BANK OF ALBANIA
Supervisory Council

BANKA E SHQIPËRISË
Supervisory Council

BANK OF ALBANIA STATEMENT
On the Financial System Stability in Albania H2 2008

Data e publikimit: 31.03.2009

 

Pursuant to the requirement of Article 69, paragraph 6 of the Law No. 8269, dated 23 December 1997 "On the Bank of Albania", as amended, and Article 8 of the Law No. 9962, dated 18 December 2006 "On Banks in the Republic of Albania", as amended, to inform the Council of Ministers, the Parliament of the Republic of Albania and to draw the attention of the financial institutions and the public at large on the situation of the financial system in the country and on the potential risks which may threaten its stability, the Bank of Albania releases the following periodical statement.

Summary

Global economic developments over the second half of the year 2008 attested to the transformation of the international financial crisis into a global-wide economic crisis. The very high integration of the financial markets in industrialized countries prompted the rapid emergence of the crisis in these countries; while the opening of economic markets is generating a stable spreading of the crisis effects to the emerging countries. Public authorities worldwide have created extraordinary fiscal and monetary stimulus to respond to the risks in the short and longer term. In the medium term, these measures and others are expected to restore confidence in the financial markets and their normal functioning in order to resume the financial intermediation process. Until the turning point, the global economy will continue to suffer decline of demand as a result of the fall in private investment and trade and increase in unemployment as a result of the business and household sectors’ need to lower costs due to the tightening financing conditions. This demanding but necessary correction process is expected to be carried out during the year 2009. Global economy is expected to gradually recover its stable growth in 2010.

The Albanian economic activity during the year 2008 performed generally in line with the early-year projections in terms of economic growth and preservation of macroeconomic balances. However, the last quarter of the year saw the increasing impact of the global economy slowdown, principally on the performance of the Albanian balance of payments. The fall of foreign demand and increase in unemployment, in particular in the neighbouring Euro area member countries prompted the decline of exports and workers’ remittances, hence moderating the domestic demand for consumption. However, state budget revenue and expenditure met close to the projections and recorded a relative annual increase by 15 and 23 percent, respectively. The annual increase of consumer prices reduced to 2.2 percent in December. News over the international situation in the last quarter of 2008 enhanced the Albanian public sensitiveness to the safety of their savings; however, the banking sector - as expected - handled this situation very well being well-capitalized and liquid at end 2008. The Bank of Albania contributed to maintaining optimal liquidity levels in the banking sector by carrying out the necessary operations in the interbank market. Starting from mid-November 2008, the form of reverse repo auctions changed from multiple price to fixed price auctions. In addition, the Bank of Albania injected liquidity of longer maturity term and employed the outright sale instrument.

The Bank of Albania made some important regulatory amendments, which eased the liquidity situation in the interbank market. In more concrete terms:

  • The base of securities serving as collateral for reverse repurchase agreements extended with the bonds issued by the Government that have a remaining term to maturity of no longer than 365 days;
  • The use of required reserve increased from 20 percent to 40 percent;
  • The spread between the Bank of Albania key interest rate and overnight credit reduced from 1.75 percentage points to only 0.75 percentage points.

The annual growth rate of the banking sector’s assets was lower than in the previous year owing to the unstable growth of deposits. The slower annual growth of loans drove the share of non-performing loans to total loan portfolio to increase. Loan to deposit ratio allows for sufficient room for lending, in particular in the Albanian Lek. The annual financial result indicators were positive for the banking sector but lower than the previous year owing to the reduced growth rate of lucrative activities and the relative enhancement of competition. The Lek exchange rate has by and large been stable.

In the light of the further deepening of the international crisis, the Albanian economy will be faced with a number of new challenges over the year 2009. Annual economic growth is expected to be positive but considerably lower than in 2008. Monetary and fiscal policies need to be fine-tuned in order to ensure stable macroeconomic and financial indicators at home. The intermediation activity of the banking sector and the financial system in general - to meet the financial needs of the public sector and the private sector in particular - is expected to be lower and at higher costs owing to the unstable demand and supply-side factors. Business and households are expected to suffer upward financing difficulties. This factor will induce a restructuring process which in the short term will result demanding and increase uncertainty over job security. In a longer term, the effects of this restructuring process on the enhancement of business activity efficiency will result positive. The free floating exchange rate of the Albanian Lek will reflect the change in the foreign currency/Lek flows in the domestic market and the developments in the international market, serving as a good shock absorber in the medium run. In the short run, the exchange rate performance will be closely monitored by the Bank of Albania in order to prevent the irregular and unjustified exchange rate movements and encourage the normal market functioning. The annual rise of consumer prices will reflect the developments in total demand. The annual consumer price rise indicator may temporarily drop below the lower limit of the corridor set by the Bank of Albania. However it is expected to remain close to the target for most of the year. Through its monetary policy, the Bank of Albania will aim at preserving the necessary stimulus to the financial agents to keep the financial assets in the national currency and orient the inflationary expectations close to the Bank of Albania target. By doing so, a longer term contribution is provided to supporting the intermediation function of the banking sector. The latter’s profitability is expected to be affected by the fall in the lending volume and the relative increase of the activity cost over the year.

In the recent months, the Bank of Albania has been conducting numerous and successive stress tests in order to identify the banking system’s response to possible pessimistic scenarios. The analysis obtained from the numerous stress tests - for the banking system-wide and individual banks - indicate that neither the banking system on the whole nor any of the systemically important banks in particular have been affected in their liquidity and capitalization indicators. Notwithstanding the enhanced spectrum of risks and a more challenging year in terms of expanding their banking activity, the financial system and the banking sector will remain stable.

The global economic crisis will extend its reach to every country. However, the extent of its impact on a given country will largely depend on the latter’s economic and financial system’s position and on the duration of this crisis. The Albanian economy and financial system are balanced and capable of coping with the expected impact of this international crisis. In this process, the Albanian economy will be supported by a number of factors which relate to the real sector’s flexibility, the adequacy of several fiscal and monetary-related macroeconomic indicators, the stability of the financial system and the banking sector and the public authorities’ ability to preserve fiscal and monetary discipline and act in a timely and harmonized manner if needed.

Despite the above supporting and protective factors, the Albanian economy will go through an adaptation phase over the year 2009 during which the public authorities need to monitor the situation ceaselessly. Close contacts and the regular exchange of information between them will harmonize the actions that may be required to address the various arising issues. Constant communication with representatives of the real and financial sectors will be maintained during this period so as to discuss the developments in the respective sectors. Given that the crisis may also affect the regional countries, the need for harmonizing the actions extends to international and regional levels. Against this background, the Bank of Albania has taken a number of regulatory and operational actions which aim at strengthening the supervisory process and preserving the liquidity level in the banking sector. Recently, the Bank of Albania has, in cooperation with the Ministry of Finance and the Deposit Insurance Agency, drafted the amendments to the Law On Deposit Insurance, envisaging among others the increase of the insurance premium and deposit compensation to ALL 2.5 million and the removal of the different compensation levels. This measure would foster the banking sector’s sustainability and provide the Albanian depositors with a much closer standard to the one applied for bank depositors in EU member countries. The Bank of Albania has the conviction that this beneficial measure to the public and the banking sector will also find the support of the Albanian Parliament. In addition, through a special regulatory act, the Bank of Albania has requested from the banking sector not to allocate the 2008 profit in the form of dividend. In this way, the banking activity capitalization is further strengthened, hence providing more guarantees for the banking sector’s financial soundness.

The maintenance of a constructive dialogue with the banking industry remains a constant objective of the Bank of Albania. At the same time, the Bank of Albania will require the strengthening of the banks’ governing structures control over the activity of their institutions and better management of the business risks. This arises from the Bank of Albania need to obtain additional information in order to be informed of the banking business performance in real time. The Bank of Albania requires from the banks’ shareholders to be willing to augment the capital if needed and keep the credit lines for their subsidiaries operating in Albania. The banking sector should utilize the existing opportunities to carry out its financial intermediation role and foster economic growth at home within the parameters of a safe banking activity and in line with the requirements of the regulatory and supervisory framework. In this context, the Bank of Albania will be cautious and willing to take all the necessary measures - not only supervisory-related ones - to foster a sustainable and long-term growth of the banking sector.

Global Developments

The measures taken by the central banks in the United States (U.S.), the Euro Zone and other developed countries to moderate the downturn in the international financial markets - mainly through the increase in the injection of liquidity - helped to relieve the situation temporarily in the beginning of the second half of the year. However, these measures were not sufficient to restore the investors’ confidence and the normal functioning of markets. The situation deteriorated further in the last quarter of the year.

  • The pronounced difficulties of some important financial institutions led the public authorities to intervene for their closure or bailout.

Many banks and other globally important financial institutions suffered great financial losses and considerable reduction of capital. This setting led the public authorities in the U.S. and Europe to intervene for the closure or bailout of the failing institutions. In particular, the decision of the U.S. authorities to allow the failure of Lehman Brothers, considering its active position in the global markets of financial instruments which refinanced mortgages and derivatives, set off the alarm bells in the financial markets and added the financial institutions’ concerns over their safety. This concern was further elevated following the release of the large losses and liquidity issues many globally important banks and insurance companies were experiencing. For this reason, interbank market operations in developed countries were almost interrupted, displaying fall in volume, concentration of financial operations in very short maturity terms and considerable increase in the financing cost. Markets for various sophisticated financial products evaporated. In addition, investors’ confidence in banks and financial institutions undermined, narrowing at large their financial ability to pay off the debts and increase their capital. Banks’ stock prices fell, while the lending terms in the interbank markets tightened further. According to the International Monetary Fund (IMF), major equity indices dropped by about 25 percent in October. Emerging countries came under even more severe pressure. Since the beginning of October, investors required a return rate of about 6 percentage points higher for sovereign debt, which attests to their uncertainty over the creditworthiness of this debt. Emerging equity markets lost about a third of their value in local currency terms and more than 40 percent of their value in U.S. dollar terms. The uncertainty led to a global-wide massive shift of funds to U.S. Government T-bills, traditionally perceived as risk-free. This brought about the drop of their return rate to almost zero and grew the demand for U.S. dollar against the other currencies. Public confidence undermined being followed by the narrowing of maturity terms and the drop of the savings value in banks.

