Number 3 Financial Stability Report 12 |
Financial Stability Report Number 3 2. Executive summary Kosovo's <strong>financial</strong> system continues to be highly stable. The key indicators of <strong>financial</strong> sector <strong>stability</strong> such as liquidity and capitalization rates, as well as loan portfolio quality remain at satisfactory levels, whereas the expansion of the <strong>financial</strong> sector credit activity has shown slight deceleration. The direct risks to the country's <strong>financial</strong> sector have been managed adequately, thus remaining at low levels. Nevertheless, the negative global developments in the real and fiscal sectors have had slight implications for Kosovo's economy and the flow of developments in its <strong>financial</strong> sector. The prospects for 2012 global economic development have deteriorated, with the global economy expected to continue its growth slowdown. United States is the only economy expected to record accelerated growth. Developing countries, despite growing at relatively high growth rates, are expected to experience decelerated growth in 2012. Conversely, the Eurozone economy, in the wake of the deep public debt crisis, is expected to fall back into recession, and hence experience increased unemployment. Such developments in the Eurozone real sector have led to the increased uncertainty in the <strong>financial</strong> markets and banking systems of the countries facing high public debt, in particular, leading to the deterioration of loan portfolio quality and reluctance of credit expansion activity by banks. The Southeast Europe marked economic decline during the first half of 2012, whereas the projections for the entire year suggest that some of the region’s economies will record growth slowdown compared to 2011, with only Croatia and Serbia expected to enter recession. In an effort to boost the domestic demand, many of the countries in the region have increased expenditures more rapidly than revenues, thus exacerbating their budget balances. The already high unemployment rate, which is one of the biggest problems facing the region, has increased further as a result of declining economic activity, while the inflationary pressures have reduced, reflecting the global decline in food and oil prices. Nevertheless, loans and deposits in the banking systems of SEE countries continued expanding, with credit growing at slower average growth rates, while deposits facing accelerated growth. In the first half of the year, all countries in the region marked deterioration in the loan portfolio quality and increased rate of non-performing loans. Adverse developments in the euro area reflected in Kosovo's economic and <strong>financial</strong> sector developments, although the low level of Kosovo's integration into the global economy reduces considerably the effect of these risks. Kosovo's economy is expected to have the highest growth rate in the region; however, the growth rate in 2012 is projected to be lower than in the previous year. Projections for 2012 suggest a real economic growth rate of below 4 percent, compared to 4.5 percent in 2011. The main factors contributing to the growth slowdown are the decline in the volume of exports, and the decline of foreign direct investments and remittances. The slowdown of credit growth to the the private sector has also contributed to the decline in the domestic consumption and investment demand; whereas the increase of public sector expenditures and uprising capital investments have had induced economic growth. Kosovo's economy continues to face structural problems, with the high level of imports relative to exports leading to a significantly negative trade balance. The high level of trade deficit continues to be the main contributing factor to the high level of current account deficit, which is partly mitigated by the current transfers. However, in the first half of 2012, remittances declined slightly compared to the previous year. A more significant drop | 13