Interview with Gent Sejko, Governor of the Bank of Albania. OraNewsTV

Publication date: 07.10.2015


Question: How would you rate the situation of the Albanian economy and the potential for economic growth this year?

Governor: During the first half, the economic growth rate was around 2.8%. This has been deemed as a positive growth also in statements following Supervisory Council meetings. In the meantime, we expect similar growth rates for the second half of 2015.

foto intervista guvernatorit

In summer, the Bank of Albania revised economic growth forecasts. The IMF has also revised the economic growth outlook for 2015, from 3% to 2.7%, due to negative factors arising from the crisis in Greece, with potential consequences on exports and imports, remittances and the banking system.

We have been monitoring closely the situation there and it appears that the political situation in Greece has been eventually resolved. The bailout has been approved and will be disbursed and the risks arising from the Greek economy are considered as lower for the remainder of the year.

In the meantime, there are positive expectations for the growth of consumption and foreign investments in the second half of 2015. If we refer to the first half of the year, foreign investments in the economy surged 36%, and a similar performance is expected for the second half.

The economic stability and the positive situation in place will sustain economic growth. These are not, certainly, the expected growth rates and this has been the reason why we have revised down our projections, as the economy is operating below its potential. When the economy operates below potential, growth rates are not optimal, but there is a positive element in it: there is potential. And when there is potential, it must be utilised. The potential is utilised through structural reforms, which we have been constantly referring to structural reforms undertaken by all the actors, the government, the Bank of Albania, business associations and other market operators, etc.

The central bank's is making maximum efforts for this. First of all, in the framework of our functions, we are pursuing an accommodative monetary policy accompanied with stimulating macroprudential policies for the banking system, for maximum contribution to economic growth and financial stability. Moreover, we are also acting as a coordinator between the government and other actors, for best coordination towards economic growth and stability during the current year and the years ahead.

Question: You mentioned structural reforms to stimulate the economy. The "anti-informality" initiative is considered as one of them. What would be its impact on the economy?

Governor: About the government initiative we are conducting our analyses, which are still in process, and conclusions are yet to be drawn about the precise impact on the economy.

What I have stated, and it valid both in practice and in theory, is that the anti-informality initiative may in the first steps have a negative impact in the economy because the Albanian economy has /suffered from a very high level of informality. This is a known fact, it is not confidential information.

As the operation rolled out, many businesses closed their shops and queued to register, which showed they were unregistered and paid no taxes. This has been a formalisation period in the aspect of registration, and in the aspect of reformatting these businesses. The will be repositioned in the market and will start paying taxes. Therefore, they need to once again revisit their business plan in the light of tax payments. In this aspect, perhaps in the short-term period there may be a negative impact, but in the long-term period, there will be undoubtedly a positive impact.

Informality breaches many market balances and suffocates the economy. It only appears to give a boost to the economy that business and households benefit. In fact, informality contributes to budget revenues falling short of expectations, consequently of investments from the budget. Informality contributes to an unfair competition, formation of a number of economic parameters. The fight against informality is absolutely one of the top priorities and most important actions to be undertaken. I underline again, it is a positive undertaking.

In addition, I would like to point out that this initiative against informality should continue, and be translated and viewed as a continued reform, in order for the markets to be properly formatted. It should not be seen as a temporary initiative, but a permanent, constantly implemented. If this initiative is implemented in the long term, the effects in the economy will be undoubtedly positive and will materialise by the beginning of next year.

This is my theoretical opinion, in this conversation with you, as I said earlier, we are conducting our studies. Very soon we will have a clear assessment report. Summarising, I may say that in the short term we will see a reformatting that may generate negative short-term effects, but in the long term the reform against informality will be a serious reform that will generate positive effects.