  • Public authorities took rapid monetary and fiscal-related actions to restore the financial markets’ functionality and moderate the impact of this crisis on the real sectors of the economy. The harmonization of global-wide actions was considered a priority.

The upward financing difficulties owing to the non-functionality of markets led to cutback of investment and trade, hitting domestic demand and fuelling a pronounced slowdown of the real sectors of economy at a global level, in particular in advanced economies. Against a background of overall economic slump, firms had to lower their costs which in turn led to job cuts in the labour market. The number of unemployed persons increased substantially. All the events so far showed clearly the far reaching extent of this crisis and prioritized the rapid and harmonized actions of central banks and their respective governments not only at a local but also at a regional and global level, including the contribution of international financial institutions. Many international financial institutions’ reports, high-level forums and meetings highlighted the necessity to take all the possible measures to safeguard the financial system and moderate the liquidity crunch in the financial market, preserve public confidence in the financial system and the banking institutions and provide the global economy with the necessary financial stimuli. Subsequently, the vital sectors of the economy and the society at large would cope more easily with the economic slump.

Central banks in more advanced economies deepened the liberalization process of liquidity injection into the respective markets. To this purpose, the relevant instruments changed, the range of participant financial institutions and the types of collateral widened and the maturity term was extended. In addition, central banks aimed to provide the economy with a longer-term financial stimulus through an accommodative monetary policy, under the conditions when the expectations for a sharp slowdown of economic development moderated the inflationary pressures. The U.S. Federal Reserve cut the key policy rate by 1 percentage point in October. Half of the cut occurred on 8 October as part of a co-ordinated international action with six other central banks including the ECB. In December, the U.S. Federal Reserve cut the key policy rate again to a range of between zero percent and 0.25 percent. In the Euro Zone, the ECB changed the form of the main financing instruments and cut the key interest rate three times. On October 8, the ECB cut the key interest rate by 50 basis points to 3.75 percent. The ECB cut the key interest rate further on November 12 and December 10 by a total of 1.25 percent. As of end 2008, the ECB’s key interest rate stood at 2.5 percent. The Bank of England, the Bank of Canada, Sweden’s Riksbank, the Swiss National Bank etc, lowered their key interest rates as well. The same trend is expected to persist.

The governments in advanced economies took extraordinary fiscal measures. On October 3, 2008 the U.S. Congress passed the Emergency Economic Stabilization Act authorizing the U.S. Secretary of the Treasury to purchase up to $700 billion in mortgage-backed securities and other troubled assets from the country’s banks and make capital injections into banks. As a result, as of end December the U.S. Government extended the purchase of preferred shares in the equity of a large number of banks for a total additional value of about $112 billion. In addition, the U.S. Government and Federal Reserve accepted the change in the status of some important financial institutions including insurance companies and others, so that they could meet the conditions for benefiting from the capitalization fund. The use of this fund by the institutions collecting deposits from the public or depositary banks was followed by some conditions which changed their decision-making overwhelmingly.

The highest representatives of the EU member countries held a number of meetings to better harmonize the actions for coping with the crisis. Heads of State and Government from the Euro Zone countries and the ECB met in Paris on 12 October 2008. In the official joint statement released after the summit, the leaders of Euro Zone countries supported the measures taken to avoid the failure of relevant financial institutions, ensure utmost transparency and disclosure on banks exposure and enhance retail deposit guarantee protection. At the same time, these authorities confirmed their commitment to act together in a decisive and comprehensive way in order to restore confidence and proper functioning of the financial system, aiming at restoring appropriate and efficient financing conditions for the economy. More specifically, they agreed to a coordinated approach aiming at: a) ensuring appropriate liquidity conditions for financial institutions; b) facilitating the constrained funding of banks; c) providing financial institutions with additional capital resources so as to continue to ensure the proper financing of the economy; d) allowing for an efficient recapitalisation of distressed banks; e) ensuring sufficient flexibility in the implementation of accounting rules given the exceptional market circumstances; and f) enhancing cooperation procedures among European countries.

The leaders of the G-20 (which represent 80 percent of global economy) met on 15 November 2008 to discuss the measures to support the global economy and stabilize financial markets. Participants in this meeting were the leaders of G-20, high representatives of the European Union, United Nations, IMF, the World Bank and the Financial Stability Forum. They agreed on some common principles, which aimed at reforming the financial market so as to avoid future crises. The principles expressed the commitment of these countries and the international institutions to strengthening transparency, accountability and enhancing sound regulation of the financial markets. They also aimed at reinforcing international cooperation, reforming and strengthening the financial resources of the international financial institutions as well as strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks.

As a follow-up to these directives and principles, on 26 November the European Commission presented the European Economic Recovery Plan which aimed at: a) taking measures to bolster domestic demand, maintaining employment levels and restoring confidence in the financial system in the short term; and b) carrying out efficient investment to stimulate economic growth and a stable welfare in the long term. This plan proposed an immediate budgetary impulse amounting to €200 billion or 1.5 percent of the EU’s GDP, which had to be provided timely, targeted and temporal at the same time. Prior to the finalization of the European Economic Recovery Plan, countries like the Great Britain, Germany, Sweden, Portugal, the Netherlands, France, Italy, Greece (€28 billion), Finland, Spain, Austria (€100 billion) and Slovenia had drafted their own national plans for supporting the financial sector and facilitating the lending terms in compliance with the provisions of the European Commission state aid rules. These countries’ packages were similar and they almost all provided for temporary actions which included: the provision of a fund for banks’ capitalisation, provision of guarantees for new debt issuance of national banks and the setting of some conditions on the management and orientation of the activities of banks which were to use this fund. The facilitation of lending terms provided for the establishment of programs which support the lending (in larger amounts, lower interest rates etc.) to enterprises in vital sectors of the economy, in particular to small and medium-sized enterprises which until the fall of 2008 were in a good financial position.

Among the other large countries, China, Brazil and India formulated necessary financial packages to stimulate economic growth. In November, China announced a $585 billion stimulus package which mainly involved key areas such as social welfare, infrastructure, environment and technology innovation. The Chinese Government believes that these measures and others if needed will recover economic growth in 2010.

  • The other European countries have been affected by the crisis and in some of them the crisis’ effects have yielded a challenging correction process of macroeconomic balances.

During the 2000s, Baltic and Central and South-East European countries by and large experienced a sustained economic growth and financial stability as a result of structural reforms stimulated by the integration process, increase of money flows in the form of direct and portfolio investment, increase of productivity and enhancement of the competitive position in foreign trade, stable exchange rate, revenue increase and fiscal consolidation. These countries had undergone a comprehensive transformation in their financial sector, being also evidenced by the growth of investment of large financial institutions - mainly from the Euro Zone. This process was further boosted by the priorities these countries provided: higher economic growth, room for the increase of banking intermediation in particular in terms of lending, proximity and satisfactory integration with the developed financial centres etc. According to the IMF experts, the share of foreign banks’ assets in the financial system of these countries has been upward since the year 2000 and as of end 2006 it stood at 80 percent to 100 percent in Serbia, Bulgaria, Hungary, Czech Republic, Romania, Croatia, Lithuania, Montenegro, Bosnia and Herzegovina and Estonia. During the period 2000-2007, bank lending in these countries and in South-Eastern Europe grew by an average of 23 percent in real annual terms. The years 2004-2007 experienced a more rapid growth of lending. In some of these countries, annual growth of lending averaged 30 percent to 50 percent. In some of these countries, the cumulative growth of private sector lending to the GDP exceeded 20 percentage points during this period. The growth of deposits was insufficient to cope with the rapid growth of credit therefore the lending process was supported by other financial resources, mainly by borrowing from the financial markets. The latter was more pronounced for foreign currency. Loan/deposit ratio increased in most of these countries, in particular in the Baltic countries where it has doubled since 2000 and in Ukraine, Hungary and Russia where it stands at 120-150 percent. In some of these countries, private sector lending in foreign currency, in particular in the currencies with very low interest rates (the Swiss franc, the Japanese yen) grew faster as a result of the borrowers’ demand for low-cost borrowing, perception for stable exchange rates and the possibility to have these loans financed by the international financial markets. The facility of having them financed by the international market - both for the private and the public sector - has fuelled growth in total demand beyond the economic growth rate and has generated the deterioration of the balance of payments and the fiscal balance in some of these countries. It is for this reason that this situation made them particularly vulnerable to the international financial markets’ stability.

The international financial crisis altered this fragile balance. The tightened lending conditions in the international markets hampered borrowing from foreign banks to refinance their debts in the short term. Moreover, the fall in raw material and energy prices led to reduced inflows and the collapse of the foreign position balance and fiscal situation deterioration. Given their short-term and speculative behaviour, portfolio investors began to move away from these countries’ financial assets. The pressure over the exchange rate of the local currencies augmented significantly. Hungary was the first country in the region where the authorities were constrained to take a number of measures to restore confidence in the national financial system. These measures involved the increase of interest rates to promote investment in financial assets denominated in local currency. On the other side, Hungary’s efforts in improving the budget financial situation and the balance of payments were rapidly supported by the European Commission and the IMF. On 4 November, the Council of Economics and Finance Ministers decided to provide balance of payments assistance of up to €6.5 billion to Hungary. On 6 November, the IMF and the World Bank approved loans of €12.5 billion and €1 billion for Hungary. The IMF approved loans for Ukraineu, Serbia (€412 million) etc. The European Union is discussing the possibilities and ways to assist the countries of this region if needed in the future.

