Construction, service sphere, extractive, manufacturing industries

ARKA News Agency, Armenia
Jan 24 2007
X-Sender: Asbed Bedrossian <[email protected]>
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Below is an exclusive interview to the ARKA News Agency by Chairman
of the Central Bank of Armenia (CBA) Tigran Sargsyan.

ARKA: Mr. Sargsyan, you have closed the year managing all the
segments of the country’s financial market. What is your assessment
of the results of the first year. What has been achieved due to the
new functions?

T. Sargsyan: After we legally assumed the function of universal
financial supervision on January 1, 2006, our priority task was
integrating all the supervisory bodies placed under the jurisdiction
of the Central Bank. They are first of all the Securities Commission,
departments supervising the activities of insurance companies and
pawnshops, RA Ministry of Finance and Economy.
We elaborated a program of integrating these supervisory functions –
from personnel selection and holding of tenders to the adoption of
normative documents that regulate both the process of performing
supervisory functions by the CBA and financial institutions’
In fact, our priority task was to create universal supervisory
instruments, instructions and approaches to the estimation of risks
on the financial market irrespective of the type of institution. This
naturally requires tremendous work both to prepare normative
documents and train personnel supposed to perform the functions. From
this viewpoint I can state that the integration process was rather
smooth and painless, and we are contented with it.
The second priority of the CBA’s activities in 2006 was to clear the
financial market of unpromising, noncompetitive and undercapitalized
institutions that failed to meet the requirements set by the CBA.
Much was done as well. This concerns both commercial banks and
insurance companies.
One of the major lines of our activities in 2006 was work in the
corporate sector. The matter particularly concerns corporate
securities. In 2006, as many as three organizations were licensed to
carry out professional activities. Summing up 2006, I can say that
this was a year when we created a serious potential for qualitative
changes in Armenia’s financial sector.

ARKA: What is your assessment of the generate state of Armenia’s
financial system. What was the most significant in 2006?

T. Sargsyan: One of the major events in the banking sector in 2006
was that a new member having a high international rating, Credit
Agricole Bank, entered Armenia’s financial market. This creates most
favorable conditions for competition between two banks with high
ratings – ACBA Credit Agricole Bank and HSBC Bank Armenia.
What is also of importance for us is that the banking sector’s
development be accompanied by the expansion of the branch network. In
2006, 31 branches were opened in the banking system.
Another significant event in 2006 was the signing of an agreement
establishing a credit bureau between the CBA and commercial banks.
The project can be said to be a success – we have founded a credit
bureau which is to launch activities in 2007. The main goal that we
hope to achieve in 2007 is the introduction of a scoring system. This
will create a new favorable situation for crediting in Armenia.
Seven new credit organizations were licensed in 2006, and 17
companies are working in the sector now. An interesting fact is that
they have 12 branches.
Cleaning is still in progress in the insurance sector. I would like
to note that 23 companies worked early in 2006, whereas only 15 have
remained now. This process will continue especially as stricter
capital requirements will be set to insurance companies. Either
amalgamation or liquidation of insurance companies is expected.
Specifically, at the end of the year we received an application
rejecting a license and stating the company’s willingness for
As regards pawnshops, the situation is rather stable – as many
companies are opened as are closed. They fill a small niche in
crediting in Armenia.

ARKA: What preliminary forecasts concerning financial institutions
can be made on the basis of the 2006 results?

T.Sargsyan: Armenia’s banks show rather high growth rates.
Specifically, 26% capital growth was recorded in 2006, which is a
very good index. Capital growth is mainly promoted by intensified
competition on the market.
Credit organizations can be said to be developing rather aggressively
in Armenia, which is a happy fact for us. Specifically, the assets of
credit organizations have increased by 26% and amounted to AMD
17.8bln, which is about 3.5% of the assets of the banking system.
This increase is mainly accounted for by crediting of individuals,
which has amounted to AMD 6.5bln. Trade and agricultural credits have
increased as well. The credit organization’s capital increased by 755
and amounted to AMD 7.7bln against AMD 4.4bln in 2005, with their
liabilities amounting to AMD 10bln (a 91% increase).
As regards the activities of insurance companies, I would like to
note that insurance compensations amounted to AMD 400mln in 2006 – an
11% increase. A 12% decrease in the ratio between insurance
compensations and insurance contributions was recorded compared to
the beginning of 2006. Insurance companies’ capital increased by 29%
and amounted to AMD 5.7bln at the end of the 3rd quarter of 206.
Twenty specialized economic entities licensed as brokerage firms and
seven institutions licensed for trust management of securities are
currently operating on Armenia’s stock market. In 2006, their assets
increased by AMD 2.7bln and amounted to AMD 10bln at the end of the
3rd quarter. The professional participants’ capital increased by AMD
144mln and amounted to AMD 1.2bln. Liabilities increased by AMD
2.600mln and amounted to AMD 9.300bln. A total of AMD 7bln worth
broker transactions, and AMD 100bln dealer transactions were
effected. The ratio between the securities market capitalization and
the Gross National Product GNP) increased by 1.5% up to 4%.

