Arthur Javadyan

27.01.2010 18:41
Arthur Javadyan

Chairman of the Central Bank of Armenia Arthur Javadyan answers questions on-line conference on the site

1. Do you recognize the erroneous transaction of selling the Central Bank’s bank gold, constituting the gold reserves of Armenia in the amount of approximately 1.5 tonnes and costs just over $ 380 per troy ounce, done at the end of 2003? Is the Central Bank of Armenia still holding the view that there is no need to buy gold to replenish their reserves?

A. Javadyan: The transaction in 2003 was a success because it was profitable, and should be judged on results of that time. In general, it is extremely difficult to make predictions about the behavior of gold. Gold is one of the items most prone to frequent fluctuations in the commodity market, which involves the formation of high profitability or losses on the basis of its review.

For comparison, note that the level of fluctuations in financial instruments is a few dozen, and in some cases, it is several hundred times lower than that of gold. The presence of precious metals in Central Bank reserves leads to a noticeable increase in fluctuations of the latter.

In addition, the profitability of investments made in gold remains at extremely low levels. At the same time it should be noted that the Central Bank of Armenia does not rule out gold as an asset, but the problem must be approached comprehensively. For countries with low foreign reserves, including Armenia, such circumstances are of great importance, and for this reason, the structure of international reserves of gold is missing.

2. Do not you think that the target inflation rate to 3%, which was the aim several years ago, will provide better stabilization of inflation expectations than the current 4 (± 1.5%)? Is it planned to reduce the rate of inflation targeting over the next years?

A. Javadyan: Medium-term inflation target, which provides the basis of medium-term programs of the Government of Armenia, is 3% (± 1.5%). It is assumed that in the near future, the Central Bank would revert to the level of the target.

Because of the financial crisis, the government temporarily deferred the current medium-term expenditure framework, only during 2010 it will become clear, will the Bank of targeting 3% (± 1.5%) in 2011, or postpone it for the next few years.

As for the current target of 4% (± 1.5%), it was temporarily increased in early 2007 in connection with the cumulative inflationary pressures, which is due to supply-driven (the international price of raw materials and basic food commodities, from which the dependence of the economy of Armenia, were unfortunately, large).

An immediate provision of 3% inflation in these conditions would lead to the suppression of economic activity.

3. How would you comment on the recent statement by the Armenian National Congress that a sharp currency devaluation will take place quite soon, given that the last time the Central Bank of Armenia has made a major intervention in the market to curb the devaluation of the dram?

A. Javadyan: Central Bank of Armenia will be faithful to the policy of the floating exchange rate at which the rate is determined by market supply and demand, and the Bank may create additional demand or supply by buying or selling currency only to smooth out sharp fluctuations.

This intervention in the currency market can have two sides: for example last week, the Central Bank not only sold the currency, but also bought it in order to avoid a sharp rise in price of the dram.

With regards to the allegations of rushed and sharp devaluation of the Armenian dram, at the present time the Central Bank sees no reasons for the crisis in which this can happen.

In accordance with the fundamentals prerequisites of the economy, no sharp depreciation of the rate is planned in Armenia. In the short term, the rate usually deviates from the equilibrium on a short term basis of speculative or psychological factors that we are witnessing in recent times.

4. After March 3, the Central Bank projected fluctuations between the dollar-dram in the hallway 360-380 drams for 1 dollar. Will the Central Bank’s forecast change for 2010, and in what direction? What monetary policy is the regulator intended to be kept at in the next year?

A. Javadyan: The forecasted average exchange rate for the subsequent months of the year, which the Central Bank of Armenia issued in March, was due to exceptional circumstances related to the need to target markets and avoid panic. Forecasting the exchange rate is something highly ungrateful.

The exchange rate is influenced by many different factors - from the fundamentals of the economy (which cause the rate in the long run) to the rates of currencies of trading partners (such as euro / dollar or ruble / dollar), as well as market sentiment (which affect the rate of short run).

Since these factors change frequently, we don’t plan to forecast the exchange rate, and we do not intend to and do not recommend to. The Central Bank will follow a policy of floating exchange rate in 2010.

It will intervene in the foreign exchange market only when necessary smoothing sharp fluctuations in the exchange rate , when the speculative or psychological factors that have a non- fundamental basis influence the rate from its equilibrium level (a phenomenon that we have seen lately).

5. Can we say that Armenia has reached the bottom of the crisis? What are the projections of the Central Bank for the further development of the economy? During the crisis in Armenia carried out anti-crisis measures for the rehabilitation and reconstruction of the economy. Given the actions taken and the reforms will Armenia come out of the crisis stronger than it was before the crisis?

A. Javadyan: During 2009, in its publications, the Central Bank has repeatedly noted that, according to forecasts, the economic downturn will culminate in the third quarter of 2009. Events have shown that in January-July, the economic downturn compared with the same period last year reached 18.5%.

However, due to the coordinated anti-crisis measures taken by the Government and the Central Bank of Armenia, in August we managed to enter the stage of economic recovery. As a result, in January-November a slowdown in economic decline was noticed, which amounted to 16%.