In relation to the banking and financial system, we have stated that the fight against informality is very important. For years, the banking system has been suffering from the incompliance with certain financial statement standards, such as operation with two balance sheets for lending purposes. Had banks insisted on only the fiscal balance sheet, they would not be able to lend, because this balance sheet did not reflect the real company income. According to the fiscal balance sheet, they did would not have enough profit to justify the credit approval. Whereas the real balance sheet was more optimistic. Hence, we had a balance sheet for tax authorities, and one balance sheet for the bank to show the real situation. However, how would this real situation be certified? The bank would make maximum efforts to understand the reality, through cross-checking and verifications at business sites, but things were not that easy for larger companies. In practical terms, the banks operating in Albania, especially subsidiaries of EU-based groups have tightened the risk criteria. One of such criteria is the requirement for the official/fiscal balance sheet. It has been a while since banks have not lent based on two standards, but this has also led to not lending even to certain businesses whose real data were more optimistic.

Question: Has this been one of the reasons of a lending deceleration?

Governor: There are a number of reasons for this lending situation and this is one of the reasons. The deceleration is related to non-performing loans. The non-performing loans (NPLs), also known by the public as bad loans, is an element that increases banks pessimism in lending.

Much is being said, and much is being commented. We have drafted an action plan in coordination with the government with a view to fighting and addressing all elements to remedy the issue non-performing loans in the banking system. These elements consist in legal initiatives, such as the law on bankruptcy, the code of civil procedures, training of bailiff offices, central bank regulatory acts, and collateral execution, which is very important. We have brought up the issue of collateral execution in a recent table with the prime minister and the banks.

Non-performing loans are crucial because they trigger either optimism or pessimism for bank's crediting; however it is not the only element. We should be clear that non-performing loans is not the only element that hampers lending; it is one of the main elements that fuels pessimism in decisionmaking. Why I say that? Banks have ample liquidity and a high capital adequacy ratio. The liquidity ratio in Albania, which is a key element, the loan to deposit ratio stands at 55 per cent. Banks have 40 per cent of their short-term liabilities as liquid assets. Their capital adequacy ratio is close to 16%. This means they have adequate capital. Thus, against this backdrop, the banking system is stable, liquid and capable of lending. The problem is on the other side, it is about a weak aggregate demand and the risk perception level by banks vis-a-vis businesses.

Question: Banks have accepted two-standard balance sheets to lend. Does that imply that they have been part of and have encouraged informality and now face this situation?

Governor: Informality is not the only cause of non-performing loans. The main cause of non-performing loans is the excessive optimism of banks during the economic boom period 2000 - 2008. The economy has seen credit growth at 30-40% of the portfolio every year. In practice, in every country we have seen similar growth rates. Later, the situation was accompanied with high levels of non-performing loans.

This growth rate, so optimistic and aggressive, would inevitably lead to problems related to credit performance. Thus, in Albania we saw excessive optimism. This has normally happened in all the countries of the region and in the euro area. That is to say, it is the same phenomenon. Albania is not an isolated phenomenon. These are phenomena that we encounter in the euro area and in the region in similar terms.

Question: Taking into account that there are 35 companies that allegedly have the largest share in the stock of non-performing loans in Albania, is there any chance for banks to collect the money they have lent?

Governor: Absolutely There are many chances for this money to be collected. The collection is first about banks to negotiate and restructure such loans directly with these businesses. These are large businesses that operate with more than one bank and practically own more than one company. And the situation of these businesses is not equally good or bad in each bank. In some banks, some businesses appear more positive, in others more negative. This will depend on the negotiations and operation of various businesses they have in the respective banks.

The purpose of this initiative of the Bank of Albania, in coordination with a World Bank project started two years ago, is to coordinate the banking system, to restructure such loans in a coordinated fashion, to find the best solution for restructuring and provide an impetus.

In principle, banks will have to determine which companies and businesses have no future and their collateral should be executed, and which companies have positive chances that may continue their business; restructuring should be applied for them. For those cases that banks are deemed as having no future, they should be sent for collateral execution, that is, address in courts. Collateral will in fact be executed even without having to go to the courts, because it is now an executive title, following the recent legal amendments. Execution of collateral would help banks retrieve their money, the money they have disbursed when they lent.

