Bank of Albania: Do Crises Change Economic Fundamentals In SEE

Transcription

1. Bank of Albania Do Crises Change Economic Fundamentals in SEE ? Proceedings of the annual International Conference organized by the Bank of Albania in cooperation with the South East European Studies at Oxford Tirana, 30 October 2015 1
2. Published by : © Bank of Albania Address:Sheshi “Skënderbej”, Nr.1, Tirana, Albania Tel.: + 355 4 2419301/2/3; + 355 4 2419401/2/3 Fax: + 355 4 2419408 E-mail: public@bankofalbania.org Reproduction is permitted provided that the source is acknowledged. Printed in: 300 copies Printed by: Gent Grafik sh.p.k. ISBN 978-9928-4199-5-8 2
3. CONTENTS Opening address9 Gent Sejko , Governor, Bank of Albania Opening address Edi Rama, Prime Minister of Albania 15 Opening address 23 Othon Anastasakis, Director of South East European Studies at Oxford (SEESOX), St Antony’s College SESSION I: Has the economy changed in the post-crisis period? Post-Crisis Adjustment and Challenges in Southeast Europe Anita Tuladhar, Mission Chief for Albania, IMF 25 27 From crisis to crisis: The uncertain state of the European Union 37 Othon Anastasakis, Director of South East European Studies at Oxford (SEESOX), St Antony’s College 3
4. Remaking the Balkan economy 43 Adam Bennett , Deputy Director of PEFM & Associate of SEESOX, St Antony’s College The New Normal And The Challenges For Bank of Albania Monetary Policy Altin Tanku, Director of Research Department, Bank of Albania 53 SESSION II: Has the financial intermediation model changed? how should financial stability and supervision policies respond? 67 A new business model for banks in the light of the global financial crisis 69 Charles Enoch, Deputy Director, Western Hemisphere Department, IMF, and SEESOX Anchoring capital flows amidst global uncertainty Gillian Edgeworth, Senior Member of St Antony’s College, PFEM, & Wellington Management Financial intermediation: what has changed during the crisis? Aneta Krstevska, Chief Economist, National Bank of the Republic of Macedonia 81 87 Changing financial intermediation, and implications for financial stability and supervision99 Natasha Ahmetaj, Second Deputy Governor, Bank of Albania 4
5. GOVERNORS ’ PANEL: Misunderstanding/misjudgment vs. reality 109 summary of Panel questions:111 Moderator: Charles Enoch, Deputy Director, Western Hemisphere Department, IMF and SEESOX 112 Summary of contributions to the governors’ panel 113 Gent Sejko, Governor, Bank of Albania Summary of contributions to the governors’ panel 125 Bedri Hamza, Governor, Central Bank of the Republic of Kosovo Summary of contributions to the governors’ panel 133 Turalay Kenç, Deputy Governor, Central Bank of the Republic of Turkey Summary of contributions to the governors’ panel 139 Giuseppe Parigi, Head of the International Relations Directorate, Banca d’Italia Closing Session145 Adam Bennett 5
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7. opening addresses 7
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9. Opening address Gent Sejko * Your Excellency Prime Minister, Dear Governor Hamza and senior central bank representatives, Your excellencies ambassadors, Dear guests, friends and colleagues, I am delighted to welcome you to the annual conference of the Bank of Albania organised in cooperation with the South East European Studies at Oxford. It is a pleasure to see that this cooperation brings together old and new partners. This has been a tough year full of challenges for the Albanian economy, consequently for the work of the Bank of Albania. The full recovery of economic growth and its further improvement in the future are and remain one of the top priorities of our work for the year. The prolonged crisis has impelled us and homologous institutions across the world to review many of the economic axioms, which we had taken for granted for a long time. It is not by accident that the main topic of the conference focuses on the causality and solutions for long-term problems we are facing during this period. 9
10. Over the five year period , the Albanian economy has been growing in positive territory, yet, below its potential. This is a global phenomenon in the post-crisis period, extending across South East European economies, which have experienced even lower growth rates. I hope that during this conference we will have the opportunity to analyse in depth the reasons behind this situation, sources that feed it and the difficulties it imposes on the business model and financial intermediation. Furthermore, it would be useful to discuss on the options available to policymakers and the way out of this situation, which, I believe, is a temporary situation rather than a long-term economic equilibrium. The Bank of Albania has been actively using two main instruments, the monetary policy and the macro-prudential policy, to give its contribution for a swift and systematic closure of the negative output gap in Albania. The Bank has continued to implement an accommodative monetary policy lowering the key interest rate to the historic 2% level. Notwithstanding the scepticism that has accompanied this process, the lowering of the key interest rate is reflected in a wide range of interest rates in the financial market, including those on loans and government securities. The fact that the economy continues to grow below its potential does not necessarily reflect the absence of an effective transmission channel for the monetary policy. We are more and more convinced that, above all, we have a weak aggregate demand, which is not generating the much needed stimuli for the recovery of the economic activity. Recent data, however, render us more optimistic. The real sector is showing signs of constant recovery, corroborated by some positive developments in the external economy. I would like to underline that a clearer prospect of the political and economic situation in Greece will have a positive impact over the upcoming period. The Bank of Albania has been continuously monitoring the developments in our Southern neighbour, aware of the various risks that could spill over in the Albanian economy. But, thanks to the precise and duly 10
