Recent Developments in the Region and Macedonia Opening of the NBRM-WB PIC Alexander Tieman 16 December, 2010

Overview Regional outlook – Central, Eastern, and Southeastern Europe Implications for Macedonia Precautionary Credit Line

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4 The backdrop: a global and regional recovery.

5 Emerging Europe: After a 6 percent contraction in 2009, an expansion of 3.9 percent in 2010…

…led by exports… 6

…while domestic demand remains subdued… 7

…and the recovery is uneven across regions Strongest growth: European CIS countries and Turkey Weakest growth: countries that had deep recessions 8

Revival of sovereign stress in advanced Europe: lower exports lower capital flows Spillover of sovereign debt concerns: higher financing costs spillovers to financial sectors 9 Some upside risks, but significant downside risks for EE

Why were some countries more affected than others? Common trigger of the crisis (external) yet different outcomes. Why? Domestic policies and vulnerabilities do matter !  Countries that had the largest imbalances and the strongest credit booms have seen the deepest recessions  Countries that managed to avoid the excesses have seen much shallower recessions or avoided them altogether 10

11 What does this mean for Macedonia? The economy in 2011 Risks and Uncertainties Policies PCL

12 The Macedonian Economy in is looking better than 2010 – 2011 GDP growth: 3 - 3½ percent – 2011 inflation: around 2½ percent Supported by – Growth in trading partners – Lower interest rates – Growing bank deposits – Ample liquidity

13 Macroeconomic Overview Current Account deficit – 2010: -3½ to -4 percent Rapid adjustment Supports stabilization of reserves – 2011: -4½ to -5 percent Growth in exports (metal prices, capacity utilization) Some growth in imports as well (inputs, consumption) – Beyond 2011 Stabilization at levels that can largely be financed through FDI

14 Macroeconomic Overview Reserves have increased further – To around € 1.65 billion – And are projected to continue a moderate increase in 2011

15 Risks and Uncertainties Growth in trading partners – Lower European growth could spill over to Macedonia – And would put renewed pressure on the balance of payments – Given the peg, the c/a deficit needs external financing Conditions in international financial markets – Higher uncertainty on financial markets might be here to stay for the foreseeable future – Market pressures (Ireland, Greece). – Such conditions could limit market access for Macedonia

16 Risks and Uncertainties On the positive side – European growth could gain momentum, giving a strong boost to exports – Progress towards EU accession would improve prospects for growth and FDI

17 Policies Fiscal stance – 2010 (-2.5 percent) and 2011 (-2.5 percent) appropriate in light of below-potential growth in both years – Possible as sound past policies have created room – Over the medium term, it will remain important to reduce the deficit somewhat further

18 Policies Fiscal Challenges, 2011 and beyond – Financing the deficit, near term Current reliance on private external borrowing Prudent to access the market early in the year – Financing the deficit, medium term Develop local public debt market Including at longer maturities  Which comes at a cost  But reduces exposure to volatility of external financing

19 Policies Fiscal Challenges, 2011 and beyond – Decrease in social contributions Beneficial reduction in labor tax wedge But burdens the budget – Important to continue to contain spending While protecting investment spending, that raises long- term growth potential

20 Policies Monetary policy – Rates lowered from 9 to 4% – Appropriate response Easing of external finance pressure Weak growth Subdued inflation – Main guidance remains protection of the exchange rate peg

21 Precautionary Credit Line Insurance against external vulnerabilities and risks For countries with a solid macroeconomic track record Precautionary, i.e., in the baseline case, no money is actually drawn from this credit line Still, valuable to have insurance against risks – Will likely lower the spread on Eurobond issuance – Positive signal for potential investors Request received, board date 2 nd half January

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