The problem then rests with the judiciary system ruling more in favour of clients that of banks, protracting therefore cases and blocking the collateral execution process and liquidity retrieval. Of course the bank needs liquidity rather than assets, because a bank is a financial intermediary and not an asset management fund.

This situation has contributed to the deterioration of the non-performing loan portfolio, consequently to the pessimism of banks. Many banks that operate in Albania are subsidiaries of EU-based banks and have standard risk criteria, with a strict risk perception.

When we speak about banks and the banking system and think that it is not actively enough to support businesses or that the interest rates are high, we need to bear in mind, and be aware of a number of things. First, we need to understand that banks operate with the deposits of Albanian citizens, which have increased. The increase is another element of discussion, related to the citizens' inclination to save rather than consume. The main objective of the central bank, however, is financial stability. Of course, we also seek to stimulate economic growth through the monetary policy, while preserving the financial stability of the banking system. Since deposits, and not the bank's capital, account for most of bank liquidity, it is pivotal for banks to administer these deposits with maximum seriousness with regard to lending.

Banks are financial intermediaries; they accept deposits and inject them in the economy through lending. This is how the market works. If the banks have a high risk perception because of a non-performing loan, as it has been the case, they will certainly be more prudent and their optimism for lending will fall.

In this regard, the central bank is very prudent to maintain the equilibrium because first of all we are interested in the security of the deposits of the Albanian citizens. At the same time, we are interested in the optimism and liquidity injection in the economy for serious, creditworthy and bankable projects. Banks would undoubtedly compete against each other for serious projects.

There is one problem related to undertaking risk. There are many projects indeed in the economy. There are projects that need financing but do not have enough capital and banks would not assume 100% of risk to finance these projects. Banks may be partners in business, but businesses should normally have a share in the capital, in the form of an immovable property or liquidity. Perhaps some parallel investment funds or investment banks would help in this regard. We are thinking of finding alternative ways in risk participation in parallel with banks, to push these projects forward.

Question: Will you seek to reactivate Tirana's stock exchange?

Governor: This is one of our long-term strategic objectives, not a short-term one. It is a long-term one, but we need to start working towards its reactivation. However, I may not say precisely when we will be able to reactivate the stock exchange. In this regard, informality has a substantial influence.

Against the backdrop of the current level of informality, we may not reactivate Tirana Stock Exchange because it requires a clear listing of companies, an accurate listing with certified balance sheets and true figures to understand the reality and enhance reliability. The stock exchange may not operate if capitals are not certified, because the market would then be speculative. We could ask for it, but this does not depend only on the Bank of Albania. As a regulatory institution, we will cooperate with the Ministry of Finance, the government and other stakeholders to develop the capital market in Albania. It is one of our strategic objectives.

Question: Since September 2011, the Bank of Albania has lowered the key interest rate 13 times. The banking system has been conservative in reflecting these cuts, as rates on deposits were lowered more than rates on credit. Why do you think this has happened?

Governor: Let's address both questions clearly. First, this is a perception. The lowering of the interest rates on loans and deposits, and it has been discussed by many analysts. But this is a perception.

If we refer to figures in 2010, the average interest rate on deposits was 5.2%; currently the interest rate on deposits is 1.5%, that is 3.7% down. The average interest rate on loans was 13%; currently it must be around 8.3%, that is more than 4% down. The same applies to the T-bill yields falling from 8% to 3.4%. That is about 3.5-4% down. The key interest rate of the Bank of Albania set by Supervisory Council decision has fallen from 5.25 % to 2%, in other words 3.25% down.

These figures only show that the stimulating monetary policy implemented by the Bank of Albania has produced the effect. This policy has been transmitted properly in the Albanian financial system, in both aspects at the same speed. Our figures prove that. Thus interest rates on loans have fallen; this fall is the same or probably higher than the interest rate on deposits. The interest rate on loans has fallen from 13 to 8%, reflecting Bank of Albania's accommodative monetary policy.