  • Notwithstanding the measures taken by the public authorities on a global level, the events of autumn 2008 attested to the deterioration of economic growth for 2008. The international financial institutions’ prospects for global growth in 2009 remain pessimistic, while the global economy is projected to experience a gradual recovery in 2010. The outlook is highly uncertain.

The positive effect of the measures taken during the year 2008 was only partial. The liquidity injections led to the decrease of interest rates in the interbank markets, while the authorities’ commitment to protect important banks and increase the deposit guarantee amount put a halt to the fall of confidence in the financial institutions. However, the financial markets continued to operate in a segmented manner and the financial intermediation remained constrained. The fiscal and monetary stimulus could not provide its effects in 2008. In fact, global economic growth figures were even lower than the projections (which were revised downward) of international financial institutions. As of end 2008, annual world output growth was 3.4 percent, while the volume of world trade in goods and services grew by 4.1 percent (7.2 percent in 2007). Advanced economies grew by only 1 percent, while the developing economies (among which China, Brazil and India) provided the main contribution to global economic growth with an annual growth of about 6.3 percent. Capital and financial markets continued to record negative figures following the release of the large losses many banks and non-financial corporations were experiencing. In the foreign exchange markets the U.S. dollar was stable against the Euro owing to the investors’ demand to purchase the additional U.S. debt and the hope that the fiscal stimulus - expected to increase with the new While House Administration - would provide a positive contribution to the improvement of the situation.

In its World Economic Outlook of January 2009, the IMF projects that world growth will fall to 0.5 percent in 2009. Output in the advanced economies is expected to contract by 2 percent in 2009 (the first annual contraction since World War II), while emerging and developing economies are expected to grow by only 3.3 percent. Helped by continued efforts to ease credit strains as well as expansionary fiscal and monetary policies, the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3 percent. U.S. output is expected to contract by 1.6 percent and grow by only 1.6 percent in 2010. Annual consumer price increase will be temporarily negative over the course of the year 2009. Public finances will deteriorate followed by the budget deficit deepening to 12.3 percent of the GDP for 2009. IMF prospects for the Euro Zone countries are even lower. Euro Zone output is expected to contract by 2 percent in 2009 and grow by only 0.2 percent in 2010. According to the January 2009 Interim Forecast, the European Commission expects the Italian economy to contract by 2 percent in 2009 and recover growth in 2010. Forecasts for Greece are more optimistic although the positive economic growth will be sluggish in 2009. Both these countries are expected to experience increase in the unemployment rate close to the average Euro Zone level in 2009. The IMF expects that the Central and East European economy will contract by 0.4 percent in 2009 and grow by 2.5 in 2010. In its January 2009 Interim Forecast, the European Commission forecasts that unemployment in the European Union will increase by 3.2 million persons causing the unemployment rate to reach 8.75 percent in 2009. According to the European Commission, public finances will be severely hit in 2009. Primary deficit in the EU is forecast to mount to 4.5 percent of the GDP compared with 2 percent in 2008. A further worsening of public finances is foreseen for 2010. Inflationary pressures in the EU are expected to ease in 2009, owing to the weakened demand for energy and raw materials. The annual consumer price increase is expected to be 1 percent in 2009 and about 2 percent in 2010 for the Euro Zone and EU countries.

Domestic Developments

The Albanian economic activity during the year 2008 performed generally in line with the early-year projections in terms of economic growth and preservation of macroeconomic balances. Economic growth was sustained by a stable fiscal and monetary stimulus. However, the international financial crisis began to provide its effects in the last quarter of 2008 as indicated by the performance of the balance of payments, slowdown in banking sector’s activity and the business and household expectations of the economic situation in the short term.

  • Fiscal policy contributed to a stable economic growth in 2008. The fiscal stimulus projected for 2009 may be confronted with difficulties owing to the dampened domestic demand and the need to find additional financial sources for carrying out expenditures.

Total budget revenues amounted to ALL 290.1 billion in 2008 - 97.3 percent of the plan. Total expenditures amounted to ALL 350.3 billion - 98.7 percent of the plan. As of end 2008, all budget revenues and expenditure items increased in absolute terms. The realization pace of budget revenues and expenditure was 15.3 and 22.6 percent higher than the same period the previous year. This performance led to a negative budget balance of about ALL 60.2 billion or about 5.7 percent of the GDP projected for 2008. The difference was financed by domestic and foreign resources amounting to ALL 24.5 billion and ALL 35.7 billion, respectively. Worth to note is the performance of capital expenditures which increased by about 3 percentage points as a share of GDP, as a result of investments in important infrastructure-related projects. The Government projects the budget deficit for the year 2009 to account for 4.2 percent of the GDP. The largest part of the budget deficit is expected to be financed by foreign resources implying relatively large foreign currency inflows in the form of foreign financing.

In a time when the Albanian economy may slow its growth rates down - below the previous projections - and when the banking sector’s demand for Government securities is downward, alternative action plans are required to be formulated. In the event both risks materialize we will be facing a more severe situation in terms of financing expenditure. Against this backdrop, the Bank of Albania calls for the restructuring of expenditure in line with the priorities and performance of fiscal revenues during the year.

This situation may moderate in the event the Government materializes all its foreign financing-related objectives. The uniform distribution of expected expenditure provides a positive contribution to maintaining the balances in the financial market and in particular in the interbank market where the performance of borrowing and public expenditure has a considerable impact.

  • Notwithstanding its stable performance for most of the year, the real sector of the economy was particularly affected by the global crisis in the last quarter of 2008. Based on the global developments and the business and household expectations, growth in Albania is expected to slump.

Activity in the real sector of the economy expanded during the third quarter of 2008, being mainly sustained by the construction sector (up by 66 percent from the same period the previous year) and the services sector (up by 15 percent). Transportation and trade had a positive and stable performance as well. Employment remained at similar levels to the ones recorded in the end of the first half of 2008 while unemployment indicators fell slightly from 12.9 to 12.6 percent. The trade balance performance reflected a stable domestic demand for the largest part of the year and the deterioration of the global crisis. As of end 2008, trade deficit was 17.8 percent higher than the same period the previous year, while workers’ remittances were about 27 percent lower. Some aggregate demand indicators for the last quarter of 2008 attest to its possible slowdown. Business and consumer confidence surveys for the last quarter recorded a fall of economic tendency indicator by 10 percentage points, which however remains above the average level of the last five years. Its figure reflects the expectations of more than 90 percent of surveyed businesses which indicate a poorer performance in production, employment, demand and their financial situation. Iown[nd indicators attests sts he previous yearobal crisis. 08 of 2008 was characterized by an nues during the year. business shIIIndustry and services in particular have negative expectations of their performance in 2009, while construction is presented relatively more optimistic. Firms’ difficulties and the real economy developments over the course of the year 2009 will affect the level of employment, hence limiting the increase of household income. It is for this reason that consumer confidence fell in the last quarter of 2008 below its historical average. Consumer expectations for the year 2009 indicate fall of employment, hence complementing the business expectations. Lower expectations for economic conditions may affect the business and consumer behaviour in terms of investment and consumption reduction. The weakened world economy, the fall in energy and food prices and the expectations for a dampened demand from the real sector of the Albanian economy are expected to lower the trade volume and keep the trade balance deficit under control for most of the year 2009.

  • In the foreign exchange market, the exchange rate movements of the foreign currencies vis-à-vis the Albanian Lek reflected the domestic demand and supply performance and the global market developments.

The situation in the foreign exchange market was relatively stable in the second half of 2008. The exchange rate of the Albanian Lek vis-à-vis the Euro and the U.S. dollar has moved close to historical intervals reflecting also the situation in the international financial markets. In the beginning of the period, the Euro traded at ALL 122, while as of end period it traded at about ALL 123.5. For the same periods, the U.S. dollar traded at ALL 78.4 and ALL 91.2, reflecting the appreciation of the U.S. dollar in the international foreign exchange markets. The exchange rate volatility of the Albanian Lek to the Euro and the U.S. dollar was higher in the last quarter of 2008. In addition to the seasonal factors and other factors related to the demand of various agents for their year-end operations, this situation has also reflected the oscillations in the foreign currency equilibrium in the domestic market owing to the deceleration of workers’ remittances and increase in imports. The free floating exchange rate of the Albanian Lek will reflect the change in the foreign currency flows in the domestic market serving in the medium run as a good absorber of shocks deriving from the international market developments. In the short run, the exchange rate performance will be closely monitored by the Bank of Albania in order to prevent the irregular and unjustified exchange rate movements and encourage the normal market functioning. In the long run this process will help to identify the possible effects on the level of consumer prices and the financial system stability indicators.

  • The Bank of Albania open market operations and its monetary policy have helped to set optimal liquidity conditions in the interbank market and preserve the public stimulus to keep assets denominated in national currency.

The Bank of Albania continued to carry out the necessary liquidity injection operations in the interbank market so that the banking sector continues to meet the public and private sector’s demands for financing under the conditions when the banking sector was confronted with an unstable retail deposit situation, in particular in the last quarter of the year. In order to better meet this objective, the Bank of Albania changed the form of liquidity injection to an undetermined amount for the one-week maturity term. The liquidity was also injected for longer maturity terms up to three months. Consequently, the regulatory framework on transaction operations changed, providing for the extension of the types of collateral used for the repurchase agreements, the increase in the use of required reserve and the decrease of the interest rate on overnight loan. As of end year, the volume of liquidity injected by the Bank of Albania in the form of non-mature reverse repurchase agreements was about ALL 24.5 billion from ALL 2.65 billion as of end the first half of 2008. As a result of the ample liquidity amounts, the trading volume in the interbank market, where banks borrow/lend loans, reduced. Average daily trading volume dropped from ALL 2.3 billion as of end June to ALL 1.25 billion as of end 2008.