In 2010, a small, but positive economic growth is expected. The crisis also showed the weaknesses of the economy of Armenia, which have repeatedly been stated the Government, the Central Bank and international organizations.

In particular, the low level of diversification, lack of institutions, working with the "long-term" money, poor competitive field and the weak price elasticity is not enough for an attractive investment environment.

We are hopeful that the government's measures are aimed at addressing the above problems, they will bear positive results, enhancing resilience and competitiveness of the economy.

6. Would you please summarize the results of the Central Bank of Armenia's monetary policy carried out in 2009? What monetary policy will the Central Bank maintain in 2010? In particular, what will be the policy regarding the refinancing rate?

A. Javadyan: In the initial period of the crisis, an effective mix of objectives of price stability and financial stability enabled us to avoid turmoil in the financial system. Next on the background of a moderate level of inflation a monetary policy to restore economic activity and price stability was accepted. As a result, we managed to create the most favourable conditions for economic recovery, while maintaining prices at a manageable level.

7. Can you assess the situation of the financial system of Armenia in 2009? How much was it affected by the crisis?

A. Javadyan: In terms of financial and economic crisis, the financial system of Armenia avoided abrupt shocks. The most important component was its banking system, which accounts for about 93% of the assets of the entire financial system.

The global financial crisis on the banking system of Armenia in the beginning has been traced in the fourth quarter of 2008. The banking system has managed to successfully withstand the crisis, primarily due to the high level of capitalization.

At present, the risks of commercial banks are within the controlled borders, the rate of capital adequacy of the banking system is 29%, which exceeds the statutory rate of 12%.

Indicators of current and overall liquidity are, respectively, 35% and 147%, which significantly exceed the rates of 15% and 60%, with an open position in foreign currency accounts for only 0,4% of the capital.

Of course, it should be noted that during 2009 a negative phenomenon was also observed in the banking system. In particular, the credit quality somewhat deteriorated.

Thus, the standard loans (good credits) account for 92,6% of total loans against 95,6% in the beginning of the year. However, in comparison with the quality of loans the banking systems of other countries this figure is quite high. In the first half of 2009, both banks and borrowers have been cautious on lending, which has led to passivity in the credit market.

Since the second half of 2009, the credit market in Armenia has increased substantially, aided by the formation of banks and borrowers with certain expectations of the stability of income borrowers.

The expansionary policy adopted by the CBA and the various programs implemented with the assistance of the state, such as Germany and the Armenian mortgage program, the program of economic stabilization in Russia's loan program of World Bank lending for small and medium-sized businesses, and bank lending to the economy in other programs.

Increased lending, of course, also associated with the positive trends of stabilization in the economy, as well as the optimistic expectations of individuals and entities.

It is noteworthy that in 2009, mainly loans granted to legal entities (mainly small and medium businesses) promoted the economic growth and progressive development of the banking system. As a result, in 2009 an increase of banking system assets by 25%, credits by 11%, liablities by 29%, deposits by 35% and capital by 13% was recorded.

8. Do you expect a merger or absorption of Armenian banks in 2010, do you think such a development would be appropriate and effective? Do you expect an entry of new banks?

A. Javadyan: Central Bank of Armenia is a proponent of consolidation, not hindering the competition in the banking market, but this process should have market-based incentives, and should not be imposed. We have many times declared, that we will contribute to such associations and mergers. The central bank has not yet received formal applications to open new banks or mergers of existing banks.

However, we do not exclude this in the future, as there are rumours present about the negotiations of such associations.

9. Do you agree with the opinion that crisis is also a chance for the economy of the country to show its stability and get competitive advantage towards other countries? What is this chance for the economy of Armenia?

A. Javadyan. In the initial phase of the crisis we managed to keep stability of financial system effectively combining this problem with the necessity of stability of prices. In the result of stimulating monetary-credit and tax-budget policies, from August gradual rehabilitation of economic activity was observed and prices were stable. It allows us to say that we have rather high level of economic stability and can resist external variations.

We should not forget that in the result of crisis also weak sides of Armenian economy were detected, particularly low level of diversification, lack of institutes working with “long” money, inefficient competitive field and weak elasticity of prices, non-attractive investment field. These problems require quick decisions.

10. Are the main macroeconomic indicators of state budget 2010 real – volume of GDP, inflation, state debt?

A. Javadyan. During the discussions оf draft budget 2010, the Central Bank of Armenia officially concluded that our prognosis related to macroeconomic indicators coincides.

11. How do you characterize the process of crediting of small and medium-size business in Armenia? Are the crediting conditions available for the borrowers? Which are the sizes of crediting of small and medium-size business and the demand for it?

A. Javadyan. From the point of view of economy development of the country small and medium-size business is very specific. Credit provision for the given sphere had always been in the center of attention of Central Bank of Armenia.

Negotiations with different international structures were mainly targeted at the crediting of this sphere. There are different programs which directly or through the banks give credits for this sphere.

It is worth mentioning that Central Bank of Armenia jointly with the Armenian government implemented broad-scale crediting of small and medium-size business. Significant crediting was provided from Russian stabilization credit fund and World Bank.

