What the crisis brought to the fore is the critical importance of having structural and policy cushions to effectively cope with shocks. From a central bank perspective, two issues are in the spotlight: well-established and preserved macroeconomic stability, and stability of the financial system.
The specifics of the Macedonian economy are that it has operated in a favourable environment of low and stable inflation and well-anchored expectations, supported by a sound external position, as an important pillar in a country with a fixed exchange rate regime. The external position of the economy has been improving continuously in the last decade. The process has been underpinned by the integration of the country into global supply chains with higher value added, which significantly improved the export base and helped to gradually lower the large trade deficit. The underlying force behind this process was the continuous inflows of FDIs in the tradable sector, mostly into the automotive industry. The FDI based flows have been dominating the overall private financial flows, thus making the capital reversal risk very unlikely. In addition, the share of interest rate sensitive flows is negligible, contributing to the overall external resilience. These positive trends have enabled significant accumulation of foreign reserves in the past years, creating cushions to cope with shocks.
The fundamentally strong external position has enabled us to implement an accommodative monetary policy as a crisis response. Pressures on the exchange rate emerged, mostly through the confidence channel, but they were short-lived and contained. Given the buffers in the reserves and the swift expectations management, monetary policy was relaxed several times as of the beginning of the year. Hence it has contributed to mitigating the impact of the crisis on the economy, while preserving the stability of the peg.
As for the financial system in light of the current crisis, it is of vital importance that the Macedonian banking system is sound, with sufficient capital and liquidity buffers that can be used to absorb potential losses. It is highly solvent, with a CAR of 16.3% at end of 2019, well above the regulatory minimum, and mainly consisting of high quality capital. Part of the capital excess refers to the capital buffers that we introduced in 2016, under the Basel III capital requirements. Hence, similar to the more advanced countries, temporary depletion of the capital buffers could be introduced, to absorb possible losses in banks’ balance sheets. The liquidity position is also strong, well above the regulatory liquidity requirement.
Given the sound banking system, while anticipating temporary financial difficulties of creditworthy borrowers, we have introduced regulatory flexibility. It allows the banks to provide a temporary and targeted loan restructuring. Hence, instead of allowing for a blanket moratorium, it has been done more prudently with tailor-made solutions, which is an additional shield against excessive risk-taking during the crisis. Overall, the strength of the balance sheets, the regulatory approach undertaken and the possibility of foreign-owned banks to approach their parent banks if needed, ensure that the capacity of banks to withstand the shock and to allow for some additional credit flows is sufficient.
Having sound economic fundamentals in place, as well as timely and coordinated measures, interventions, and active and appropriate communication with the public, we managed to anchor expectations and preserve the stability on the FX and deposit market, even in this turbulent and highly uncertain environment. Although the economy will face a downturn in the short run, it is not expected to create severe economic imbalances nor seriously affect the potential of the economy in the long run. The structure of the external trade and financial flows could facilitate faster post–crisis recovery. The dominance of exports connected with global supply chains of goods, as compared to the much lower dependence on services, might enable the recovery of the Macedonian economy to commence at the earlier stage of the overall global recovery. After the rebound, the economy is expected to unleash its growth potential, which will also be supported by the opened perspectives for EU and NATO membership.
The clear lesson is that while we are currently focused on fire extinguishing, we should not lose sight of structural hurdles that have to be tackled to increase the long term potential of the economy, reduce vulnerabilities and consequently rebuild policy buffers for future shocks that will inevitably appear on the horizon.