The mounting inflationary pressures over the first half subsided in the second half of 2008. The dampening inflationary pressures were a consequence of the fall of energy and food prices following the slump in global demand as a result of the international financial crisis. Although downward, the annual consumer price increase remained within the corridor set by the Bank of Albania throughout the second half of the year. In December it marked 2.2 percent. It is for this reason that the Bank of Albania kept the key interest rate unchanged at 6.25 percent. The signals deriving from the regional and European economy indicate sharp deceleration of economic growth for 2009, favouring the slump of inflationary pressures arising from imported goods. Consequently, the annual consumer price increase may temporarily decrease below the lower limit set by the Bank of Albania. However, it is expected to remain close to the Bank of Albania target for the largest part of the year. Through its monetary policy, the Bank of Albania will aim at preserving the necessary stimulus to the financial agents to keep the financial and non-financial assets in national currency and orient the inflationary expectations close to the central bank’s target.

  • The banking sector’s performance over the course of the year 2008 has been conditioned by the last quarter developments when the increase of the activity close to the past years’ average was hampered by a considerable slump in deposit growth. However, the banking sector remained well-capitalized and liquid.

As of end 2008, the banking sector’s assets totalled ALL 834.1 billion, up by 12.3 percent from the previous year, and accounted for about 86 percent of the GDP. The heightened public sensitiveness to the safety of their savings - concentrated in the last quarter of the year - as a result of the global financial crisis, led to the moderated increase of banking activity during 2008. The annual growth of deposits in the banking sector was 2 percent compared with about 20 percent in 2007. The unstable performance of deposits affected the banking sector’s intermediation activity as well, being followed by the decelerated credit growth. Annual credit growth was about 35 percent compared with 48 percent in 2007. Credit growth rate was also decelerated at the end of the year. As of end December 2008, credit made up about 43 percent of total banking sector’s assets, mounting to about 37 percent of the GDP. Shareholders’ equity made up about 8.6 percent of total assets compared with 7.6 percent as of end 2007. The banking sector’s financial result was positive - ALL 7.3 billion.

As of end December 2008, the banking sector’s capital adequacy indicator was 17.2 percent, remaining almost unchanged throughout the year. The minimum required by the regulatory and supervisory framework is 12 percent. All commercial banks stood at above the required minimum attesting to the adequate capitalization of the banking activity. As of end year, the liquidity indicator, expressed as the ratio of liquid assets to total assets, was 43 percent compared with 47 percent as of end June. The liquidity indicator is considered as satisfactory. Loan portfolio quality, expressed as the ratio of non-performing loans to total loan portfolio, deteriorated during the year 2008 reaching 6.6 percent as of end year. The increase of this ratio was mainly concentrated in the last quarter of the year. In addition to the statistical effect arising as a result of the decelerated credit growth for this period, this performance indicates greater prudence of the banking sector to identify non-performing loans and create the necessary reserves. As of end year 2008, loan to deposit ratio mounted to 62 percent compared with 53 percent as of end June. In foreign currency, this ratio reached 103 percent from 90 percent as of end June. The increase of this indicator reflects broadly the drop of deposits during this period. As of end 2008, return on equity decreased to 11.4 percent from 20.7 percent as of end 2007. Return on assets was 0.9 percent compared with 1.6 percent the previous year. The decrease of both these indicators has reflected the decline in the positive financial result of the banking sector during the year 2008, conditioned mainly by the lower growth rate of lucrative activities, increase of reserve funds for non-performing loans and higher activity costs. Liabilities to non-residents and assets of non-residents stood at 10.1 percent and 9.7 percent, respectively, reflecting a limited exposure to the international financial institutions and a balanced balance sheet position. This fact is also confirmed by the almost similar share that foreign currency-denominated assets and liabilities have in the banking sector’s balance sheet - close to 49 percent.

  • The spectrum of risks in the banking sector has expanded but it will be stable in 2009 owing to the maintenance of satisfactory capitalization levels in the banking activity and the operations to preserve the liquidity indicators. However, its intermediation role - displayed in the form of public deposits mobilization and financing of the public and private sector needs - will be lower than in the previous year.

The spectrum of risks in the banking sector has become more diversified owing to the developments in the last quarter of 2008. The growth rate of deposits in the first months of 2009 was lower than in the same period the previous year. Notwithstanding the commitment of parent banks to support the lending activity of their subsidiaries in Albania, the banking sector’s capacity to lend steadily will be conditioned by the stable growth of deposits. The indicators for the first two months of the present year confirm the expectations for the decreasing growth rates of loans over 2009. This situation will make banks more prudent in selecting the projects to finance and it may orient the lending activity to shorter maturity terms and to the local currency. As a result, the lower financial stimulus that the banking sector could provide to meeting the financial needs of the public and private sector represents another restricting factor the Albanian economic growth will be faced with during the year 2009. With respect to the banking sector’s financial result it is expected to be poorer owing to the fall of interest revenues (due to the fall of lending and the change of interest rates’ structure), increase of the activity cost and higher reserve funds for non-performing loans.

  • The Bank of Albania has taken some actions to strengthen the supervision of the banking sector’s activity during this period and is working on a number of other measures which extend their effects on a longer period of time. These actions will be implemented in close consultation with the banking sector. In addition, the Bank of Albania requires from the banks’ governing structures to strengthen their control over their institutions.

In addition to its continued presence before the media to inform the public, the Bank of Albania has established a strengthened regime of monitoring the developments starting from the daily information on the liquidity situation of the banking sector to the credit situation. In order to preserve the liquid situation of the banking sector, the Bank of Albania has conducted the necessary open market operations to provide banks with ample liquidity - mainly of one-week to one-month and three-month maturity terms. Closer contacts with the commercial banks’ representatives have been established in order to get informed of their viewpoint of the situation. In addition, the central bank is monitoring the performance of foreign banking groups operating in Albania through the exchange of information, visits and contacts with the supervisory authorities in Austria, Greece and Italy. The internal procedures of our response to the needs of the financial markets have been revised, aiming at a higher level of flexibility in line with the other countries’ experience with the financial crisis.

In order to foster the banking sector’s sustainability, the Bank of Albania, in cooperation with the Ministry of Finance and the Deposit Insurance Agency, has drafted the amendments to the Law On Deposit Insurance, envisaging among others the increase of the insurance premium and deposit compensation to ALL 2.5 million and the removal of the different compensation levels. This measure would provide the Albanian depositors with a much closer standard to the one applied for bank depositors in EU member countries. The Bank of Albania is also working on a number of regulatory changes which aim at maintaining the balances in the banking activity. In more concrete terms, after the approval of some amendments to the regulations on the management of banks’ large exposures, applications for licensing banking activity etc, the new regulation on banks’ liquidity will be approved soon. The latter aims at preserving and strengthening the banking sector’s liquidity indicators in the period to follow. The Bank of Albania will also formulate a number of amendments to the regulatory and supervisory framework which will strengthen the banking sector’s protective capabilities by placing the banking business in a more balanced development model in the medium and long term.

The Bank of Albania avails itself of this opportunity to require from the representatives of the banking industry utmost commitment and prudence in monitoring and coping with this year’s developments. The central bank will prompt a constructive dialogue with the banking industry representatives and welcome any proposals related to the actions to be undertaken and the assessment of their effects. At the same time, the Bank of Albania will require the strengthening of the banks’ governing structures control over the activity of their institutions. This arises from the Bank of Albania need to obtain additional information in order to be informed of the banking business performance in real time. The Bank of Albania requires from the banks’ shareholders to be willing to augment the capital if needed and keep the credit lines for their subsidiaries operating in Albania. The banking sector should utilize the existing opportunities to carry out its financial intermediation role and foster economic growth at home within the parameters of a safe banking activity and in line with the requirements of the regulatory and supervisory framework.

  • The Albanian economy is capable of coping with the effects of this crisis, being supported by a number of factors which allow considerable flexibility and adequacy and by the public authorities’ commitment to foster economic growth within the parameters allowed for preserving fiscal and monetary discipline.

The Bank of Albania considers that the Albanian economy is currently capable of coping with the acknowledged impacts of the international crisis. In this process, the Albanian economy will take advantage of:

a) The adequate flexibility, which has been established through the structural reforms undertaken over the years. It has helped to open the markets and enhance competition, making the Albanian economy more independent to the developments in individual sectors, which are more vulnerable to the global crisis;

b) The adequate levels of some economic indicators to the GDP, namely the budget deficit, domestic debt, banking sector’s lending etc., which indicate that the current liabilities of both the public and private sector are under control, hence reducing the refinancing amount if needed;

c) The exchange rate flexibility, which serves as an automatic shock absorber;

d) The existence of real positive spreads between the interest rate of return from ALL and foreign currency investment, which promotes investment in Albanian Lek;

e) The low exposure of the banking sector and the financial system to instruments representing assets or liabilities of non-resident financial institutions;

f) The balanced foreign currency position of the banking sector and the maintenance of balanced ratios between assets and liabilities denominated in foreign currency;

g) The adequacy of the banking sector’s indicators which relate to the loan to deposit ratio, capitalization and liquidity. These ratios stand at better levels than in the regional countries and allow continued financial intermediation activity;

h) The measures taken by the public authorities to maintain public confidence in the banking sector and the financial system in general.

Despite the above supporting and protective factors the Albanian economy will go through an adaptation phase over the year 2009 during which the public authorities need to monitor the situation ceaselessly. Close contacts and the regular exchange of information between them will harmonize the actions that may be required to address the various arising issues. Constant communication with representatives of the real and financial sectors will be maintained during this period in order to discuss the developments in the respective sectors. Given that the crisis may also affect the regional countries, the need for harmonizing the actions extends to international and regional levels as well. It is crucial that the authorities maintain fiscal and monetary discipline utilizing the existing opportunities for sustaining economic growth.

