A story of Continued Recovery
By Genc Mlloja
Albanian Daily News
Published April 18, 2017

The Bank of Albania is of course engaged in delivering a stable economic and financial environment, as well as in promoting the development of financial markets. This is an issue of extreme importance to any potential investor and I think we have done a good job in that regard, says Mr Gent Sejko, Governor of Bank of Albania in this exclusive interview for Albanian Daily News. Governor Sejko expresses what he calls “a reasonable confidence” on the positive trend of Albanian economy. He gives details about banking system’s health, loans situation and the need of de-euroization to a certain level.  

-Mr. Governor, thank you very much for the opportunity to have this interview. Three months have elapsed this year. Would you give an overview of Albania’s economic situation and how is the situation of the banking system for supporting the expected economic growth as declared by the highest government authorities?

 First, allow me to thank you for the opportunity given to share with your audience our opinions regarding the current and expected developments of the Albanian economy.

Regarding the economic situation in Albania, our analysis of all available economic and financial indicators paints a story of continued recovery. According to INSTAT, Albanian GDP grew by around 3.5 percent in 2016. The economic growth was broadly supported by strong domestic consumption and investment, as well as an improved external demand. In sectorial terms, we see a robust recovery of construction activity, a continued growth of services, and a more nuanced developments of the industrial sector, with branches exposed to the decline in external commodity prices suffering whereas the light and agro industrial branches going strong.

Naturally, as policy makers and central bankers we should not limit ourselves to the headline story; rather, we should carefully assess growth drivers, we should be mindful of economic and financial balances, and we should be attentive to long term trends and challenges. Allow me to elaborate.

The growth drivers that have underpinned the continued recovery over the past three years appear to be strengthening. The external environment is gradually improving; while not exactly rosy, external demand and external financial conditions are less challenging compared to just a few years ago. On the external front, the balance sheets of the private and financial sector agents are improving and their expectations are trending up. Labor market indicators are also improving, with employment figures increasing by around 7 percent year-on-year in 2016, while the unemployment rate went down to a cyclical low of 14.2 percent at the end of the year. Lastly, the financial conditions are quite supportive of the economic recovery. On account of our determined and accommodative monetary policy, the financing costs are at their historical lows while credit conditions have stabilized. Credit recovery remains still tentative, though credit in Lek increased by around 11 percent over the last 12 months. Our prudent regulation and diligent supervision of the banking system has made sure the banks remain liquid, profitable and well-capitalized; they remain a trustworthy place to invest the savings of the population though they should do more to finance the ongoing recovery. Further, the consolidation drive of the public authorities has decreased overall financial risks in Albania and has both complemented and re-enforced the monetary stimulus provided by the central bank.

In terms of macroeconomic balances, the Albanian economy moved a little bit closer to equilibrium in 2017. In spite of severe shocks during the first quarter, inflation trended up and towards our 3 percent target during 2016. Furthermore, the current account deficit contracted by around 7 percent in 2016, whereas public finances scored a primary surplus and public debt decreased by around 0.7 GDP percentage points.

Regarding the future, I’m reasonably confident about our short to medium term prospects. Based on current trends and policies, economic growth should remain at or above current levels over this horizon; inflation should reach our target by mid-2018; employment figures should continue to grow and indicators of financial health should improve further.

Fulfilling this projection should require staying the course of current policies and a further acceleration of structural reforms. However, given our past history and institutional improvements, I’m reasonably optimistic about our chances.

Turning to the second part of your question I would like to give a snapshot the latest trends of the banking industry.

The activity of the financial system expanded during H2 2016, and its financial indicators remained relatively stable. The weight of banking sector’s assets to GDP increased to 94.9%. Banking activity was profitable, with appropriate levels of capital and liquidity indicators. In the activity expansion of the banking sector, the main contribution came from operations with securities, other investments, and lending, on the asset side; and operations of treasury and interbank, deposits and own funds, on the liabilities side. In annual terms, the banking sector increased its net (creditor) position with nonresidents, lending by 2.5% and deposits by 5.2%. The nonbank financial segment, maintained its weight to GDP and his activity was positively contributed by performance of nonbank financial institutions (involved in lending and payments) and insurance ones. Exposure of banking sector to nonbank financial segment remains low, but the stability of the banking sector is crucial for the activity and stability of nonbank financial segments of the financial system. 