ARKA: Have we any `problematic’ banks now?

T.Sargsyan: At present, Armenia has three problematic banks.
According to the CAMELS analysis system they received rather low
ratings. This is first of all the result of a low management level at
the banks as well as of the application of money-laundering
techniques, which is unacceptable for Armenia. The CBA is exercising
a strict supervision over the banks now. Negotiations are also being
conducted with the banks’ owners to resolve the problems. We have a
schedule of joint measures to be implemented.
The owners’ understanding inspires optimism that we will resolve the
problems with the three banks in 2007. The CBA would not like to
revoke their licenses. They have a serious potential for resolving
their problems so we are against revoking their licenses, but for the
implementation of the agreements we have reached. If the owners fail
to meet the terms of the agreements, their licenses will be revoked
in conformity with the decisions of the CBA Board.

ARKA: What risks are facing the banks, particularly those related to
growing crediting volume?

T.Sargsyan: A sharp increase in the crediting volume was recorded in
2006, which, of course, caused an increase in the amount of
classified assets – their share is currently about 5%. This is a
natural process: increasing volume of economic crediting causes
increase in the share of classified credits. However, this is not yet
an awful index. It is under our control, and banks are capable of
working with these classified assets. The banks have sufficient
reserves of these credits, loans.
The rates of increase in crediting will be maintained during the next
few years, which means that asset classification will be in the
center of attention of both the CBA and the banks.

ARKA: What is your assessment of banks capitalization?

T.Sargsyan: The CBA has approved a new requirement to the banks’
capital – AMD 5bln instead of the previous AMD 2.4bln. All the banks
must ensure AMD 5bln capital by the end of 2009. Our estimates show
that most of the banks have already ensured AMD 5bln and more capital
and, in principle, all the banks will be able to overcome this
barrier. That is it is not a problem for them. If fact, we have
created equal conditions for both the operating and newly founded
banks. As you can remember, we set capital requirements to newly
founded banks long ago. We have set this bar to the operating banks
as well now. From January 1, 2009, they must meet this requirement.
At first we wanted to set stricter requirements – AMD 7bln, but the
banks convinced us that AMD 5bln is a sufficient sum for the present.

We are sure that after corporate management rules have been
introduced the capital requirement set to banks will not be of
principal importance.

ARKA: What new financial institutions can appear on Armenia’s market
in 2007? What are your expectations of 2007?

T. Sargsyan: We hope to have new banks with foreign capital in 2007.
First of all this is a Dutch bank with Dutch capital and management,
which is expected to enter the market in the first half of 2007. We
also expect another bank with European capital, which will specialize
in crediting small and medium businesses. Thus we expect two new
banks with foreign capital in Armenia in 2007.
We also hope to attract the Stockholm Stock Exchange to Armenia not
only as an elaborator of projects and programs and projects for the
CBA, but also as owner. This will certainly create a most favorable
environment for Armenia’s enterprises which seek capitalization and
enter y to the financial markets, issue of securities and attraction
of new proprietors. Serious preconditions will be created for this in
As regards the insurance sector, cleaning and amalgamation is
currently in progress here. Credit organizations are a developing
segment of the financial market. The promotion of this process is one
of the priorities of the CBA’s activities in 2007.

ARKA: What does the CBA plan to do with this end in view in 2007?

T. Sargsyan: In 2007, we will focus our attention on the elaboration
of conceptual documents which would determine the strategy of
developing the financial market. We will aim our efforts at creating
attractive conditions, attracting first-rate investment companies to
Armenia. We do not cherish illusions that we will be able to do it
very quickly – this requires the formation of market infrastructures
that are currently lacking in the country.
Specifically we have elaborated a new concept of developing the
insurance market. A new expansive bill on insurance has been drafted
to be approved by the Government and submitted to the Parliament.
This will create new conditions and advantages for the attraction of
private investments.
First, we plan to create infrastructures to keep records of all the
insured accidents. Competent record-keeping and calculation of
insurance companies’ losses and incomes is impossible without such an
infrastructure. The second is the establishment of one register
office to register all the cases. This requires cooperation between
various establishments. Armenia also needs actuaries specializing in
making estimations and forecasts, having statistical data at their
hand and making calculations for insurance companies. After these
structures have been formed, we will be ready to legally stipulate
some types of activities liable to mandatory insurance.
The second conceptual document in 2007 is a new concept of the
securities market, which has been approved by the CBA Board and
implies close cooperation with the Stockholm Stock Exchange. At
present Stockholm Stock Exchange is conducting a survey by the CBA’s
request to reveal the potential of the country’s corporate market.
Among the important directions of the CBA’s activities in 2007 is
preparing the enterprises being rated by the CBA or international
rating agencies for issuing their own bonds or securities. We hope
that 2007 will be a turning-point, that is, there will appear the
first Armenian enterprises that will start issuing their own
securities. We will do our best to promote this process. It is
important that Armenian enterprises’ securities be in circulation on
the secondary market equally with government treasury bonds and
securities. It will promote the development of the secondary market.