PUBLICATION DATE: 31.03.2009

 

Pursuant to the requirement of Article 69, paragraph 6 of the Law No. 8269, dated 23 December 1997 "On the Bank of Albania", as amended, and Article 8 of the Law No. 9962, dated 18 December 2006 "On Banks in the Republic of Albania", as amended, to inform the Council of Ministers, the Parliament of the Republic of Albania and to draw the attention of the financial institutions and the public at large on the situation of the financial system in the country and on the potential risks which may threaten its stability, the Bank of Albania releases the following periodical statement.

Summary

Global economic developments over the second half of the year 2008 attested to the transformation of the international financial crisis into a global-wide economic crisis. The very high integration of the financial markets in industrialized countries prompted the rapid emergence of the crisis in these countries; while the opening of economic markets is generating a stable spreading of the crisis effects to the emerging countries. Public authorities worldwide have created extraordinary fiscal and monetary stimulus to respond to the risks in the short and longer term. In the medium term, these measures and others are expected to restore confidence in the financial markets and their normal functioning in order to resume the financial intermediation process. Until the turning point, the global economy will continue to suffer decline of demand as a result of the fall in private investment and trade and increase in unemployment as a result of the business and household sectors’ need to lower costs due to the tightening financing conditions. This demanding but necessary correction process is expected to be carried out during the year 2009. Global economy is expected to gradually recover its stable growth in 2010.

The Albanian economic activity during the year 2008 performed generally in line with the early-year projections in terms of economic growth and preservation of macroeconomic balances. However, the last quarter of the year saw the increasing impact of the global economy slowdown, principally on the performance of the Albanian balance of payments. The fall of foreign demand and increase in unemployment, in particular in the neighbouring Euro area member countries prompted the decline of exports and workers’ remittances, hence moderating the domestic demand for consumption. However, state budget revenue and expenditure met close to the projections and recorded a relative annual increase by 15 and 23 percent, respectively. The annual increase of consumer prices reduced to 2.2 percent in December. News over the international situation in the last quarter of 2008 enhanced the Albanian public sensitiveness to the safety of their savings; however, the banking sector - as expected - handled this situation very well being well-capitalized and liquid at end 2008. The Bank of Albania contributed to maintaining optimal liquidity levels in the banking sector by carrying out the necessary operations in the interbank market. Starting from mid-November 2008, the form of reverse repo auctions changed from multiple price to fixed price auctions. In addition, the Bank of Albania injected liquidity of longer maturity term and employed the outright sale instrument.

The Bank of Albania made some important regulatory amendments, which eased the liquidity situation in the interbank market. In more concrete terms:

  • The base of securities serving as collateral for reverse repurchase agreements extended with the bonds issued by the Government that have a remaining term to maturity of no longer than 365 days;
  • The use of required reserve increased from 20 percent to 40 percent;
  • The spread between the Bank of Albania key interest rate and overnight credit reduced from 1.75 percentage points to only 0.75 percentage points.

The annual growth rate of the banking sector’s assets was lower than in the previous year owing to the unstable growth of deposits. The slower annual growth of loans drove the share of non-performing loans to total loan portfolio to increase. Loan to deposit ratio allows for sufficient room for lending, in particular in the Albanian Lek. The annual financial result indicators were positive for the banking sector but lower than the previous year owing to the reduced growth rate of lucrative activities and the relative enhancement of competition. The Lek exchange rate has by and large been stable.

In the light of the further deepening of the international crisis, the Albanian economy will be faced with a number of new challenges over the year 2009. Annual economic growth is expected to be positive but considerably lower than in 2008. Monetary and fiscal policies need to be fine-tuned in order to ensure stable macroeconomic and financial indicators at home. The intermediation activity of the banking sector and the financial system in general - to meet the financial needs of the public sector and the private sector in particular - is expected to be lower and at higher costs owing to the unstable demand and supply-side factors. Business and households are expected to suffer upward financing difficulties. This factor will induce a restructuring process which in the short term will result demanding and increase uncertainty over job security. In a longer term, the effects of this restructuring process on the enhancement of business activity efficiency will result positive. The free floating exchange rate of the Albanian Lek will reflect the change in the foreign currency/Lek flows in the domestic market and the developments in the international market, serving as a good shock absorber in the medium run. In the short run, the exchange rate performance will be closely monitored by the Bank of Albania in order to prevent the irregular and unjustified exchange rate movements and encourage the normal market functioning. The annual rise of consumer prices will reflect the developments in total demand. The annual consumer price rise indicator may temporarily drop below the lower limit of the corridor set by the Bank of Albania. However it is expected to remain close to the target for most of the year. Through its monetary policy, the Bank of Albania will aim at preserving the necessary stimulus to the financial agents to keep the financial assets in the national currency and orient the inflationary expectations close to the Bank of Albania target. By doing so, a longer term contribution is provided to supporting the intermediation function of the banking sector. The latter’s profitability is expected to be affected by the fall in the lending volume and the relative increase of the activity cost over the year.

In the recent months, the Bank of Albania has been conducting numerous and successive stress tests in order to identify the banking system’s response to possible pessimistic scenarios. The analysis obtained from the numerous stress tests - for the banking system-wide and individual banks - indicate that neither the banking system on the whole nor any of the systemically important banks in particular have been affected in their liquidity and capitalization indicators. Notwithstanding the enhanced spectrum of risks and a more challenging year in terms of expanding their banking activity, the financial system and the banking sector will remain stable.

The global economic crisis will extend its reach to every country. However, the extent of its impact on a given country will largely depend on the latter’s economic and financial system’s position and on the duration of this crisis. The Albanian economy and financial system are balanced and capable of coping with the expected impact of this international crisis. In this process, the Albanian economy will be supported by a number of factors which relate to the real sector’s flexibility, the adequacy of several fiscal and monetary-related macroeconomic indicators, the stability of the financial system and the banking sector and the public authorities’ ability to preserve fiscal and monetary discipline and act in a timely and harmonized manner if needed.

Despite the above supporting and protective factors, the Albanian economy will go through an adaptation phase over the year 2009 during which the public authorities need to monitor the situation ceaselessly. Close contacts and the regular exchange of information between them will harmonize the actions that may be required to address the various arising issues. Constant communication with representatives of the real and financial sectors will be maintained during this period so as to discuss the developments in the respective sectors. Given that the crisis may also affect the regional countries, the need for harmonizing the actions extends to international and regional levels. Against this background, the Bank of Albania has taken a number of regulatory and operational actions which aim at strengthening the supervisory process and preserving the liquidity level in the banking sector. Recently, the Bank of Albania has, in cooperation with the Ministry of Finance and the Deposit Insurance Agency, drafted the amendments to the Law On Deposit Insurance, envisaging among others the increase of the insurance premium and deposit compensation to ALL 2.5 million and the removal of the different compensation levels. This measure would foster the banking sector’s sustainability and provide the Albanian depositors with a much closer standard to the one applied for bank depositors in EU member countries. The Bank of Albania has the conviction that this beneficial measure to the public and the banking sector will also find the support of the Albanian Parliament. In addition, through a special regulatory act, the Bank of Albania has requested from the banking sector not to allocate the 2008 profit in the form of dividend. In this way, the banking activity capitalization is further strengthened, hence providing more guarantees for the banking sector’s financial soundness.

The maintenance of a constructive dialogue with the banking industry remains a constant objective of the Bank of Albania. At the same time, the Bank of Albania will require the strengthening of the banks’ governing structures control over the activity of their institutions and better management of the business risks. This arises from the Bank of Albania need to obtain additional information in order to be informed of the banking business performance in real time. The Bank of Albania requires from the banks’ shareholders to be willing to augment the capital if needed and keep the credit lines for their subsidiaries operating in Albania. The banking sector should utilize the existing opportunities to carry out its financial intermediation role and foster economic growth at home within the parameters of a safe banking activity and in line with the requirements of the regulatory and supervisory framework. In this context, the Bank of Albania will be cautious and willing to take all the necessary measures - not only supervisory-related ones - to foster a sustainable and long-term growth of the banking sector.

Global Developments

The measures taken by the central banks in the United States (U.S.), the Euro Zone and other developed countries to moderate the downturn in the international financial markets - mainly through the increase in the injection of liquidity - helped to relieve the situation temporarily in the beginning of the second half of the year. However, these measures were not sufficient to restore the investors’ confidence and the normal functioning of markets. The situation deteriorated further in the last quarter of the year.

  • The pronounced difficulties of some important financial institutions led the public authorities to intervene for their closure or bailout.

Many banks and other globally important financial institutions suffered great financial losses and considerable reduction of capital. This setting led the public authorities in the U.S. and Europe to intervene for the closure or bailout of the failing institutions. In particular, the decision of the U.S. authorities to allow the failure of Lehman Brothers, considering its active position in the global markets of financial instruments which refinanced mortgages and derivatives, set off the alarm bells in the financial markets and added the financial institutions’ concerns over their safety. This concern was further elevated following the release of the large losses and liquidity issues many globally important banks and insurance companies were experiencing. For this reason, interbank market operations in developed countries were almost interrupted, displaying fall in volume, concentration of financial operations in very short maturity terms and considerable increase in the financing cost. Markets for various sophisticated financial products evaporated. In addition, investors’ confidence in banks and financial institutions undermined, narrowing at large their financial ability to pay off the debts and increase their capital. Banks’ stock prices fell, while the lending terms in the interbank markets tightened further. According to the International Monetary Fund (IMF), major equity indices dropped by about 25 percent in October. Emerging countries came under even more severe pressure. Since the beginning of October, investors required a return rate of about 6 percentage points higher for sovereign debt, which attests to their uncertainty over the creditworthiness of this debt. Emerging equity markets lost about a third of their value in local currency terms and more than 40 percent of their value in U.S. dollar terms. The uncertainty led to a global-wide massive shift of funds to U.S. Government T-bills, traditionally perceived as risk-free. This brought about the drop of their return rate to almost zero and grew the demand for U.S. dollar against the other currencies. Public confidence undermined being followed by the narrowing of maturity terms and the drop of the savings value in banks.

