Devaluation of Armenian dram to increase credit burden and dollarization in population's deposits

09.12.2014 18:15
Devaluation of Armenian dram to increase credit burden and dollarization in population's deposits

YEREVAN, December 9. /ARKA/. Devaluation of the Armenian national currency took recently will increase credit burden and dollarization in the population's deposits in banks.

On November 24, the Armenian dram took a sharp dive – it fell 16.6 percentage points against the U.S. dollar hitting its record low in the last eight years. On December 2, the national currency sank 7.07 percentage points against the dollar to a new record low – 442.33 drams per one dollar, and today the dollar traded at 452.50 drams.

Dollarization of credits in Armenia reached 62.3% in October 2014, and this increase the population's credit burden amid the national currency's devaluation.

The difference in exchange rates resulted from 8.2% devaluation of the dram since the beginning of this year has created additional credit burden amounting to more than AMD 96.9 billion to the population.
The Central Bank of Armenia says the share of the loans extended to residents in foreign currencies grew from 56% to 62.3% over five years.

Lending in foreign currencies amounted to about AMD 1182.7 billion in October 2014 after growing 9.8% since the beginning of the year, and loans in drams totaled AMD 712.7 billion after growing 6.8%.
The high demand for loans in foreign currencies is mainly due to lower interest rates, compared with those for loans in drams. The regulator says loans extended in for a period less than one year in dollars were available at a9.84% interest rate in October 2014 and those extended in drams at a 15.1% interest rate. Loans extended for a period longer than one year in dollars were offered at an 11.79% and in drams at a 17.13% interest rate.

Armenia's residents earn money in the national currency and the dram's devaluation puts additional repayment burden on borrowers of loans in foreign currencies.

At the same time, devaluation of the dram amid the current fuss at forex market, despite the high interest rates on dram deposits, may lead to redistribution of the population's savings toward the dollar.
According to the central bank's data, interest rate on up-to-one-year deposits in drams was 10.54% in October and in dollars 6.5%. Interest rates on over-one-year deposits were 12.55% and 7.36% respectively.

Things were similar also in 2009, when dollarization rose from 44.1% in 2008 to 66.6% in March 2009, immediately after the dram's plunge caused by the central bank's transition to a floating exchange rate policy. By the end of 2009 dollarization reached 68.6% hitting its historical record high.

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However, dollarization escalation started subsiding as the country's economy was stabilizing, and it lessened to 58.6% in October 2014. Residents' deposits in foreign currencies totaled then AMD 734.7 billion, after growing 6.7% since the beginning of the year and deposits in drams grew 12.7% to AMD 518.7 billion.

It is obvious that dollarization is commonplace in developing countries and that, as a rule, it emerges after high-inflation and/or devaluation periods.

Very often the growing public confidence in the dollar comes as people's reaction to instability of their own national currency.

Although deposit dollarization rate went down in Armenia in recent years, it still remains relatively high.
Experts say reduction of dollarization is mostly hobbled by large volumes of imports (45% of GDP), individual money transfers (about 17% of GDP) and the population's high inflation outlooks.
The stable national currency would become an effective dedollarization instrument.

Some Armenian experts, explaining what is now going on with the dram, point out outside factors, particularly economic things in Armenia's partner countries that face economic decline now and devaluation of their national currencies. They also point out the situation at international commodity, raw materials and financial markets.
Economist Vilen Khachatryan thinks Armenian dram’s downward motion will be not so dramatic, but the national currency will remain under the threat of devaluation until March. In his opinion, the dram’s devaluation is unlikely to come out of a 20-percent range.

The economist said that sharper fluctuations will be seen after January as a result of rapprochement between Armenian and Russian economies within the Eurasian Economic Union.
He didn’t rule out that western economic sanctions against Russia may be eased in March.
Tatul Manaseryan, head of the ALTERNATIVE Research Center, said that the exchange rate is hardly to reach 500 drams per one dollar. He is convinced that it will fluctuate between 450 and 460 drams per one dollar.

He doesn't rule out either downward or upward movement saying it will depend on how much not only Armenia’s but also Russia's state reserves allow the countries to make currency interventions.
To tame things at forex market and curb currency jobbing, the Central Bank of Armenia used some instruments – it raised Lombard REPO rate from 10.25% to 21% and started its interventions by selling limited amounts of dollars at every-day auctions.

The regulator says it has shifted to a new policy in a bid to take control over the situation at the forex market, to tame volatility and to restore balance here. --------0----


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