This is about the interest rates on lek loans, as the bulk of the credit stock is denominated in foreign currency, mainly in euro. This portfolio has changed due to the accommodative monetary policy of the Bank of Albania, lowering the key interest rate in lek. This is another very positive step showing that the monetary policy has produced its effects: the interest rate in lek is down, and lending in lek is up. This has also contributed to preventing the exchange rate risk in credit repayment. If businesses operate in lek, that is if they generate their income in lek, their costs would rise if lek depreciated, hence running the exchange rate risk. Thus the policy has had another positive effect. However, apart from this effect, if we refer only to the fact of the interest rate, both for lek and euro, the interest rates on loans have fallen.

In addition, we should take into account another very important element, often overlooked in debates or discussions: risk perception. The interest rate does not determine only the cost of and profit spread of the bank, it also assigns a risk premium, risk perception. The higher is the risk in an economic setting, the higher is the interest rate. This applies everywhere, across all developing economies, not only in Albania. We may not draw a comparison between a 2% rate in Germany and an 8% rate in Albania. Of course the risk perception is many times lower than in Germany, because it is a much more formalised economy compared to the Albanian economy.

Question: But many experts do not consider banks' profit as normal...

Governor: First, I would like to point out that we, and I mean not only the central bank, but all the Albanian citizens, we should be happy when banks realise profit. Banks are capitalism institutions, cold, profitmaking, as all the corporates that operate in a market economy, in Albania and elsewhere. But banks operate with deposits and this is a very sensitive issue. When the banking system makes sound profit, it means the banking system is sound, thus creating security for the liquidity and deposits. The fact that banks are in profit should not be seen as a negative thing but as a positive development. Why should banks be in loss? It is a very good thing that they realise profit.

Question: Profit, but not so high... Normally you buy lek cheap and sell it pricey?

Governor: If we refer to data, the profit rate is around 2-2.3% higher than in the previous year. These are approximate figures. The banking system has always made profit, until the moment it had the first impact from the non-performing loans.

Question: You don't want to admit it then?

Governor: The profit rate is the result of the spread between loans and deposits. The lowering of the interest rate on deposits and on loans has a certain spread. I believe that this profit rate has been continuously in the banking system. It is not that there is a profit rate in the banking system, but there is a continuity, there is a certain profit amid an economic setting in difficulty. Because the economic environment is in difficulties, banks are perceived to realise "high profit". In this aspect, we should be happy they are realising profit. If a business went bankrupt, it would affect the industry where it operates. But it would also create a positive effect as it would boost competition in this industry with a positive impetus. Meanwhile, in the banking industry, the systemic risk creates very serious problems across all the system, followed by more serious consequences.

Question: I would insist, just as businesses and experts say, that the banking system has high profit rates and we are not talking about seeing banks in loss, it is a good thing they make profit. But they may not buy lek cheap and sell it at pricey. Are high interest rates one of the reasons that have kept credit?

Governor: Thank you for the very good question. No, the interest rate is not the main reason and this must be emphasised. We should understand that the interest rate is not the factor for which banks do not lend or the main factor keeping clients away from credit? Clients that are problematic would accept a higher interest rate compared to more serious clients. First of all, interest rate have been lowered at the same level, respectively, both on loans and deposits, according to our monitoring, which are accurate and known statistical figures. The interest rate represents the risk premium and, as I explained earlier, the interest rate on loans reflects also the economic setting.

On the other hand, the interest rates are determined by the market, banks have operational independence. We have moved away from direct instruments to indirect instruments of the monetary policy since 1993, when through direct instruments commercial banks were imposed interest rate bands they had to abide by. As the economy and the financial market evolved, we have moved towards indirect instruments; we set the key interest rate by a decision of the Supervisory Council and the market reflects it. What is important is the way how the monetary policy is transmitted. This has been transmitted to the economy in the right direction and in both aspects.

Back to your question. It is not the interest rate the reason why banks do not lend. It is the risk perception, the lack of serious projects and a mismatch of the businesses demand for certain projects and banks criteria to support them with loans. What matters most is the history. When clients (corporates, small businesses, or households) have a poor performance, they are not creditworthy and this is a principal banking standard. If the clients need a loan, which may be not covered by their revenues, than the bank may not approve this loan, because there is no optimism. If the client applies with a certain risk level for example to buy an apartment for EUR 100,000 but does not contribute in the purchase of this apartment with a certain share, but requests total funding, the bank would say no, I contribute only 70%. The bank says you should put in 30% of the apartment and share the risk together.