  • Public authorities took rapid monetary and fiscal-related actions to restore the financial markets’ functionality and moderate the impact of this crisis on the real sectors of the economy. The harmonization of global-wide actions was considered a priority.

The upward financing difficulties owing to the non-functionality of markets led to cutback of investment and trade, hitting domestic demand and fuelling a pronounced slowdown of the real sectors of economy at a global level, in particular in advanced economies. Against a background of overall economic slump, firms had to lower their costs which in turn led to job cuts in the labour market. The number of unemployed persons increased substantially. All the events so far showed clearly the far reaching extent of this crisis and prioritized the rapid and harmonized actions of central banks and their respective governments not only at a local but also at a regional and global level, including the contribution of international financial institutions. Many international financial institutions’ reports, high-level forums and meetings highlighted the necessity to take all the possible measures to safeguard the financial system and moderate the liquidity crunch in the financial market, preserve public confidence in the financial system and the banking institutions and provide the global economy with the necessary financial stimuli. Subsequently, the vital sectors of the economy and the society at large would cope more easily with the economic slump.

Central banks in more advanced economies deepened the liberalization process of liquidity injection into the respective markets. To this purpose, the relevant instruments changed, the range of participant financial institutions and the types of collateral widened and the maturity term was extended. In addition, central banks aimed to provide the economy with a longer-term financial stimulus through an accommodative monetary policy, under the conditions when the expectations for a sharp slowdown of economic development moderated the inflationary pressures. The U.S. Federal Reserve cut the key policy rate by 1 percentage point in October. Half of the cut occurred on 8 October as part of a co-ordinated international action with six other central banks including the ECB. In December, the U.S. Federal Reserve cut the key policy rate again to a range of between zero percent and 0.25 percent. In the Euro Zone, the ECB changed the form of the main financing instruments and cut the key interest rate three times. On October 8, the ECB cut the key interest rate by 50 basis points to 3.75 percent. The ECB cut the key interest rate further on November 12 and December 10 by a total of 1.25 percent. As of end 2008, the ECB’s key interest rate stood at 2.5 percent. The Bank of England, the Bank of Canada, Sweden’s Riksbank, the Swiss National Bank etc, lowered their key interest rates as well. The same trend is expected to persist.

The governments in advanced economies took extraordinary fiscal measures. On October 3, 2008 the U.S. Congress passed the Emergency Economic Stabilization Act authorizing the U.S. Secretary of the Treasury to purchase up to $700 billion in mortgage-backed securities and other troubled assets from the country’s banks and make capital injections into banks. As a result, as of end December the U.S. Government extended the purchase of preferred shares in the equity of a large number of banks for a total additional value of about $112 billion. In addition, the U.S. Government and Federal Reserve accepted the change in the status of some important financial institutions including insurance companies and others, so that they could meet the conditions for benefiting from the capitalization fund. The use of this fund by the institutions collecting deposits from the public or depositary banks was followed by some conditions which changed their decision-making overwhelmingly.

The highest representatives of the EU member countries held a number of meetings to better harmonize the actions for coping with the crisis. Heads of State and Government from the Euro Zone countries and the ECB met in Paris on 12 October 2008. In the official joint statement released after the summit, the leaders of Euro Zone countries supported the measures taken to avoid the failure of relevant financial institutions, ensure utmost transparency and disclosure on banks exposure and enhance retail deposit guarantee protection. At the same time, these authorities confirmed their commitment to act together in a decisive and comprehensive way in order to restore confidence and proper functioning of the financial system, aiming at restoring appropriate and efficient financing conditions for the economy. More specifically, they agreed to a coordinated approach aiming at: a) ensuring appropriate liquidity conditions for financial institutions; b) facilitating the constrained funding of banks; c) providing financial institutions with additional capital resources so as to continue to ensure the proper financing of the economy; d) allowing for an efficient recapitalisation of distressed banks; e) ensuring sufficient flexibility in the implementation of accounting rules given the exceptional market circumstances; and f) enhancing cooperation procedures among European countries.

The leaders of the G-20 (which represent 80 percent of global economy) met on 15 November 2008 to discuss the measures to support the global economy and stabilize financial markets. Participants in this meeting were the leaders of G-20, high representatives of the European Union, United Nations, IMF, the World Bank and the Financial Stability Forum. They agreed on some common principles, which aimed at reforming the financial market so as to avoid future crises. The principles expressed the commitment of these countries and the international institutions to strengthening transparency, accountability and enhancing sound regulation of the financial markets. They also aimed at reinforcing international cooperation, reforming and strengthening the financial resources of the international financial institutions as well as strengthening the resilience and transparency of credit derivatives markets and reducing their systemic risks.

As a follow-up to these directives and principles, on 26 November the European Commission presented the European Economic Recovery Plan which aimed at: a) taking measures to bolster domestic demand, maintaining employment levels and restoring confidence in the financial system in the short term; and b) carrying out efficient investment to stimulate economic growth and a stable welfare in the long term. This plan proposed an immediate budgetary impulse amounting to €200 billion or 1.5 percent of the EU’s GDP, which had to be provided timely, targeted and temporal at the same time. Prior to the finalization of the European Economic Recovery Plan, countries like the Great Britain, Germany, Sweden, Portugal, the Netherlands, France, Italy, Greece (€28 billion), Finland, Spain, Austria (€100 billion) and Slovenia had drafted their own national plans for supporting the financial sector and facilitating the lending terms in compliance with the provisions of the European Commission state aid rules. These countries’ packages were similar and they almost all provided for temporary actions which included: the provision of a fund for banks’ capitalisation, provision of guarantees for new debt issuance of national banks and the setting of some conditions on the management and orientation of the activities of banks which were to use this fund. The facilitation of lending terms provided for the establishment of programs which support the lending (in larger amounts, lower interest rates etc.) to enterprises in vital sectors of the economy, in particular to small and medium-sized enterprises which until the fall of 2008 were in a good financial position.

Among the other large countries, China, Brazil and India formulated necessary financial packages to stimulate economic growth. In November, China announced a $585 billion stimulus package which mainly involved key areas such as social welfare, infrastructure, environment and technology innovation. The Chinese Government believes that these measures and others if needed will recover economic growth in 2010.

  • The other European countries have been affected by the crisis and in some of them the crisis’ effects have yielded a challenging correction process of macroeconomic balances.

During the 2000s, Baltic and Central and South-East European countries by and large experienced a sustained economic growth and financial stability as a result of structural reforms stimulated by the integration process, increase of money flows in the form of direct and portfolio investment, increase of productivity and enhancement of the competitive position in foreign trade, stable exchange rate, revenue increase and fiscal consolidation. These countries had undergone a comprehensive transformation in their financial sector, being also evidenced by the growth of investment of large financial institutions - mainly from the Euro Zone. This process was further boosted by the priorities these countries provided: higher economic growth, room for the increase of banking intermediation in particular in terms of lending, proximity and satisfactory integration with the developed financial centres etc. According to the IMF experts, the share of foreign banks’ assets in the financial system of these countries has been upward since the year 2000 and as of end 2006 it stood at 80 percent to 100 percent in Serbia, Bulgaria, Hungary, Czech Republic, Romania, Croatia, Lithuania, Montenegro, Bosnia and Herzegovina and Estonia. During the period 2000-2007, bank lending in these countries and in South-Eastern Europe grew by an average of 23 percent in real annual terms. The years 2004-2007 experienced a more rapid growth of lending. In some of these countries, annual growth of lending averaged 30 percent to 50 percent. In some of these countries, the cumulative growth of private sector lending to the GDP exceeded 20 percentage points during this period. The growth of deposits was insufficient to cope with the rapid growth of credit therefore the lending process was supported by other financial resources, mainly by borrowing from the financial markets. The latter was more pronounced for foreign currency. Loan/deposit ratio increased in most of these countries, in particular in the Baltic countries where it has doubled since 2000 and in Ukraine, Hungary and Russia where it stands at 120-150 percent. In some of these countries, private sector lending in foreign currency, in particular in the currencies with very low interest rates (the Swiss franc, the Japanese yen) grew faster as a result of the borrowers’ demand for low-cost borrowing, perception for stable exchange rates and the possibility to have these loans financed by the international financial markets. The facility of having them financed by the international market - both for the private and the public sector - has fuelled growth in total demand beyond the economic growth rate and has generated the deterioration of the balance of payments and the fiscal balance in some of these countries. It is for this reason that this situation made them particularly vulnerable to the international financial markets’ stability.

The international financial crisis altered this fragile balance. The tightened lending conditions in the international markets hampered borrowing from foreign banks to refinance their debts in the short term. Moreover, the fall in raw material and energy prices led to reduced inflows and the collapse of the foreign position balance and fiscal situation deterioration. Given their short-term and speculative behaviour, portfolio investors began to move away from these countries’ financial assets. The pressure over the exchange rate of the local currencies augmented significantly. Hungary was the first country in the region where the authorities were constrained to take a number of measures to restore confidence in the national financial system. These measures involved the increase of interest rates to promote investment in financial assets denominated in local currency. On the other side, Hungary’s efforts in improving the budget financial situation and the balance of payments were rapidly supported by the European Commission and the IMF. On 4 November, the Council of Economics and Finance Ministers decided to provide balance of payments assistance of up to €6.5 billion to Hungary. On 6 November, the IMF and the World Bank approved loans of €12.5 billion and €1 billion for Hungary. The IMF approved loans for Ukraineu, Serbia (€412 million) etc. The European Union is discussing the possibilities and ways to assist the countries of this region if needed in the future.