11. interventions , especially in the banking sector, these risks never materialised. The constant easing of the monetary policy seems to be reflected especially in investment indicators, with the domestic and foreign ones showing significant improvement over the first half of the year. On our side, we are happy that these investments were not made only due to public sector interventions. There was also a substantial component by the private sector. This leads us to believe that wellstudied projects by the investors, coupled with an increasingly sound and pro-investment business climate, will serve as main drivers for the economy towards not only higher but also more sustainable growth in the near future. In accordance with the best contemporary practices, the Bank of Albania has endeavoured to enhance the transparency in its communication with the public, not only about the actual decisions but also about our forecasts. The Bank of Albania has constantly conveyed to the economic agents the idea that the monetary policy will remain accommodative and will sustain the revitalisation of the economy. As a result, we hope that the forward guidance on the monetary policy stance of the Bank of Albania will be adequately understood by all market agents and the public. Banks and entrepreneurs should use this opportunity to boost their activity, assured that the central bank will continue to sustain and support their activity. In addition to the monetary policy easing, the Bank of Albania has paid special attention to the reform in the financial sector and the prudent supervision of the banking sector. The Chair of the Board of Governors of the Federal Reserve System, Ms. Yellen, in a statement not long ago leaves no doubt about the necessity of reforms in the financial sector, I quote “... a sine qua non for sustained economic recovery following a financial crisis is a thoroughgoing repair of the financial system.” From that perspective, in cooperation with the Parliament, government and other public regulatory entities, we have undertaken 11
12. a series of legislative and regulatory initiatives , aimed at creating incentives for the recovery and assurance in lending. Thanks to the reforms we have undertaken during this year, we have started to reap the first positive results regarding the situation of the non-performing loans. As a result, the ratio of the non-performing loans fell for the first time after almost seven years of continuous rise. The write off of loss loans, as I have explained in previous statements, was the finalisation of joint inter-institutional efforts. During this process, we have been assisted and overseen also by important international financial institutions such as the World Bank and the International Monetary Fund. Beyond the non-performing loans issue, the banking system continued to be well capitalised, liquid and financially sound. The issue of non-performing loans will require some more time to resolve, but this should not keep us from the recovery of the credit activity at home. For as long as the positive performance of the other above-mentioned indicators continues, the banking sector has room and the potential to credit convincing projects and investments. In my judgement, it is important to administer with courage and persistence the prevalent perception that non-performing loan have forced banks to adopt a very conservative approach to lending. To permanently address this problem, additional measures have been taken and will be taken in the future. I would like to briefly focus on the latest initiative in this regard: a coordinated plan between the Bank of Albania, Government of Albania, Association of Banks, and International Monetary Fund, consisting in two main pillars: The first pillar relates to the drafting and completing the legislation that regulates lending from the moment of concluding a contract until the final repayment, including disputes among the parties. These changes aim at making more precise in legal terms all procedures related to banking activity, bailiff services, borrowers and other relevant state institutions. 12
13. The second pillar is related to the regulatory framework of the activity of the banking system , therefore, related to the day to day activity of the Bank of Albania and the banking system. We have identified the regulations that will be subject to amendments. In addition to the objective for creating higher flexibility in relation to certain aspects of the activity in the treatment of the credit portfolio, we will aim at adopting a new concept: the “background check (biography)” of the client in relation to bank borrowing. We believe that this new element will help banks assess the borrowing potential of each client. In addition to what I said above, it is a fact that, recently, lending in the national currency has seen positive growth over the months. This phenomenon, among others, has been accompanied with a positive side effect at a higher speed and intensity in the monetary policy pass-through in the economy. Dear guests, As I pointed out, at the beginning, economic activity at home remains in a positive trajectory, but it has not yet reached the level we wish it were. Research at the Bank continues to confirm that the Albanian economy has unutilised potential and that the closing of the gap remains the main challenge for policymakers. Interventions through both the monetary policy and macro-prudential elements insofar have not succeeded to definitively close the gap. I listed these facts intentionally as the conference of this year is called “Do crisis change economic fundamentals?” These interventions are the main actions central banks are allowed by the legislation, and recommended by the most modern theory. If these interventions fail to introduce a long-term positive equilibrium for the economy, then a question arises naturally: what else should be done? The answer is in the phrase “structural reforms”. While the phrase may have often been speculated, the truth firmly confirms: only the willingness to project and undertake courageous and visionary reforms is the golden key to success”. 13
