Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Financial Stability ReportNumber 1ALL/EUR, while the Serbian dinar depreciated against the euro by 4.2 percent, reaching104.70 RSD/EUR. Croatian Kuna (7.21 HKR/EUR) and Macedonian denar (61.52MKD/EUR) during this period were more stable against the euro.Increasing prices in the eurozone were also reflected in the price level in SEE, whereinflation rates in the majority of these countries were higher than in the previous quarter.Serbia and Albania during this quarter marked the highest rate of annual inflation (4.3 and4.2 percent, respectively), while Macedonia and Montenegro marked the lowest annualinflation rate in this period (0.5 and 0.8 percent, respectively).While in 2009, the banking sector of some of the SEE countries was mainly characterizedby credit tightening and deposit withdrawals, the first half of 2010 indicated an increase ofconfidence in the banking sector. Although at a modest pace, loan and deposit rates markedan increase in some of the region countries, suggesting continuous improvement in thebanking sector performance during this period. Countries with the highest credit growth inJune 2010 were Serbia (26.2 percent), Kosovo (9.7 percent) and Albania (8.5 percent), whilenegative credit growth rates were recorded in Montenegro (11.4 percent) and Bosnia andHerzegovina (2.0 percent). With regard to deposits, in Q2 2010, Serbia led with the highestgrowth rate in the region (22.5 percent), followed by Kosovo (15.8 percent), Albania (14.8percent) and Macedonia (14.4 percent).In Q2 2010, the banking sectors of SEE countries were profitable, with the exception ofMacedonia and Bosnia and Herzegovina which were characterized by losses. Comparedwith Q1 2010, the quality of loans in Q2 2010 deteriorated in almost all countries of SEE.Montenegro had the highest rate of non-performing loans from 16.8 percent (14.6 percent inQ1 2010), followed by Albania with 12.0 percent (11.5 percent in Q1 2010), Serbia 12.0percent (10.6 percent Q1 2010) and Bosnia and Herzegovina 8.7 percent (7.1 percent in Q12010). Kosovo remains the country with the lowest rate of non-performing loans in theregion with 4.5 percent in Q2 2010 (4.6 percent in Q1 2010).4. Macroeconomic Developments in KosovoDespite the global economic crisis, Kosovo’s economy was characterized with a stablemacroeconomic environment. Even though at a moderate rate, Kosovo's economyexperienced positive growth rates during 2009. Continuous growth of financialintermediation as well as remittances represented an important source of finance forprivate consumption and investments, despite the negative impact of the recent crisis.Euroisation minimized the exchange rate risk and brought price stability to the economy.Limited discretion of fiscal policy as a result of euroisation, and lack of law on public debtuntil 2009, as a result of Kosovo’s unresolved political status, resulted in a tight fiscalpolicy. As a result of these developments and policies, Kosovo’s budget registered surplusesand low levels of deficits. However, the low level of domestic production and, consequently,import-based economy resulted in continuous high current account deficit. The highunemployment rate remains one of the main challenges for the economy and it necessitateshigher economic growth rates in order to generate jobs and absorb the high growth rate oflabor force.| 21