Regarding the banking sector exposure to risks the Bank of Albania assesses that:

a)  Credit risk decreased during the period, albeit remaining near the previous year levels. The value of non-performing loans decreased by 8% and the ratio of non-performing loans decreased during H2-2016 to 18.3%. The main contribution to this performance came from process related with loan collection, restructuring and write-off (of lost loans). The non-performing loans decrease is associated with an improvement of their coverage with reserve and capital funds, while loan collateralization level remains stable.

b) The Liquidity risk in banking activity is assessed as low. The low value of loans to deposits ratio, continuation of deposits growth and the high presence of liquid assets above the minimum regulatory requirements, show a very good situation of liquidity in the banking sector in general and by main currencies.

c)  Banking systems assessment and control of operational risk need further improvement. Although banking reports indicate an improvement of their coverage with capital to overall operational risks, the Bank of Albania supervisory activity highlights the need to further improve the process of identification and report of operational losses in accordance with the bank activity profile.

Overall, the indices do not show increase in financial stability risks during the period. The decrease of the banking sector earnings and the slight decrease of liquidity indicators (which anyway remain at high levels) are balanced by positive developments in real economy, in terms of improvement of the economic growth and the financial situation of households and businesses. The accumulation of risks has weakened due to the contraction of foreign currency lending, improvement of public debt indicators and the positive performance of the housing market. On the other hand, the probability of systemic risk materialization decreased, in the conditions where credit quality index improved, unemployment decreased and volatility in the exchange rate has been low.

-Can you tell us a few words on the cooperation of the Bank of Albania (BoA) and the Executive Committee of the Albanian Association of Banks (AAB)? Which are the major fields of cooperation?

Bank of Albania (BoA) has a continuous and fruitful cooperation with the Albanian Association of Banks. It considers this close collaboration as an important connection, a bridge between us and banking industry in Albania including all 16 commercial banks. During the year, there organized frequent meetings with the representatives of the association technical committees or other ad-hoc groups to discuss on several regulative initiatives, for amendments to existing or new regulations.

BoA is thankful to the Association of Banks for supporting its endeavors through a number of cooperation activities and projects. The latest event was the celebration of the Global Money Week. Bank of Albania in collaboration with Albanian Association of Banks and the support of other institutions such as Ministry of Education and Sports and the Deposit Insurance Agency conducted a number of well-tailored educative activities for general public.

BoA has confidence in further strengthening the productive relationship between these two institutions.

-It is spoken much on the issue of non-performing loans. Which is the role of BoA to handle that concern?

This is one of main challenges we are facing recently. I would like to mention few of directions we are working on to bring NPLs down.

Addressing the non-performing largest borrowers and out-of-court debt restructuring

In collaboration with FinSAC project of the World Bank, we have started a project on the issue of non-performing loans, which consists of two parts:

- Revision of the Bank of Albania guidelines for the restructuring of loans including international best practice principles that can be used in solving nonperforming borrowers.

- Development of a cooperation framework scheme for coordination between banks for providing solutions to borrowers simultaneously exposed to several banks, specifying among those who can go into bankruptcy and those that can be settled outside the legal process.

Loan granting based on official financial statements

Based on national plan for NPL addressing, Bank of Albania duty is to impose regulatory provisions for the granting of new loans based only on official or audited financial statements, within the first quarter of 2018.

Credit Registry

Bank of Albania was engaged to make improvements regarding Credit Registry. On that purpose, at the end of 2015 there were made some improvements in the credit registry to enrich the information on the borrower about the collateral enforcement and loans write-offs. In 2016 another improvement process has started. With the financial and technical assistance provided by EBRD it was launched a project for the complete revision of the credit registry to implement an advanced platform and extended information on borrowers in the country.

I would also like to emphasize that the level of NPL dropped down further at 18% on February, and this also thanks to “Plan of measures to reduce the non-performing loans” undertaken in collaboration with other national decision-making factors and our international partners, which was fully fledged only in 2016.

-Speaking of inflation are you worried about its current level - 2.2 percent or better to say the decreasing trend during the last years?

