Friday, September 2 2011 16:15
EBRD works out a new strategy for Armenia
ArmInfo. The summary results of the activities of the European Bank for Reconstruction and Development (EBRD) in Armenia are investments worth over 435 million EUR ($626 million) - about 100 projects. Having launched activities in Armenia in 1994, the EBRD remains one of the constant partners of the country notwithstanding the crisis phenomena. It is also ready to prolong and increase financing in Armenia. Head of the EBRD Office in Yerevan Valeriu Razlog told about the EBRD's current and future policy on Armenia in his interview with the ArmInfo News Agency.
Mr. Razlog, the period of the EBRD's previous strategy on Armenia will expire by late 2011. What are the preliminary results of this strategy?
Both before and after 2009, at the peak of the crisis, the EBRD purposefully cooperated with the private sector in Armenia, mostly with the banking system of the country. We quite positively estimate the results of the work done with the partner banks. During the crisis, which affected a lot of banks suffered, including those in Transcaucasia, the Armenian banking sector successfully passed all the tests. This is also demonstrated by the fact that not a single Armenian bank was liquidated or applied to the Central Bank for emergency financing.
Certainly, some decline in financing was observed, but due to the projects of the CBA and other partners, the financing has been resumed and now it is almost as much as during the pre-crisis period. We also see our contribution to that, because during the crisis many international structures wondered whether the financing for Armenia was worth reducing, while the EBRD, on the contrary, exerted all efforts to increase the support to the banking sector. We started financing more actively the spheres and the products that have become traditional for us - micro- and co-financing, small and medium enterprises, trade financing. The EBRD also actively went on providing technical assistance to the banks, even by means of training courses on risk management and on fight against money laundering.
Over this period of time, we also supported the increase of the capitals of three partner banks of ours - ARARATBANK, ProCredit Bank and Byblos Bank. However, one of the most important initiatives of the EBRD was more active "promotion" of financing in Armenian drams via provision of synthetic loans.
In particular, over the current year the EBRD has already made two big transactions with ACBA-Credit Agricole Bank to credit SME (worth 10 mln EUR), and micro-business (worth 3 mln EUR). These resources will be directed to the farms and companies, which have been taking part in the logistics and purchase of agricultural equipment. Now we are considering possible provision of credit lines to our partner banks to finance agriculture. This financing will be accompanied by technical support. Thus, the EBRD is activating a new sphere of crediting in Armenia - agriculture.
Moreover, the EBRD also provided a credit in the local currency to ARARATBANK. At the moment we are working with other banks as well to provide long-term resources in AMD. The hedging of the currency risks on the given credits is implemented by an international fund - TCX Currency Exchange Fund, one of the shareholders of which is the EBRD.
The EBRD thinks that in the financial sector of Armenia it is necessary to develop the capital market via active using of the credit products in the national currency. For this reason, the authorities of the country should focus on provision of micro-economic stability, support the flexible exchange rate regime, as well as ensure the growth of the share of the state debt financed from the internal resources.
As a rule, the interest rates of synthetic loans are higher than those of ordinary one. Moreover, the currency risks are hedged by a foreign organization. At what rates does the EBRD provide AMD loans to the Armenian banks?
In this case it is hard to say what is cheaper or more expensive for Armenian banks, taking into account the excessive USD liquidity and the shortage of AMD resources. The dollarization level in Armenia remains rather high, though the latest trends point at its gradual reduction, i.e. the shift of USD resources to the AMD ones.
Unfortunately, in the Bank's deposit base the domination of USD liquidity is reflected on the opportunities of financing in the local currency. This has been to some extent influenced by the economic crisis, which has led the banks to restraint of the liquidity reserves in case of strong shocks. One can say with more confidence that in the future the banks will be decreasing this reserve. Nevertheless, both now and in the future the banks will need long-term AMD resources. One of the problems in this matter is the lack of sufficient mechanisms and tools of hedging.
As regards the interest rates of the synthetic credits, we determine them with due regard for the yield of the government bonds of Armenia. It is no secret that today the yield of the government bonds is rather high - 8.5-10%.
What financing is envisaged for Armenia in 2012-2015? What will be the basis of the new strategy? Will any new spheres of financing in Armenia be selected? So far the Bank has been providing loans mostly to business, hasn't it?
The EBRD's new strategy related to the support to Armenia, which will supposedly come into force in April 2012, will not radically differ from the current strategy, though certain changes are expected. We will also support the initiatives on consolidation of the banks, enlargement of their capitals, assets and branches. The banking sector of Armenia is on the threshold of mergers and acquisitions, and the market participants themselves should gradually come to the relevant decision in this matter, without any external pressure. From this viewpoint, the EBRD is ready to help all the participant banks of Armenia in the projects on consolidation and mergers, elaboration of new products and reformation of the banking sector.
