1. Macedonia and the Euro-zone Debt Crisis (Small and Open – Hostages of Uncertain prospects?) Ana Mitreska National bank of the Republic of Macedonia Athens May, 2012

2. Small and Open and Highly Exposed (hostages of uncertain prospects?) The resumption of the European debt crisis brought us to the starting point once again!  The intensity of the spill over effects lower, but the “agony” prolonged  Transmission channels well known  Sound initial conditions prior to the global crisis still in place... ...but strong external and internal impulses needed to built growth model

3. In the midstream of the crisis  Scrutinizing the impact through main transmission channels  Real channels of transmission – weaker impulses through foreign demand...

4. In the midstream of the crisis  Scrutinizing the impact through main transmission channels ...impacting domestic and export demand and bringing to a standstill the growth... ...not allowing the economy to hit the potential... ...implying sluggish recovery of the labour market

5. In the midstream of the crisis

6.  Scrutinizing the impact through main transmission channels  The outcome already anticipated, with high exposure of the trade to Euro zone countries

7. In the midstream of the crisis  Scrutinizing the impact through main transmission channels Financial channels of transmission – multidimensional  The banking sector – low financial integration, stable and well capitalised... ...but confidence factor brought the “lacklustre” feature of the credit market

8. In the midstream of the crisis

9.  The banking sector, assessed to be resilient to shocks arising out of the ongoing crisis...  despite the large share of EU capital within the total banking capital

10. In the midstream of the crisis  Scrutinizing the impact through main transmission channels  Financial channels of transmission – multidimensional  Capital inflows – “Flight to Quality” and “Home Bias” yielded into a sharp slowdown in capital inflows at the onset of the global crisis  Yet, capital flows resumed, providing impetus to economy... ...and despite the ongoing debt crisis in the Euro zone, they continued to penetrate into the economy... ...although at a more moderate pace compared to prior to the crisis

11. In the midstream of the crisis Scrutinizing the impact through main transmission channels  Financial channels of transmission – multidimensional  The Euro crisis shivered financial markets again  Macedonia – with low integration on the international capital markets... ...yet, increased risk aversion, lead to higher risk premium and possible limited future access to external funding of the private and public sector

12. Policy Setup  Looser Monetary policy, amidst  negative output gap  contained inflationary pressures  no large external disequilibria  Fiscal policy prudent  with low deficit and public debt  ability to attain external financing at concessional terms in 2011, despite rising turbulences on international market... ...but prospects might be worrisome, as economy recovers slowly and access to financing becomes more difficult

13. Policy Setup

15. The old Conclusion Recent crisis – “testing ground” for the resilience of the economy The crisis has been weathered well, as no excessive imbalances existed prior to it Macro-policies remained focused during the crisis, providing stable and benign environment Main challenges ahead, same as before the crisis Augmenting stability with structural reforms Diversifying the export structure Attracting new foreign investments Moving towards sustainable external position

16. New insights and Conclusion The protracted Euro crisis labeled us as a “hostage’ of its uncertain recovery......again, it brought to a halt the recovery process and yielded into a very “moderate” scenario for the economy as a whole in the next two years......posing future policy challenges in the fiscal area. Yet, there are few sparks, making the initial conditions slightly to differ compared to the very beginning of the crisis o the protracted Euro crisis, amidst uneven global recovery, pressed for new trade directions o the economy started to feel positive spill over effects from FDI newcomers – structural change of the trade structure o low imbalances preceding the crisis and prudent policy stances helped, capital inflows to resume faster, with non-EU investments announced to enter the economy

17. New export destinations and more diversified export structure (in % of total export)

18. New export destinations and more diversified export structure

19. New insights and Conclusion The Euro zone is our natural anchor...hence, inevitably changes in its economic cycle pose direct and indirect consequences Yet the crisis in progress demonstrated the need not “to put all eggs in the same basket “ It prompted the need to discover alternate export destinations and to make efforts to diversify the FDI country of origin It revalidate the need for sound fundamentals and policies, as a prerequisite for stronger resilience to crisis and faster exit out of the gloomy outlook

20. THANK YOU FOR YOUR ATTENTION http://www.nbrm.gov.mk MitreskaA@nbrm.gov.mk