CPI inflation has undershoot our 3 percent target over the past few years. In a nutshell, this outcome is a reflection of subdued domestic inflationary pressures, in turn reflecting weak aggregate demand and prevailing spare capacity in the economy, as well as low inflation among our trading partners.

Such an outcome – and given our institutional mandate of price stability – has conditioned the Bank of Albania to engage in an unprecedented level of monetary expansion. We have cut our policy to a historical low of 1.25 percent, we have expanded our liquidity injection program, and we have made use of forward guidance, as a monetary policy instrument employed to inform financial market agents and to anchor their expectations.

All in all, we have been successful with our monetary policy. As I explained before, the Albanian economy and CPI inflation are in a recovery trend, and this is due in no small part to the monetary policy we have pursued.

Our analysis indicates overall inflationary pressures strengthened in 2016. We did suffer a severe negative shock to prices over the course of the first quarter, but the situation was soon reversed and this rapid recover – in itself – was partly a testament to the trust economic agents put on our ability to meet our commitments.

So, coming back to your question, yes indeed we are aware inflation is below target and but I’m confident we will be able to meet our target within a reasonable amount of time, i.e. within the next year.

-The policy rate has kept unchanged at 1.25%. Also, BoA's Supervisory Council decided to keep unchanged the interest rates for the overnight deposit and overnight lending facilities, at 0.25% and 2.25%, respectively. Do you think that this decrease at these levels is healthy for the economy in general?

The current level of interest rates in Albania is indeed at historical lows. You are also correct this level of policy rates is indicative our efforts to stimulate the economy through the pursuit of a quite expansionary monetary policy. I would further venture this policy is correct and absolutely necessary for the Albanian economy and its financial system.

As I explained before, the expansionary turn of monetary policy across the turn of this decade was instigated by a deficient aggregate demand and undertaken across the backdrop of a profound economic and financial crisis amongst our foreign partners. In turn, this situation was reflected in higher unemployment, in financial difficulties across the private sector, and in an undershooting of our inflation target. Monetary policy is a perfect instrument to combat such a predicament, and all central banks faced with similar circumstances have made heavy use of monetary policy. The Bank of Albania is no stranger to the book of good economic management.

The intensity of the monetary stimulus in itself is determined by the depth of the shock and the strength of the transmission mechanism. I would say that, by carefully assessing both of these factors, we have come up with the correct answer to the challenges we are facing and, as of now, we are seeing the concrete positive results of our policies: the credit in Lek is growing, private sector consumption and investments are picking up, economic growth and employment are trending up, and inflation is gradually converging to our target. At the same time, we are not seeing any adverse and un-intended impact from our policy of monetary accommodation.

I am confident the Bank of Albania has done the right thing at the right time.

-You have recently announced a new focus of the institution headed by you, that toward de-euroization of the Albanian economy. Could you give some details on what exactly does it consist in? How is BoA planning to address it and what could be the upsides and downsides of it?

High euroization levels, particularly in the banking sector activity provide a challenge for the effectiveness of monetary policy and for financial stability.

In terms of monetary policy, high euroization level mean that the credit and exchange rate channel of monetary policy transmission mechanism may not operate well. In terms of financial stability, the still high level of Fx (euro) loans, particularly of those where the borrower doesn’t have appropriate levels of Fx sources to serve the debt, represent a significant exchange rate and credit risk, that could materialize if the economy or the financial system is faced with a shock that causes exchange rate depreciation. Furthermore, large levels of Fx deposits, expose the system to Fx liquidity risk, where the ability of central bank to help if there is a need is more limited. Hence, it makes sense to have regulatory requirements asking for larger mandatory Fx liquid assets in  banks, in order to strengthen the capacities of them to deal with such situation should they occur.

In this regard, BoA has identified several measures that initially will aim at: providing a difference between deposits interest rates in Fx and local currency (Reserve Requirement Rate in Fx will increase, while that in domestic currency will decrease); requiring higher liquid assets in Fx compared to domestic currency, and improving the awareness of borrowers for risks related with borrowing in Fx.