14. This fact was strongly emphasised in the final statement of the Ministers of Finance and central bank Governors of 24 most developed nations , (Financial Committee of the IMF) in the annual meeting of the IMF organised earlier this month in Lima, Peru. A secure sustainable long-term growth requires timely-implemented and well-sequenced structural reforms which remain critical to raise productivity, potential output, and living standards; they should bolster confidence in the economy and reduce social inequality. Concluding, I would like to underline the support of the Bank of Albania for a series of reforms undertaken recently as part of the medium-term agreement between the Government of Albania, the Bank of Albania and the International Monetary Fund. Similarly to the rest of South East Europe, Albania needs a new path, in which investors will be able to see again profit opportunities. It is vital for all of us, for the region to detach itself as fast as possible from the perception as an irrelevant geographical area, fragmented, with insignificant human, financial and economic potentials. We should do anything it takes, at any cost, to restore once again the trend and vitality this region showed before the crisis. Thank You! * Gent Sejko, Governor, Bank of Albania. 14
15. Opening address Edi Rama * Just as the birth of Christ serves as the dividing line for the two phases of human history, the same major financial crises serve as a separation line between different economic eras. Although Nobel laureate Paul Samuelson said that what we really know about global crises is that we actually know very little, today we can say with certainty that dealing with the recent crisis tested the implementation of all possible options, policies, conventional and non-conventional ones for policy makers around the world, in countries rich or poor, in developed countries or in developing countries. In the vocabulary of economists there is always the expression that financial crises are all the same, but no one looks like the other. The manner and speed with which the last crisis expanded, as a domino effect, has defied all traditional views on the self-correcting nature of financial markets, and has brought in the foreground, since many years now, the debate on the role of finance in economic growth. The World Bank report on South Eastern Europe, where we are included, says that probably no other region in Europe is sensitive anymore to the Euro crisis than countries of Eastern Europe, with very serious challenge for these small economies. Growth prospects 15
16. of the region depend largely on external factors , including the recovery of external demand, particularly in Europe, and stabilization of international energy prices at current levels. In fact, after a decade with high rates of economic growth, the region of Southeast Europe was affected severely by the economic and fiscal crisis in the Euro area. Economic activity in Eastern Europe is suffering from weak domestic demand, high unemployment rate, and from the banking systems being loaded with many nonperforming loans. The World Bank report also says that structural challenges continue to be the answer to finding growth in Eastern European countries. In this almost vicious circle lies in a new model of growth based primarily on regional economic integration, on a comprehensive and intelligent economy beyond the boundaries that separate today the region, by defining and even condemning them as economies too small to be self-sufficient. Beyond the way how it was born and spread, the crisis induced also the implementation of some specific policies that were unprecedented in the national and international level. Monetary authorities in developed countries were the first to apply aggressive monetary incentives, by reducing interest rates and then using unconventionally their own balance sheets in order to inject liquidity. At the same time, decline in production due to the crisis brought the need for countercyclical fiscal policies of such dimensions that could not even be imagined prior to the crisis. Nowadays, the developed world is dealing with the analysis of the success of unconventional instrument, such as quantitative easing. The Federal Reserve, Bank of England and the European Central Bank recently are trumpeting the success of this instrument, in a world that is still troubled financially, and whose cycles mark both large growth and loss. The crisis showed that market players were not prepared to manage the system that they themselves created. It taught us that the financial market cannot correct itself by market forces, and that central banks should play an even more important role in overseeing the health of the financial system. 16
17. National authorities should be aware that in an integrated financial system the power of their local policies is marginal . Therefore, coordination of financial supervision across countries and between different sectors of the economy is very important in maintaining financial stability in an integrated global system which, as indicated by the latest crisis of refugees, puts us face to face with developments that were unpredictable and unimaginable until a short time ago. The crisis has highlighted the fact that international economic cooperation and integration have become necessary since no country has been able to handle the new challenges in isolation from other countries, given the nature of contamination that all these challenges have. For the first time at the Vienna Conference on 27 and 28 August, the one that followed the Berlin last year, the countries of this region made a common step to show up with joint plans, in view of the internal integration of their economies, and in view of their integration to the wider European region. This first step is expression of both the awareness being shaped in the region that this is a situation that cannot be overcome partially, and no country can afford it isolated from the other, and of the conviction that is being created in the European Union that the concerns of countries in our region are necessarily linked to the fate of the region as a whole, and that the performance of each of our countries is very important to the performance of all countries together. I believe that in this regard, the Government has a merit and its role to play because this is a new approach with an aim at making this region a much more attractive destination for investments where, when someone takes up to invest, they don’t just invest in Albania or in another country in the region, but in a wider economy than the economy of each of the countries. We are all witnesses to the extraordinary transformation that has occurred in the past two decades from every aspect both in the region and in Albania, as well as to a very deep restructuring process of the economies of the region in view of an organic transformation across the continent, and simultaneously under the inevitable pressure of globalization. 17
