Martin Galstyan: The new forecast report of the Central Bank for 2021  is supplemented with an apocalyptic scenario, but in reality the  economy began to breathe and expectations for GDP growth will be  improved

ArmInfo. The new forecast report of the Central Bank of the Republic of Armenia for 2021 is supplemented with an apocalyptic scenario, but the recorded development indicates  that the economy has begun to breathe.

In this regard, the regulator is set to improve expectations for GDP  growth from the previous 1.4% to a higher level, given the improved  situation in the service sector and an increase in transfers. This  was announced on June 3 at a press conference timed to the  publication of the Central Bank's report "On Financial Stability in  2020", Governor of the Central Bank of Armenia Martin Galstyan,  explaining that a specific forecast will be announced in a few days.

However, he drew attention to the fact that people still have the  effect of deferred consumption (deferred demand), that is, they  abstain from previously planned purchases until incomes recover,  which is why they have a more rational attitude to expenses.

According to the Central Bank's expectations, some acceleration of  inflation will take place by the end of the year, and if the target  level (4%, +/- 1.5) cannot be achieved in 2021, then in 2022 this  will be ensured.

He also said that there is already an increase in interest rates,  which is being pushed by an increase in risks.

Regarding 2020, Galstyan noted that Armenia's financial system was  operating in an environment of unprecedented shocks and high  uncertainty caused by the coronavirus pandemic and martial law. "The  year was very difficult, but to the credit of the financial system,  it managed to ensure a continuous process of financial intermediation  while maintaining the ability to absorb risks, since the system had  sufficient capitalization and liquidity. The Central Bank also  provided support in the form of assistance programs, which allowed  the financial system to move smoothly into 2021" ,  M. Galstyan  noted.

In 2020, the economy felt the influence of the above factors, GDP  contracted by 7.4%, mainly due to a decline in volumes in the service  sector by 9.2% and the construction sector by 6.6%. The shocks that  have been formed have created challenges for the financial system as  well. 

The Central Bank has taken steps to preserve financial stability in  2020 by ensuring the continuity of the financial intermediation  process. And from the point of view of continuity, as M. Galstyan  pointed out, the Central Bank identified 2 groups of issues. The  first related to the growth of credit risk, which naturally had to  occur during such a difficult year, and the second was the pushing of  liquidity. To resolve the issues of the first group, the Central Bank  held countercyclical measures in support of the financial system, and  to resolve the issues of the second group, an injection of liquidity  followed. In addition, the Central Bank conducted a more operational  monitoring of the current development, promptly investigated risks  and gave a prompt assessment of the ability to absorb risks.  Turning  to specific figures, Galstyan said that by the end of April the share  of overdue consumer loans exceeded 14%, agricultural loans - 6%,  business loans - 7%, mortgage loans - 2%. And the total share of  non-performing loans in the total loan portfolio approached 7%.

The ratio of pure interest income to assets remained almost  unchanged, amounting to 3.3% (versus 3.4% at the end of 2020), and  the ratio of net lending losses to assets was 1.9% (after increasing  in 2020 from 1.3% up to 1.9%). "In the conditions of almost unchanged  level of pure interest income, credit losses have increased, and it  is expected that the growth rate of the loan portfolio will be  somewhat restrained," he said.

With regard to the behavior of depositors in 2020, M. Galstyan noted  that since September 2020, there has been a decrease in the deposit  portfolio. In particular, in October-November there was an outflow of  deposits due to economic uncertainty in connection with the pandemic  and the war, but from the beginning of 2021 there was an inflow with  a full recovery of the pre-war volume in May. "So, in January-May  2021, the deposits of residents increased by 3%, and not of residents  - they did not change (0%), and high uncertainty played a role here,"  he explained.

Basically, the Central Bank used the instruments of macroprudential  policy: it kept the countercyclical capital buffer at zero, giving  banks the opportunity to use the previously formed capital buffers;  reduced the minimum level of the capital adequacy ratio from 10% to  9%; and attached particular importance to the banks' approach to  carefully and prudently manage capital.

Facilitating growth by type of loans showed that 66.7% came from  business loans, 23.7% from mortgages, 7.1% from agricultural loans  and 2.5% from consumer loans. Moreover, the growth of business loans  in 2020 was largely supported by state assistance programs.  The  level of total capital adequacy decreased in 2020 slightly from 17.6%  to 16.9% (with a minimum standard of 12%), and total liquidity - from  27.1% to 25.6% (with a minimum standard of 15%), against 20% and  32.5% respectively in 2016. 

He noted that the result of a stress test, which based not on the  baseline scenario, but on the likelihood of the worst case scenario,  showed that, even with such an extremely bad scenario (taking into  account 2020, and even 2021), the level of capital adequacy remains  at a level exceeding minimum requirement.  The banks' reaction to the  shocks of 2020 was as follows: about 980 loan agreements were revised  in opposition to the shocks caused by the coronavirus pandemic, the  residual amounts for which totaled 1.3 trillion drams, and non-cash  and online transactions increased significantly; and the shocks  caused by the martial law were reacted by the forgiveness of loans,  in the total amount of almost 2.5 billion drams, who died or became  disabled in the Artsakh war, their relatives and friends.  

To note, the WB forecasts GDP growth in Armenia in 2021 by 3.4% and  inflation near the target of 4%.  And the IMF predicts GDP growth in  Armenia in 2021 by 1% and inflation at 3.9%.