Macedonia's political crisis has put local banks on the alert, after the central bank raised the benchmark interest rate by 0.75pp to 4% due to pressures on the deposit base and higher demand for foreign currency.
Macedonia is facing political stalemate with no sign of a quick solution following the start of anti-government protests in mid-April after President Gjorge Ivanov made the shock decision to pardon politicians under criminal investigation. It is not clear whether the snap general election planned for June 5 will take place, particularly since no political parties except the governing VMRO-DPMNE have submitted lists for election board members.
The aim of the central bank’s measure is to increase confidence in the local currency, the denar, and its stability, as well as to discourage the conversion of denar savings into foreign currency deposits, the press office of Komercijalna Banka said in a notice sent to bne IntelliNews.
Komercijalna Banka is the largest of the fourteen banks in Macedonia in terms of assets. The other three large banks are Greek-owned Stopanska Banka Skopje, Ohridska Banka, part of the French group Societe Generale, and Slovenian-owned NLB Tutunska Banka.
The central bank's decision was taken on May 4. The benchmark interest rate, which determines its monetary policy, has been kept at 3.25% since July 2013. It is also the rate of the Central Bank (CB) bills.
According to Komercijalna Banka, this is another measure aimed at stabilising the economic and financial situation in Macedonia amid the deep political crisis, alongside interventions on the foreign exchange market.
Even though it is too early to expect quick reactions from banks, they will certainly make their own calculations to adjust their interest rates in the next 10-15 days, Komercijalna Banka said.
However, there is some nervousness among the population about a potential devaluation of the denar, even though central bank governor Dimitar Bogov has tried to assure the public that this will not happen.
The panic is reflected in the tendency to withdraw denar deposits from banks and convert them into hard currency, which was one of the reasons for the central bank;s recent rate hike.
The central bank’s measure may be a signal for banks to increase their interest rates on denar deposits, but it will also mean that local lenders will have to hike their interest rates on loans to businesses and households, Komercijalna said.
Instant changes are expected for loans that are tied to the movement of central bank bills’ interest rate, but the share of these loans is small in the balance sheets of banks, the bank said in a notice.
Interest rates on T-bills may increase
Komercijalna Banka’ press office said that interest rates on treasury bills are also expected to increase in the coming days, since the last auction showed that banks have do not have excessive funds for buying government papers. At the same time, the finance ministry will need to keep up borrowing on the domestic market to carry out its operations.
Macedonia sells government securities via a 'volume tender' with a fixed interest rate stipulated by the finance ministry and dealers bid only with amounts.
In the last auction on May 4, the finance ministry sold nearly MKD2.2bn (€35.7mn) in one-year T-bills, down from the target offer of MKD3.65bn, of which banks bought only 18.3%.
So far, there are no extreme changes on the market, Jasmina Dobrasevic Kostova from Stopanska Banka Skopje’s marketing and PR department said in a notice sent to bne IntelliNews, stressing that the bank is carefully following developments.
However, she added that the increase of the key interest rate and higher demand for foreign currency may push Stopanska Banka to change its active and passive interest rates, if the central bank keeps the measure in place for the long-term.
Ohridska Banka is also closely monitoring the situation. "We will suggest taking appropriate activities in line with the market conditions if needed," the press office of Ohridska Banka told bne IntelliNews.
The average interest rate on Macedonian loans (local and foreign currency) was 6.5% in March, down from 6.9% a year ago. In the same month, the average interest rate on deposits was 1.8%, down from 2.4% in March 2015, according to central bank data.
The interest rate on denar deposits fell to 2.5% in March from 3.1% a year ago, while the interest rate on loans in local currency was 6.7%, down from 7.2% in March 2015.
The latest central bank measure may increase deposit interest rates but will also make loans more expensive.
To stimulate savings in denars, on May 5 the central bank also took the decision to increase the reserve requirement ratio for banks' liabilities in domestic currency with FX clause.
In addition, banks will be able to place foreign currency deposits at the central bank at higher interest rates, which is expected to reduce the costs of domestic banks, and consequently lead to higher interest rates on deposits.
The Macedonian central bank also warned that economic growth is likely to slow down to 1.6% in 2016, if the current political crisis continues, given its expected spillover effects on the economy.
According to broadcaster Sitel, if this alternative macroeconomic scenario is realised, Macedonia will lose €170mn as a result of lower GDP growth. Previously GDP growth was projected at 3.5%.
Central bank governor Dimitar Bogov said in a statement on May 5 that the crisis is expected to fade in 2017.