4 4.3 2.2 4.1 -2.9 1.4 0.2 4.6 -0.6

contrib. in p.p.

Private

consumption

Gross capital

formation

Exports of goods

and services

Imports of goods

and services

Public

consumption

Inflation forecast

Lower inflation in 2016 than expected in the October forecast: a downward correction from 1.5% to around 0.5% in 2016.

Lower performance in the first quarter and downward revision of import prices.

A positive output gap in the period 2016-2017.

For 2017 - inflation rate of 1.6% amid positive output gap, higher food and energy prices, and increased foreign effective inflation.

Risks to the projected path of inflation are downward and mainly attributable to the uncertainty about the global economy and the prices of global primary commodities.

-4.0

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2013 2014 2015 2016 2017

Inflation rate(in %)

revisions (in p.p.)

Inflation (April 2016)

Inflation (October 2015)

A smaller current account deficit for 2016 and 2017 than projected in October lower energy deficit; lower income deficit - lower reinvested profit. The current account deficit in 2016-2017 remains moderate and stable improved balance of goods and services - lower energy deficit, increased net exports of new facilities; unfavorable trends in export of metals in 2016 and recovery in 2017; moderate decrease in the surplus in current transfers.

-6.8

-2.0 -2.5 -3.2-1.6 -0.8 -1.4 -1.2 -1.4

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

Current account deficit in the balance of payments(% of GDP)

Trade balance of goods and services Primary income Secondary income Current account deficit

April 2016

-1.9 -2.4

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2016 2017

Ocotber 2015

Lower net financial inflows compared with the October forecast - mainly due to reduced foreign investment and lower net borrowing of the private sector.

During the entire forecast horizon, foreign reserves adequacy indicators have

ranged within the safe zone.

6.4

2.8

6.8

4.7

0.8

5.2

-1.0

1.1

2.9

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

Financial account structure(% of GDP)

Other, net

Direct investment, net

Private sector net-borrowing

Governmnet net-borrowing

Financial account

April 2016

1.8

4.1

-10.0

-5.0

0.0

5.0

10.0

15.0

2016 2017

Ocotber 2015

Forecast of credit and deposit growth

Estimates for steady economic growth, amid deposit growth and stable risk perceptions of banks, will contribute to the continuation of solid credit growth, which is expected to reach 6.8% at the end of 2016 and 7% at the end of 2017.

It is expected that the deposit growth will be 6% in 2016 and for 2017, it is estimated to accelerate and climb to 7.2%.

The banking system remains stable, liquid and highly capitalized.

40.0

42.0

44.0

46.0

48.0

50.0

52.0

54.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

2010 2011 2012 2013 2014 2015 2016 2017

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)

Alternative macroeconomic scenario

Decreased public confidence

Increased propensity for foreign currency -

lower private transfers

Withdrawal of deposits - lower deposit growth

Reduced private consumption

Increased distrust of investors

Lower FDI inflows and lower domestic

investment

Unfavorable labor market

developments

Risks to financing of economy

Consequences

Lower lending

Lower exports, thus lower imports

Slower economic growth and

reduced price level

Reduced foreign reserves

Lower GDP growth: 1.6% in 2016 and 3.9% in 2017. Compared to the baseline scenario, the greatest downward deviation would be registered

in private consumption and investment, exports would be similar, and imports would be slightly lower.

Opening of negative output gap with downward pressures on prices.

-2

-1

0

1

2

3

4

5

6

7

Q1

2014

Q3 Q1

2015

Q3 Q1

2016

Q3 Q1

2017

Q3

GDP

(y-o-y changes, in %)

alternative scenario

baseline

-3

-2

-1

0

1

2

3

4

5

6

Q12014

Q3 Q12015

Q3 Q12016

Q3 Q12017

Q3

Private consumption

(y-o-y changes, in %)

alternative scenario

baseline

-20

-10

0

10

20

30

40

Q12014

Q3 Q12015

Q3 Q12016

Q3 Q12017

Q3

Gross capital formation(y-o-y changes, in %)

alternative scenario

baseline

Larger current account deficit, due to reduced inflows of private transfers (net purchase from the currency exchange market). Yet, the deficit remains moderate at about 2% of GDP in 2016 (compared to 1.2% in the baseline scenario).

-6.8

-2.0 -2.5 -3.2-1.6 -0.8 -1.4 -1.2 -1.4

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

Current account deficit in the balance of payments(% of GDP)

Trade balance of goods and services Primary income Secondary income Current account deficit

Baseline scenario

-2.0 -2.8

-30.0

-20.0

-10.0

0.0

10.0

20.0

30.0

2016 2017

Alternative

scenario

Alternative scenario

- financial account -

Deteriorated financial account, due to: lower direct investment and net borrowing of the government and

the private sector; higher net outflows in currency and deposits of other sectors

(increased preference for liquid foreign assets).

6.4

2.8

6.8

4.7

0.8

5.2

-1.0

1.1

2.9

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

12.0

2009 2010 2011 2012 2013 2014 2015 2016 2017

Financial account structure(% of GDP)

Other, net

Direct investment, net

Private sector net-borrowing

Governmnet net-borrowing

Financial account

Baseline scenario

-1.0

1.5

-10.0

-5.0

0.0

5.0

10.0

15.0

2016 2017

Alternative

scenario

Slower economic activity and weaker foreign exchange flows - weaker deposit growth (2.3% rather than 6% in 2016), which along with the lower demand and supply of loans results in slower credit growth compared to the baseline scenario (3% rather than 6.8%).

2

3

4

5

6

7

8

9

10

11

12

Q1

2014

Q3 Q1

2015

Q3 Q1

2016

Q3 2017

Credit

(y-o-y changes, in %)

alternative scenario

baseline

2

3

4

5

6

7

8

9

10

11

12

Q12014

Q3 Q12015

Q3 Q12016

Q3 2017

Deposits(y-o-y changes, in %)

alternative scenario

baseline

Summary

Risks to the two scenarios:

- External environment is uncertain and unfavorable;

- Domestic political risks are particularly pronounced.

The alternative scenario clearly shows the effects of political instability on the economy.

In response to the deteriorating expectations due to the political situation, the NBRM has increased the policy rate from 3.25% to 4%, and today, we have adopted new monetary measures.

It is worth mentioning that the economic fundamentals remain sound and in recent days, the pressures on currency exchange market and deposits have alleviated.

The NBRM will continue to closely monitor and, if necessary, take additional measures to fully stabilize the expectations of economic agents.