We understand that the process is complex and challenging. Trying to decrease euroization levels only at the banking sector (financial system) without providing similar incentives for the real economy agents, is not sufficient and could prove not successful. Hence, together with MoF and FSA, through an MoU that will be signed shortly, a more strategic long-term approach on de-euroization will be followed, where the authorities will coordinate and gradually introduce measures in their areas of competence.

This approach doesn’t aim at “zero” level of euroization for the Albanian economy. This would be completely unrealistic and economically counterproductive. What we are aiming for is to stop and reduce the euroization in the Albanian economy and its financial system, over the medium to long term, to levels that markedly reduce exposure to risks and improve the capacities of the authorities in discharging relevant macroeconomic policies. We believe, that, if macroeconomic stability in the country is maintained and the authorities show consistency in such approach, the measures that will be taken will achieve the goal of lowering euroization levels to more appropriate ones.

-With regards to the attraction of foreign investments. Which is your estimation for future, given the fact that Albania is in an electoral atmosphere? Which is the role that BoA can play in this direction?

Incoming FDIs have been high in Albania. They have averaged above 7 percent of GDP over the past 4 years, and they increased a further 10 percent in 2016, reaching close to 9 percent of GDP. That is noticeable source of external financing and we can only be pleased about that.

There are a couple of reasons why FDIs are highly prized in a developing country like Albania. First, they represent a capital boost to our economy, increasing investment, production capacity, employment and know-how. Second, they are a non-debt creating flow, and as such less volatile to shocks.

As a converging economy, the Bank of Albania has constantly spoken of the need to attract FDIs. To our view, there are at least three preconditions the country must meet in order to be attractive to foreign capital. First, it needs to offer a stable political, economic, and financial environment. We should not forget FDIs are mostly private capital and they are extremely sensitive to any source of uncertainty. Second, the country needs to offer a good business prospect, not only over the short to medium term but also – and especially – over the long term. Third, the country has to offer a business friendly environment, meaning predictable legal and judiciary practices and efficient public administration. Albania has made good progress over the past years in fully or partly meeting these preconditions, though we should not think we have completed our job.

The Bank of Albania is of course engaged in delivering a stable economic and financial environment, as well as in promoting the development of financial markets. This is an issue of extreme importance to any potential investor and I think we have done a good job in that regard. Most of the external assessment of strengths and weaknesses of Albania, do categorize economic and financial stability as a plus, and this would not have been possible without our full commitment.

-Some incidents have happened in which robbers have stolen great monetary values. What measures is the BoA taking and with which order and law enforcement you cooperate to prevent such incidents? And secondly have they created insecurity in the banking system in Albania?

First, I have to say that what this was a very complex and specific typology of crime where Bank of Albania’s involvement is limited. Our role mainly consists on providing certain guidance on how minimum standards should be adopted, including insurance policies of monetary values.

On the other side, regarding the transportation of monetary values, where the criminal activity has been focused mainly, BoA has defined as obligatory for the commercial banks to insure monetary values while transporting (insurance companies has to be licensed by the Albanian Financial Supervision Authority). Regarding physical security, the legal provisions provide that banks will have to employ services of Private Physical Security Companies which by virtue of law are licensed and supervised from the Albanian State Police.

We have continuously asked from the commercial banks to report to State Police, all the problems related to daily activities of the security companies they employ.

However, considering the robbery episodes that took place, I would like to mention that recently we have made some revisions and adapted the regulations concerning transportation and storing of monetary values.

BoA has also proposed to the Ministry of Interior, some amendments to the normative acts, which regulate the transportation of monetary values in Albania.

In close cooperation with the State Police, we have proposed a set of minimum obligatory standards that have to be applied during the transportation of monetary values. Amongst other things, the draft stipulates clear specifications on the class / category of armored vehicles, including the characteristics and armor levels of the vehicles that will be used for transporting monetary values. Those standards reflect the same as those applied within EU.

Finally, I would like to come back to the explanations I gave you at the beginning regarding the solidity of the banking system. The banking system in Albania is safe and sound. Few episodes as described herein, apart from the momentary impact in the public opinion, could not undermine our rigorous efforts undertaken from BoA, in the context of financial health and public confidence on the banking industry. However together with other public and private agencies we are working earnestly to avoid such criminal episodes in the future.





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