18. The road to EU membership has contributed as a unique attraction to target reforms and structural transformation that couldn ’t be targeted without this path, and which would even be seen as unnecessary, not only to promote economic growth by opening and expanding markets, but also by creating the basis in terms of legislation and drafting of special economic policies in view of a goal that is as aware as it is an inevitable pressure of the transformation process that globalization imposes. Foreign investment in the first quarter of this year, as the Bank of Albania has certified, have reached 258 million Euros, thus making a jump of 90 million Euros compared with the same period last year. Only foreign companies are 30% more recorded in 2014 than a year earlier. In the first half of this year exports marked an increase of 11.9% compared with the same period a year ago. But these encouraging signs are not enough. We are aware that although Albania withstood the financial crisis and, as the governor underlined, withstood successfully also the threat coming from an escalation of the crisis in the neighbouring country, providing positive growth rates and financial stability, the crisis has highlighted the physiological weaknesses of a system that had actually exhausted the space for further growth. The overall economic growth rate, before the first stages and after the crisis, was halved thus reflecting the situation in the Eurozone and the difficulties in the energy sector. What we are observing constantly, and which should make us all not just reflect - because I believe that the phase of reflection is guaranteed, - but act in a more unified way, is the fact that the crisis actually brought fully to light the businesses of domestic production with all their weakness as non-formalized structures that do not guarantee a normal ongoing and ambitious accreditation of the banking sector. In fact, today we are at a time when despite the substantial progress made in relation to bad loans – we should not forget that bad loans have only increased for 7 years in a row and touched the ceiling of 25%, which constituted both a serious threat and the highest peak in the whole region exhausted by the crisis, today we have reached the lower level of 20%. 18
19. It is very clearly that in order to go below , a structural strengthening of the businesses in Albania is required, a transformation of the mentality and of the way businesses in Albania are structured and ready to access banks, because actually we are at a crossroads in this regard. Banks are ready with liquidity, but domestic business is not ready to be up to the challenge of being well-structured and to motivate with credible projects their lending requirements. In fact I believe that despite, I guess, the naturally imperfection of responses that we have chosen to answer the questions in front of which the crisis has put us, Albania has entered the process of redesigning the model of its economic development and of the transformation of its economy’s nature, aiming at an economy that is oriented by a much more sustainable domestic production and by exports. The trade sector, as well as the manufacturing sector have consistently increased their influence on credit for businesses, while it is very clear that there are two sectors that are regarded as attractive to the financial sector; agriculture and electricity. Despite major structural changes that have happened in all these years, it is still clear to everyone that agriculture is one of the most important sectors of the Albanian economy, and actually the sector with the largest contribution to the national economy by 22%. Therefore, seeing this sector as a strategic sector, as a sector with great potential of internal transformation and for transforming the country’s economy, we are focused on promoting systematic and aggressive growth, production development and formalization of businesses in the agricultural sector, and the increase of production capacities through financial investment, as well as through training and development of human capital. In fact we are on the eve of opening a new innovative program in agriculture, thanks to the support, not only moral, of the governor and of BoA, but also to the understanding with second level banks to create the conditions for a much broader access to credit for 19
20. investment in agriculture starting from next year , by establishing a state guarantee fund for them. However it is clear that economies are very complex and very dynamic systems developed by social systems and behaviours of people who populate these systems, and if we want to give an example, we can see this clearly in this new transformative phase determined by the operation against informality. Figures of only 45 days are impressive, not in terms of success, but in terms of a large quantity of data in order to analyse in depth in what social system and system of behaviours we have lived for years in relation to the economy, and what transformation can bring to the economy the social transformation of this behaviour system, in relation to the obligation of everyone to contribute according to what the law has established, in relation to their income. On the other hand it is very clear that the financial crisis has taught us how important it is for a country to focus on policies aimed at sustainable and long-term growth based on reliable sources of growth. Our economic model of many years was based on two sources, although it was clear that they would not be there for a long time, remittances and the boom in construction. Meanwhile, reliable sources of growth remain largely unaddressed and unused by longterm development policies. However, today it is clear that wherever we look, the convergence towards the EU remains the main subject of every model and every method to ensure long-term growth and sustainable economic growth. On the other hand we believe that today, since it is BoA’s annual conference, is the day to say that BoA continues to play successfully an extremely important role. It continues to be a very strong guarantor of a financial stability that, despite threats, has proved to be stable and on the other hand continues to be a very reliable reference point, which is not very common in a country like ours. Finally I want to emphasize that as a government, we support and will support on an ongoing basis every effort that would lead to 20