  • Notwithstanding the measures taken by the public authorities on a global level, the events of autumn 2008 attested to the deterioration of economic growth for 2008. The international financial institutions’ prospects for global growth in 2009 remain pessimistic, while the global economy is projected to experience a gradual recovery in 2010. The outlook is highly uncertain.

The positive effect of the measures taken during the year 2008 was only partial. The liquidity injections led to the decrease of interest rates in the interbank markets, while the authorities’ commitment to protect important banks and increase the deposit guarantee amount put a halt to the fall of confidence in the financial institutions. However, the financial markets continued to operate in a segmented manner and the financial intermediation remained constrained. The fiscal and monetary stimulus could not provide its effects in 2008. In fact, global economic growth figures were even lower than the projections (which were revised downward) of international financial institutions. As of end 2008, annual world output growth was 3.4 percent, while the volume of world trade in goods and services grew by 4.1 percent (7.2 percent in 2007). Advanced economies grew by only 1 percent, while the developing economies (among which China, Brazil and India) provided the main contribution to global economic growth with an annual growth of about 6.3 percent. Capital and financial markets continued to record negative figures following the release of the large losses many banks and non-financial corporations were experiencing. In the foreign exchange markets the U.S. dollar was stable against the Euro owing to the investors’ demand to purchase the additional U.S. debt and the hope that the fiscal stimulus - expected to increase with the new While House Administration - would provide a positive contribution to the improvement of the situation.

In its World Economic Outlook of January 2009, the IMF projects that world growth will fall to 0.5 percent in 2009. Output in the advanced economies is expected to contract by 2 percent in 2009 (the first annual contraction since World War II), while emerging and developing economies are expected to grow by only 3.3 percent. Helped by continued efforts to ease credit strains as well as expansionary fiscal and monetary policies, the global economy is projected to experience a gradual recovery in 2010, with growth picking up to 3 percent. U.S. output is expected to contract by 1.6 percent and grow by only 1.6 percent in 2010. Annual consumer price increase will be temporarily negative over the course of the year 2009. Public finances will deteriorate followed by the budget deficit deepening to 12.3 percent of the GDP for 2009. IMF prospects for the Euro Zone countries are even lower. Euro Zone output is expected to contract by 2 percent in 2009 and grow by only 0.2 percent in 2010. According to the January 2009 Interim Forecast, the European Commission expects the Italian economy to contract by 2 percent in 2009 and recover growth in 2010. Forecasts for Greece are more optimistic although the positive economic growth will be sluggish in 2009. Both these countries are expected to experience increase in the unemployment rate close to the average Euro Zone level in 2009. The IMF expects that the Central and East European economy will contract by 0.4 percent in 2009 and grow by 2.5 in 2010. In its January 2009 Interim Forecast, the European Commission forecasts that unemployment in the European Union will increase by 3.2 million persons causing the unemployment rate to reach 8.75 percent in 2009. According to the European Commission, public finances will be severely hit in 2009. Primary deficit in the EU is forecast to mount to 4.5 percent of the GDP compared with 2 percent in 2008. A further worsening of public finances is foreseen for 2010. Inflationary pressures in the EU are expected to ease in 2009, owing to the weakened demand for energy and raw materials. The annual consumer price increase is expected to be 1 percent in 2009 and about 2 percent in 2010 for the Euro Zone and EU countries.

Domestic Developments

The Albanian economic activity during the year 2008 performed generally in line with the early-year projections in terms of economic growth and preservation of macroeconomic balances. Economic growth was sustained by a stable fiscal and monetary stimulus. However, the international financial crisis began to provide its effects in the last quarter of 2008 as indicated by the performance of the balance of payments, slowdown in banking sector’s activity and the business and household expectations of the economic situation in the short term.

  • Fiscal policy contributed to a stable economic growth in 2008. The fiscal stimulus projected for 2009 may be confronted with difficulties owing to the dampened domestic demand and the need to find additional financial sources for carrying out expenditures.

Total budget revenues amounted to ALL 290.1 billion in 2008 - 97.3 percent of the plan. Total expenditures amounted to ALL 350.3 billion - 98.7 percent of the plan. As of end 2008, all budget revenues and expenditure items increased in absolute terms. The realization pace of budget revenues and expenditure was 15.3 and 22.6 percent higher than the same period the previous year. This performance led to a negative budget balance of about ALL 60.2 billion or about 5.7 percent of the GDP projected for 2008. The difference was financed by domestic and foreign resources amounting to ALL 24.5 billion and ALL 35.7 billion, respectively. Worth to note is the performance of capital expenditures which increased by about 3 percentage points as a share of GDP, as a result of investments in important infrastructure-related projects. The Government projects the budget deficit for the year 2009 to account for 4.2 percent of the GDP. The largest part of the budget deficit is expected to be financed by foreign resources implying relatively large foreign currency inflows in the form of foreign financing.

In a time when the Albanian economy may slow its growth rates down - below the previous projections - and when the banking sector’s demand for Government securities is downward, alternative action plans are required to be formulated. In the event both risks materialize we will be facing a more severe situation in terms of financing expenditure. Against this backdrop, the Bank of Albania calls for the restructuring of expenditure in line with the priorities and performance of fiscal revenues during the year.

This situation may moderate in the event the Government materializes all its foreign financing-related objectives. The uniform distribution of expected expenditure provides a positive contribution to maintaining the balances in the financial market and in particular in the interbank market where the performance of borrowing and public expenditure has a considerable impact.

  • Notwithstanding its stable performance for most of the year, the real sector of the economy was particularly affected by the global crisis in the last quarter of 2008. Based on the global developments and the business and household expectations, growth in Albania is expected to slump.

Activity in the real sector of the economy expanded during the third quarter of 2008, being mainly sustained by the construction sector (up by 66 percent from the same period the previous year) and the services sector (up by 15 percent). Transportation and trade had a positive and stable performance as well. Employment remained at similar levels to the ones recorded in the end of the first half of 2008 while unemployment indicators fell slightly from 12.9 to 12.6 percent. The trade balance performance reflected a stable domestic demand for the largest part of the year and the deterioration of the global crisis. As of end 2008, trade deficit was 17.8 percent higher than the same period the previous year, while workers’ remittances were about 27 percent lower. Some aggregate demand indicators for the last quarter of 2008 attest to its possible slowdown. Business and consumer confidence surveys for the last quarter recorded a fall of economic tendency indicator by 10 percentage points, which however remains above the average level of the last five years. Its figure reflects the expectations of more than 90 percent of surveyed businesses which indicate a poorer performance in production, employment, demand and their financial situation. Iown[nd indicators attests sts he previous yearobal crisis. 08 of 2008 was characterized by an nues during the year. business shIIIndustry and services in particular have negative expectations of their performance in 2009, while construction is presented relatively more optimistic. Firms’ difficulties and the real economy developments over the course of the year 2009 will affect the level of employment, hence limiting the increase of household income. It is for this reason that consumer confidence fell in the last quarter of 2008 below its historical average. Consumer expectations for the year 2009 indicate fall of employment, hence complementing the business expectations. Lower expectations for economic conditions may affect the business and consumer behaviour in terms of investment and consumption reduction. The weakened world economy, the fall in energy and food prices and the expectations for a dampened demand from the real sector of the Albanian economy are expected to lower the trade volume and keep the trade balance deficit under control for most of the year 2009.

  • In the foreign exchange market, the exchange rate movements of the foreign currencies vis-à-vis the Albanian Lek reflected the domestic demand and supply performance and the global market developments.

The situation in the foreign exchange market was relatively stable in the second half of 2008. The exchange rate of the Albanian Lek vis-à-vis the Euro and the U.S. dollar has moved close to historical intervals reflecting also the situation in the international financial markets. In the beginning of the period, the Euro traded at ALL 122, while as of end period it traded at about ALL 123.5. For the same periods, the U.S. dollar traded at ALL 78.4 and ALL 91.2, reflecting the appreciation of the U.S. dollar in the international foreign exchange markets. The exchange rate volatility of the Albanian Lek to the Euro and the U.S. dollar was higher in the last quarter of 2008. In addition to the seasonal factors and other factors related to the demand of various agents for their year-end operations, this situation has also reflected the oscillations in the foreign currency equilibrium in the domestic market owing to the deceleration of workers’ remittances and increase in imports. The free floating exchange rate of the Albanian Lek will reflect the change in the foreign currency flows in the domestic market serving in the medium run as a good absorber of shocks deriving from the international market developments. In the short run, the exchange rate performance will be closely monitored by the Bank of Albania in order to prevent the irregular and unjustified exchange rate movements and encourage the normal market functioning. In the long run this process will help to identify the possible effects on the level of consumer prices and the financial system stability indicators.

  • The Bank of Albania open market operations and its monetary policy have helped to set optimal liquidity conditions in the interbank market and preserve the public stimulus to keep assets denominated in national currency.

The Bank of Albania continued to carry out the necessary liquidity injection operations in the interbank market so that the banking sector continues to meet the public and private sector’s demands for financing under the conditions when the banking sector was confronted with an unstable retail deposit situation, in particular in the last quarter of the year. In order to better meet this objective, the Bank of Albania changed the form of liquidity injection to an undetermined amount for the one-week maturity term. The liquidity was also injected for longer maturity terms up to three months. Consequently, the regulatory framework on transaction operations changed, providing for the extension of the types of collateral used for the repurchase agreements, the increase in the use of required reserve and the decrease of the interest rate on overnight loan. As of end year, the volume of liquidity injected by the Bank of Albania in the form of non-mature reverse repurchase agreements was about ALL 24.5 billion from ALL 2.65 billion as of end the first half of 2008. As a result of the ample liquidity amounts, the trading volume in the interbank market, where banks borrow/lend loans, reduced. Average daily trading volume dropped from ALL 2.3 billion as of end June to ALL 1.25 billion as of end 2008.