Question: Do banks share this?

Governor: The same applies to businesses. Banks often require the same as in the above example. Businesses request higher coverage for investments, for lack of liquidity.

Question: Are banks sharing the risk?

Governor: They have certainly shared. We should be clear about it; lending has continued, though not at the desired pace. It has not continued at the pace we want to it to be in order to have an impact on economic growth. For as long as we have seen loans outstanding grow, especially during this year it saw positive growth, it means that lending continues at a good pace, though not the desired one. Had the lending stopped, the portfolio would have contracted. Indeed, it fell in August, compared to the previous year. But, this was due to the seasonal effect, as lending always falls in the summer to rise again in the last four months of the year. Also, it fell due to the psychological effect from the Greek crises.

To sum it up, I would say that the interest rate is one element, but not the main factor for not lending. Therefore, interest rates have fallen, the accommodative monetary policy has been transmitted and reflected in the economy. Again, always speaking about lek lending, because in the case of the euro lending the Euribor is determined by the European Central Bank. The main factor that keeps lending from the desired levels is the perceived risk level by banks and the lack of serious projects by businesses. These are the main underlying reasons.

Question: Will the initiative against informality affect lending? Only two weeks ago, the General Anti-Money Laundering Directorate sent an order to banks to accept businesses with only one balance sheet. Will this affect lending, taking into account the insofar practice in the majority of cases?

Governor: We have agreed with the government and will continue the fight against informality gradually. We have an agreement, part of the plan of measures that the Bank of Albania has with the Prime Minister's Office, for its implementation in 2018. In the meantime, we have already reflected it in our regulations. The banks have been asking for it for a long time. We are talking about the larger businesses; they do not accept to apply two standards because they do consider fiscal risk as one of the key risks.

This should be viewed from this perspective. If all the clients declared their income immediately - let us say hypothetically that all clients declared and paid the taxes regularly, then we would have a very positive impact on lending. In a real situation, their income would be higher and it would be easier for banks to approve loans for them. Of course, this is a hypothetical situation. In a real concrete situation, not all the clients will have to declare, because the initiative against informality will move gradually and efforts will be made by the market, because there are many other factors that have an effect. Of course, not all will be formalised very soon and some businesses may go bankrupt. This may have positive effects on competitiveness in the long term. I said in theory, we see this in the long term and not in the short term. One thing is certain: if accurate balance sheets are submitted to the bank, then banks will find it easier to make a decision to grant the loan. Of course, we are presuming that revenues are not disclosed accurately. The fight against informality is waged because revenues are higher than declared. When presented to the banking and financial system, such revenues increase the optimism in decision-making. Then we may discuss when balance sheets will be approved, how will revenues be taken, what will be the procedures, but this is a principle discussion. In the long term I am confident that this initiative will be translated in reform, and will have a positive impact on the economy.

Question: The Bank of Albania has identified in the Monetary Policy Report for the first quarter of this year that the action in the energy sector to collect past dues reduced the annual consumption by 1.2%. You said you are analysing the effect that the initiative against informality will have and that you may not draw a conclusion? Would it be an effect, even a short-term one, if consumption is affected?

Governor: Effects on consumption could certainly be present. However, not so much. The initiative related to the energy sector that you mentioned was more sensitive, as it affected a good part of the population. Figures showed that a good part of the population had not paid the electricity bills; not only households but also businesses. Of course that would affect consumption. Related to the households, not businesses, the payment of electricity bills, since past due bills were also paid, would reduce consumption. This is common sense. Then, things will gradually fall into place. The same would apply to the initiative against informality.