Today it is difficult to judge about the financing to Armenia for the next 3 years. Unlike other international structures implementing projects mostly with the state sector, where all the issues are specified long before the launch of the programmes, the EBRD mostly focuses on development of the private sector, which constitutes 92% of the EBRD's credit portfolio in Armenia. This is why it is hard to determine now how many resources will be needed in the future. In addition, the EBRD wants to retain flexibility for possible intermittent growth or decline in certain spheres. But I hope that whatever the amount of lending, its quality will remain high. We will also determine new spheres of crediting regardless of the applications to be received from the partner banks. In this context, we do not rule out possible participation in the mortgage financing market and agriculture crediting, as well as increasing the support to agriculture.
In addition, due to its dialogue with the municipal authorities, the EBRD is planning to explore new sectors: public transport, water supply, waste recovery. The bank has already implemented a number of successful projects to upgrade a sewerage system near Lake Sevan and to recover the Yerevan subway. In July, jointly with the European Investment Bank and the European Union, the EBRD launched a program to improve water supply in 23 settlements in Armenia.
Is the EBRD going to launch any projects with the state companies in the sphere of industry?
The EBRD has all opportunities to work with industrial companies belonging to the state, providing our financing contributes to privatization of these companies.
Mr. Razlog, what is the EBRD's conservative approach to attraction of new partner banks conditioned by?
At present we are working with 12 banks in Armenia, and we think this figure complies with the reality of the banking sector of Armenia. The EBRD's strategy on Armenia for 2009-2012 envisaged deepening of cooperation only with the existing partner banks by means of increasing the financing.
This year the bank has concluded credit agreements for 13 investment projects worth $65mln. By the end of 2011 the EBRD is planning to conclude with Armenian banks 3-5 more credit agreements worth a total of $15mln. This is a bit more than we earlier planned for this year - about 72 mln USD. The greater part of the loans has been given to SMEs. However, as I have pointed out, we will consider possible expansion of partnership with other banks, if this contributes to consolidation and enlargement of the banking sector.
Not long ago the EBRD was going to start a large energy saving project in Armenia. What stage is the project at?
The EBRD goes on drawing out the programme on financing of the energy-conserving projects in the corporate sector. This will be a long-term programme, which is still at the early stage of elaboration. At present we are revising the opportunity of extension of the frames of the programme so that to attract a big number of partner banks. We also start drawing out a programme on opening of credit lines to finance the energy-conserving projects for private houses, apartments and apartment houses in Armenia. Within the frames of the programme, the population will be offered the needed technology to reduce energy consumption, which will provide the guaranteed level of savings. The EBRD has already got certain accord of the Armenian government, Urban Development Ministry and Energy Ministry to start the programme.
It is still hard to speak about the terms of the programme launch in Armenia, as we have to assess available housing, to improve legislation, construction norms and standards. The bank has already successfully implemented similar projects in many countries, including Bulgaria, Slovakia, Georgia and Turkey. The fact that even upon completion of crediting of the given programme by the EBRD in some countries commercial banks went on financing these projects at the expense of their own resources is the evidence of success of the programme.
The EBRD has recently stopped being a shareholder of the STAR retail network of supermarkets. Will the EBRD participate in this segment of the market in the future?
At present we have no specific projects on involvement in retail trade, but we are ready to discuss new possible proposals.
Even if the inflation level in Armenia grows?
We think inflation will be declining till the end of the year and meet the index fixed by the Central Bank for this year - 4% (+1,5%). Today we are already observing the positive trend of inflation reduction, which will continue till late 2011.
This is first of all conditioned by the situation in the world food market, particularly, by the high grain output in Russia, Ukraine, where the output of the current year considerably exceeds last year's output. Therefore, we expect the prices of grain and other important food commodities to drop; and the trends of the external factor will be reflected on the domestic prices in the country. Though oil prices are still high in the international oil markets, we expect the oil supply to grow alongside with improvement of the complicated situation in Libya and other Arab countries. This will contribute to reduction of prices. In addition, this year the output of agricultural products in Armenia is much higher than last year, and this will also contribute to the price growth restraint.
What are the EBRD's expectations about the economic state of Armenia?
First of all, I'd like to point out that in terms of reforms the rating of Armenia (alongside with Georgia) is one of the highest in the countries of Eastern Europe and the Caucasus where the European Bank is represented. The progress of the last years in privatization, liberalization of prices in trade and exchange rate in the country is especially obvious. We believe that the money remittances to Armenia from Russia will reach the previous level, though the given circumstance does not determine everything. There are still certain shortcomings in business-environment, infrastructure, financial sector and energy safety.
The EBRD recommends Armenia to keep on modernizing the internal transport and communications to recompense the high trans-boundary transaction expenses. The country is isolated and has no direct access to the sea; therefore, it must minimize internal transport expenses, including air transport, and develop the communications sector. The EBRD also recommends Armenia to continue upgrading the energy safety of the country and further diversify the sources of importing energy products.
According to our forecasts, Armenia's economy will keep on developing and will ensure 4.5% GDP growth by the end of 2011. The most important thing is to avoid any unexpected shocks.
Thanks.
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