Attractive conditions of this credit in some way fall behind the conditions of crediting of stabilization program. In the result of joint discussions of CB Armenia and WB, credit conditions were improved and in 2010 growth of crediting volume are expected.

The mentioned programs had effect of locomotive and during their implementation sizes of crediting from own resources were increased. In 2009 significant increase of credit investments was implemented by funding of small and medium-size business.
Commercial banks, taking credit risks, assess solvency of borrowers themselves and carry out positive or negative decisions on providing credits. In its result availability of credits for the borrowers with high risk is doubtful.

Despite reduction of 1 point, percent rates of crediting are still high. Its main obstacle is absence of scale effect in the banks which has tendency of improvement related to integration of banks in the conditions of stable growth of assets. At present, sizes of crediting of small and medium-size business are 30% of credit portfolio. Demand of credits is rather high.

In 2010 the Central Bank of Armenia will continue implementation of measures targeted at the increase of small and medium-size business.

12. In 2009 the institute of financial ombutsman was established in Armenia. How do you assess the activity of such institute? Does it implement its tasks?

A. Javadyan. Office of financial ombutsman is a professional out-of-court institute which deals with free, quick and efficient review of complaints of consumers on provided financial services by organizations.

In the absence of the given structure the clients had to apply to general or arbitrage courts which take rather long time and money.

Office of financial ombutsman has specific assignment. In general, the year 2009 can be considered the year of establishment of office of financial ombutsman. The office developed principles for cooperation of financial organization, state bodies and international structures.

This is an important step in providing information, quick and efficient exchange of experience.

Today the great number of financial organizations concluded agreement on cooperation and liabilities of not disputing the decisions of financial ombutsman in the court. Cooperation is established between international structures dealing with the protection of rights of consumers and financial ombutsmen of a number of countries.

One of the most important issues in 2009 was public outreach of the activity of financial ombutsman’s office, people’s rights and their protection.

Advertisement Company was conducted; visits were organized to the regions of Armenia where seminars were conducted. In 2009 about 380 people applied to this office and 55 cases are under review.

Such a big backlog is conditioned by low level of public outreach. Applications were submitted to financial ombutsman regarding different issues. The majority of applications are out of competence of financial ombutsman. About 70% of reviewed cases were in favor of the clients or decision on reconciliation of financial organization and the client.

13. Is Armenia going to become financial center in the region? Do you conduct any activities or steps in this direction? Did the crisis affect implementation of this project?

A. Javadyan. Currently activities in this direction are in process. The first step will be establishment of necessary structures, legislative and normative field in accordance with international standards.

In the context of infrastructure the important achievement is introduction of the institute of ombutsman, system of consumers’ rights protection on legislative basis and regulation of financial reporting in accordance with European directives and international standards (IFRS). In the context of becoming regional financial center, currently necessary studies are implemented and works with different international structures are conducted.

In current crisis conditions not only in our region but in the world the financial system is somehow paralyzed or is in expectance stage. After post-crisis stabilization we will more actively implement these broad-scale and step-by-step processes.

14. How do you assess the process of credit return?

A. Javadyan. In the result of crisis in 2009 worsening of the quality of credits was registered and the weighted average of such called bad credits reached 10% in the credit portfolio of the banks. At the end of the year together with positive economic developments improvement of quality of credits was observed.

Weighted average of classified credits (class of controlled, non-standard and doubtful credits) is 7.4%. In the beginning of the year this indicator was 4.4%.

In banking system of other countries this indicator exceeds 8% (for example, in Latvia, Lithuania, Moldova. In Georgia it is 8-11%, Ukraine and Kazakhstan - higher).

15. Why the Armenian banks do not inform the population about the changes of percent rates of deposits (or inform not properly)?

A. Javadyan. From January 2009 the law “On involvement of bank deposits” entered into force according to which the order and conditions of provision of information by the banks about involvement of deposits, advertisement of deposits, order of percent rates of deposits, rights of depositors and protection of legal interests are regulated.

Moreover, regulation “On order, conditions, forms and minimum requirements between the banks and depositors, creditors and consumers” was adopted which you can find in the official site of CB Armenia

According to the regulation, the order of contact between the bank and the client before signing a contract in the period and action of contract should be regulated. In case of one-sided change of the provided information by the bank, the client should be notified about it within seven working days till entering of the decision into force.

In other cases (if the changes are not directly related to the given bank, for example, if the percent rate is floating and is related to calculation rate of CB and the bank knows about the expected change earlier) the information should be provided in seven working days after notification of the bank. If the bank informs its depositors, in this case CB Armenia applies necessary measures. The client in its turn can apply to the office of financial ombutsman for regaining its violated rights.

16. Government of Armenia plans to provide long-term mortgage loans to young families by available percent rates. Could you tell us about it in detail?

A. Javadyan. Central Bank jointly with the Government of Armenia develops project of providing available mortgage credits to young families. During implementation of the project young families can get mortgage loans by low percent rates for 10 years.

Currently, works are conducted in the direction of creation of separate structure which will bear responsibility for the project implementation. Parallel to it, mechanisms of maximum support are being developed. Separate structure of project implementation will be created by the end of first quarter of 2010, after which project implementation will start. –0–

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