We are studying whether this would contribute most to price rise. Practically, if businesses paid taxes, they would logically attempt to transfer the cost, this tax, to the end-buyer. From the perspective of the Bank of Albania, since our objective is targeted inflation at 3%, this would increase inflation towards the target. But, if we see it from a broader social perspective, with regard to the economy, it would be a negative element. However, market elements are self-regulatory. The economy does not have a forecast, it has many elements, many effects, and many factors that constitute the whole and create a certain balance. We are, therefore, studying the potential effect more in the light of prices than of consumption. Of course that if prices rise, consumption falls. But, consumption is also related to other psychological factors, such as tendency to save or to spend. This depends on consumers' optimism for the future, and elements related to the economic situation.

Question: Does the growth of deposits reveal that we are unsafe in the future? This growth is identified in some regular monetary policy reports

Governor: It is true there is a growth in deposits. As I have mentioned in the previous interviews, it is an element that affects the psychology of individuals to neither undertake investing initiatives nor make purchases, but rather adopt a saving inclination, at moments of crises.  It is a known fact that Albania and the region are not living in an optimistic or economic recovery, but in a stagnation situation. This is reflected in the psychology of individuals. Absolutely, households are inclined to save more.  For example, the sale of luxury goods, such as cars or furniture items has fallen. The daily consumer goods have the highest sales and are dominant, due to the crisis psychology. The economic growth and recovery drive to a higher optimism for households, and in practice they spend more. If they spend more, they may need loans, because expenditures are not 100% covered. A part of their needs is covered by savings and the rest by bank loans. In that way deposits fall, and bank lending increases. On the contrary, if savings increase, lending falls, as there are no investing initiatives.

Question: Is the low inflation a problem to the Albanian economy?  At present, inflation stands below the lower bound of Bank of Albania's target. 

Governor: At present, inflation stands below the target. Bank of Albania's inflation target is 3%. We expect it to reach this rate in 2017. This year, inflation averaged 1.8%, owing to the low inflationary pressures and a weak aggregate demand in the economy. Food prices, which account for the major share of the prices basket, 39%, have also contributed to this performance. The decelerated rise in food item prices and the fall in oil prices have contributed to the low inflation rates. 

Question: Isn't that a concern?

Governor: Obviously, it is not a positive element, but it does not constitute a concern.

Question: The Government aims to borrow EUR 300-500 million in the international market, through the Eurobond. The Bank of Albania monitors the international market and the fluctuation in the interest rates. Is this a favourable moment? What is your assessment related to the interest rate upon which the Eurobond may be issued?

Governor: Albania has an agreement with the International Monetary Fund and the World Bank, hence constituting a security and guarantee criterion, which affects and would affect the Eurobond interest rate as well. The markets determine the interest rate on Eurobond. Obviously, the interest rate is somewhat higher compared with the previous period when we could have issued the Eurobond; however, the interest rate is lower than the debt interest rate borrowed in the previous years. 

First, I would say that we should be concerned about having the adequate liquidity and it would be preferable to take this liquidity through the Eurobond from the external market in order to free domestic liquidities for lending to businesses in Albania. This is the most important thing. 

Absolutely, this Eurobond shall replace the Eurobond of EUR 30 million due to be matured very soon, in October. The Bank of Albania would prefer that any addition on EUR 300 million be spent to narrow/close budget deficit. This is what we have suggested the Albanian Government. This depends on the management of funds by the Government itself, as funds may be spent for investments as well. 

First, as I mentioned above, in terms of liquidity, it is very important to conclude the Eurobond. Second, it is about the price, we wish it were as cheap as possible, but it is the market that determines the price.  Nobody guarantees that the market will be more favourable at a later time. That is, we need liquidity as the Eurobond is maturing. We cannot discuss the price before the liquidity, as we would face difficulties. Otherwise, we would have to address the domestic market, but its prices would be probably higher than in the international markets.

If you need a house today, you may not wait for the price to lower. Nobody guarantees that the price will fall, it may well increase. Then, this is the time. It is a positive and necessary step, and we advised the Government to take this step. This issue is discussed by the experts in a number of TV programmes, and is understood properly. This is the gist of the matter: absolutely the Eurobond should be issued. 

Note: the interview took place on 2 October 2015.