The mounting inflationary pressures over the first half subsided in the second half of 2008. The dampening inflationary pressures were a consequence of the fall of energy and food prices following the slump in global demand as a result of the international financial crisis. Although downward, the annual consumer price increase remained within the corridor set by the Bank of Albania throughout the second half of the year. In December it marked 2.2 percent. It is for this reason that the Bank of Albania kept the key interest rate unchanged at 6.25 percent. The signals deriving from the regional and European economy indicate sharp deceleration of economic growth for 2009, favouring the slump of inflationary pressures arising from imported goods. Consequently, the annual consumer price increase may temporarily decrease below the lower limit set by the Bank of Albania. However, it is expected to remain close to the Bank of Albania target for the largest part of the year. Through its monetary policy, the Bank of Albania will aim at preserving the necessary stimulus to the financial agents to keep the financial and non-financial assets in national currency and orient the inflationary expectations close to the central bank’s target.

  • The banking sector’s performance over the course of the year 2008 has been conditioned by the last quarter developments when the increase of the activity close to the past years’ average was hampered by a considerable slump in deposit growth. However, the banking sector remained well-capitalized and liquid.

As of end 2008, the banking sector’s assets totalled ALL 834.1 billion, up by 12.3 percent from the previous year, and accounted for about 86 percent of the GDP. The heightened public sensitiveness to the safety of their savings - concentrated in the last quarter of the year - as a result of the global financial crisis, led to the moderated increase of banking activity during 2008. The annual growth of deposits in the banking sector was 2 percent compared with about 20 percent in 2007. The unstable performance of deposits affected the banking sector’s intermediation activity as well, being followed by the decelerated credit growth. Annual credit growth was about 35 percent compared with 48 percent in 2007. Credit growth rate was also decelerated at the end of the year. As of end December 2008, credit made up about 43 percent of total banking sector’s assets, mounting to about 37 percent of the GDP. Shareholders’ equity made up about 8.6 percent of total assets compared with 7.6 percent as of end 2007. The banking sector’s financial result was positive - ALL 7.3 billion.

As of end December 2008, the banking sector’s capital adequacy indicator was 17.2 percent, remaining almost unchanged throughout the year. The minimum required by the regulatory and supervisory framework is 12 percent. All commercial banks stood at above the required minimum attesting to the adequate capitalization of the banking activity. As of end year, the liquidity indicator, expressed as the ratio of liquid assets to total assets, was 43 percent compared with 47 percent as of end June. The liquidity indicator is considered as satisfactory. Loan portfolio quality, expressed as the ratio of non-performing loans to total loan portfolio, deteriorated during the year 2008 reaching 6.6 percent as of end year. The increase of this ratio was mainly concentrated in the last quarter of the year. In addition to the statistical effect arising as a result of the decelerated credit growth for this period, this performance indicates greater prudence of the banking sector to identify non-performing loans and create the necessary reserves. As of end year 2008, loan to deposit ratio mounted to 62 percent compared with 53 percent as of end June. In foreign currency, this ratio reached 103 percent from 90 percent as of end June. The increase of this indicator reflects broadly the drop of deposits during this period. As of end 2008, return on equity decreased to 11.4 percent from 20.7 percent as of end 2007. Return on assets was 0.9 percent compared with 1.6 percent the previous year. The decrease of both these indicators has reflected the decline in the positive financial result of the banking sector during the year 2008, conditioned mainly by the lower growth rate of lucrative activities, increase of reserve funds for non-performing loans and higher activity costs. Liabilities to non-residents and assets of non-residents stood at 10.1 percent and 9.7 percent, respectively, reflecting a limited exposure to the international financial institutions and a balanced balance sheet position. This fact is also confirmed by the almost similar share that foreign currency-denominated assets and liabilities have in the banking sector’s balance sheet - close to 49 percent.

  • The spectrum of risks in the banking sector has expanded but it will be stable in 2009 owing to the maintenance of satisfactory capitalization levels in the banking activity and the operations to preserve the liquidity indicators. However, its intermediation role - displayed in the form of public deposits mobilization and financing of the public and private sector needs - will be lower than in the previous year.

The spectrum of risks in the banking sector has become more diversified owing to the developments in the last quarter of 2008. The growth rate of deposits in the first months of 2009 was lower than in the same period the previous year. Notwithstanding the commitment of parent banks to support the lending activity of their subsidiaries in Albania, the banking sector’s capacity to lend steadily will be conditioned by the stable growth of deposits. The indicators for the first two months of the present year confirm the expectations for the decreasing growth rates of loans over 2009. This situation will make banks more prudent in selecting the projects to finance and it may orient the lending activity to shorter maturity terms and to the local currency. As a result, the lower financial stimulus that the banking sector could provide to meeting the financial needs of the public and private sector represents another restricting factor the Albanian economic growth will be faced with during the year 2009. With respect to the banking sector’s financial result it is expected to be poorer owing to the fall of interest revenues (due to the fall of lending and the change of interest rates’ structure), increase of the activity cost and higher reserve funds for non-performing loans.

  • The Bank of Albania has taken some actions to strengthen the supervision of the banking sector’s activity during this period and is working on a number of other measures which extend their effects on a longer period of time. These actions will be implemented in close consultation with the banking sector. In addition, the Bank of Albania requires from the banks’ governing structures to strengthen their control over their institutions.

In addition to its continued presence before the media to inform the public, the Bank of Albania has established a strengthened regime of monitoring the developments starting from the daily information on the liquidity situation of the banking sector to the credit situation. In order to preserve the liquid situation of the banking sector, the Bank of Albania has conducted the necessary open market operations to provide banks with ample liquidity - mainly of one-week to one-month and three-month maturity terms. Closer contacts with the commercial banks’ representatives have been established in order to get informed of their viewpoint of the situation. In addition, the central bank is monitoring the performance of foreign banking groups operating in Albania through the exchange of information, visits and contacts with the supervisory authorities in Austria, Greece and Italy. The internal procedures of our response to the needs of the financial markets have been revised, aiming at a higher level of flexibility in line with the other countries’ experience with the financial crisis.

In order to foster the banking sector’s sustainability, the Bank of Albania, in cooperation with the Ministry of Finance and the Deposit Insurance Agency, has drafted the amendments to the Law On Deposit Insurance, envisaging among others the increase of the insurance premium and deposit compensation to ALL 2.5 million and the removal of the different compensation levels. This measure would provide the Albanian depositors with a much closer standard to the one applied for bank depositors in EU member countries. The Bank of Albania is also working on a number of regulatory changes which aim at maintaining the balances in the banking activity. In more concrete terms, after the approval of some amendments to the regulations on the management of banks’ large exposures, applications for licensing banking activity etc, the new regulation on banks’ liquidity will be approved soon. The latter aims at preserving and strengthening the banking sector’s liquidity indicators in the period to follow. The Bank of Albania will also formulate a number of amendments to the regulatory and supervisory framework which will strengthen the banking sector’s protective capabilities by placing the banking business in a more balanced development model in the medium and long term.

The Bank of Albania avails itself of this opportunity to require from the representatives of the banking industry utmost commitment and prudence in monitoring and coping with this year’s developments. The central bank will prompt a constructive dialogue with the banking industry representatives and welcome any proposals related to the actions to be undertaken and the assessment of their effects. At the same time, the Bank of Albania will require the strengthening of the banks’ governing structures control over the activity of their institutions. This arises from the Bank of Albania need to obtain additional information in order to be informed of the banking business performance in real time. The Bank of Albania requires from the banks’ shareholders to be willing to augment the capital if needed and keep the credit lines for their subsidiaries operating in Albania. The banking sector should utilize the existing opportunities to carry out its financial intermediation role and foster economic growth at home within the parameters of a safe banking activity and in line with the requirements of the regulatory and supervisory framework.

  • The Albanian economy is capable of coping with the effects of this crisis, being supported by a number of factors which allow considerable flexibility and adequacy and by the public authorities’ commitment to foster economic growth within the parameters allowed for preserving fiscal and monetary discipline.

The Bank of Albania considers that the Albanian economy is currently capable of coping with the acknowledged impacts of the international crisis. In this process, the Albanian economy will take advantage of:

a) The adequate flexibility, which has been established through the structural reforms undertaken over the years. It has helped to open the markets and enhance competition, making the Albanian economy more independent to the developments in individual sectors, which are more vulnerable to the global crisis;

b) The adequate levels of some economic indicators to the GDP, namely the budget deficit, domestic debt, banking sector’s lending etc., which indicate that the current liabilities of both the public and private sector are under control, hence reducing the refinancing amount if needed;

c) The exchange rate flexibility, which serves as an automatic shock absorber;

d) The existence of real positive spreads between the interest rate of return from ALL and foreign currency investment, which promotes investment in Albanian Lek;

e) The low exposure of the banking sector and the financial system to instruments representing assets or liabilities of non-resident financial institutions;

f) The balanced foreign currency position of the banking sector and the maintenance of balanced ratios between assets and liabilities denominated in foreign currency;

g) The adequacy of the banking sector’s indicators which relate to the loan to deposit ratio, capitalization and liquidity. These ratios stand at better levels than in the regional countries and allow continued financial intermediation activity;

h) The measures taken by the public authorities to maintain public confidence in the banking sector and the financial system in general.

Despite the above supporting and protective factors the Albanian economy will go through an adaptation phase over the year 2009 during which the public authorities need to monitor the situation ceaselessly. Close contacts and the regular exchange of information between them will harmonize the actions that may be required to address the various arising issues. Constant communication with representatives of the real and financial sectors will be maintained during this period in order to discuss the developments in the respective sectors. Given that the crisis may also affect the regional countries, the need for harmonizing the actions extends to international and regional levels as well. It is crucial that the authorities maintain fiscal and monetary discipline utilizing the existing opportunities for sustaining economic growth.