ARKA: Besides the new banks entering Armenia’s market, what else do
you expect of the banking system in 2007?

T. Sargsyan: This is first of all higher rates of economic crediting,
emergence of new institutions, attraction of foreign investments. I
also regard the preparation of commercial banks for issuing their own
shares and for entering international markets as an important
direction of developing the banking sector. The whole year 2007 will
obviously be a year of preparation for the implementation of these
projects, which are most likely to be implemented in 2008-2009,
because our banks are not yet ready for this. This is rather
long-lasting work which requires the introduction of corporate
management rules, increase in capita and transparency of the banks’
activities. Such shares and securities must first be put into
circulation on the domestic market, for residents. Only after that
will we be ready to enter international markets.
In 2007 the banking system’s activities will be more transparent than
in 2006. Fundamental changes are expected in this direction.
The CBA’s activities will be more transparent and predictable as
well. As regards supervisory functions, we will assume the commitment
to report to the financial community on the preventive measures
against particular violations and banks. This will create favorable
preconditions for greater confidence in the CBA.

ARKA: What are the first results of the CBA’s inflation targeting
policy? What are its strong and weak points? What can you tell about
inflation in 2006?

T. Sargsyan: An important feature of 2006 was the transition to an
inflation targeting policy. Armenia was the first CIS country to make
this step considering all the strong and weak points of the process.
The average inflation can be said to have remained within the
forecast level in 2006. By the end of the year it is expected to be
within 5%, which does not exceed the indices set by the Government
and the CBA under a 3-year program. In this aspect, I can say that we
managed to keep within the bar.
Our major task in launching the implementing the inflation targeting
policy during the three years of transition is that interest rates
start performing their function of `signals’. Unfortunately, they are
not yet performing this function in Armenia. Therefore, the CBA’s new
set of instruments is supposed to promote this process.
By our experts’ estimates, 2006 proved to be a rather effective year
– mall the market members are closely following the CBA-set
refinancing rate, and this rate is a determinant for the market to be
guided by. During the three years these rules will be consistently
observed. It is important that the correlation between short- and
long-term interest rates finally become actuality and allow us to
influence money supply and, consequently, the prices in Armenia.
Despite all our fears that it is a rather long-term project, I can
state that 2006 unexpectedly saw the first positive results. This
proves that interest rate correlations and signals can be applied in
Armenia, and we are happy about it.
Thus, the two major results of the inflation targeting policy is that
the signals start operating in Armenia and that we managed to meet
the main indices of inflation targets.

ARKA: What are the peculiarities of Armenia’s monetary policy in

T. Sargsyan: An important feature of the CBA’s monetary policy is
that the continuing revaluation of the national currency was
accompanied by 9% reduction of dollarization. AMD assets constituted
over 50% of bank assets for the first time in 2006. That is the
psychological barrier has been overcome. I think that early in 2008
we will be able to overcome the psychological barrier in attracting
funds, which is currently 46%-47%.
An interesting feature of 2006 is also the fact that Armenian
commercial banks’ external assets reduced to zero. This means that
all the free dollar funds (about AMD 27bln) our banks put on
correspondent accounts abroad were directed to crediting residents.
This, in turn, was one of the reasons for the revaluation of the
national currency because banks started crediting the country’s
economy from thee funds. Correspondingly, the USD supply increased on
the market.
In general, we can note that the AMD supply increased by 42% during
the year, the monetary base by 35% and cash by 37%. These are rather
serious indices, and the increase in the money supply and monetary
base was directed to serving the economy and slowing down the rates
of revaluation of the national currency. The CBA had to issue its
AMD70bln securities worth, and AMD 50bln worth securities were
redeemed in 2006. AMD 40bln securities have so far been issued, and
the Government issued AMD 65bln worth treasury bonds.

ARKA: What your general estimation of the country’s foreign exchange
market in 2006?

T. Sargsyan: An interesting feature of the foreign exchange market in
2006 was that 70% of all the USD transactions were effected on the
Exchange, with only 30% effected on the interbank market.
The CBA’s interventions became much more frequent. In 2005 we
purchased $100mln, and in 2006 about $250mln, that is 2.5-times as
much. In spite of that 11% AMD average annual revaluation was
recorded. By the end of the year, 20% AMD revaluation had been

ARKA: What will be the AMD exchange rate in 2007?

T. Sargsyan: First, some provisions on setting the AMD exchange rate
will be amended. The market will set the AMD exchange rate, and such
term as the CBA-set official exchange rate will be put an end to.
All the market members must be guided by the market exchange rate,
and the CBA is only one of the market members. The CBA-set exchange
rate must not cause market confusions because the CBA forms this
exchange rate formed at the Stock Exchange as well as for performing
operations with its clients. This means that society must chiefly be
guided by the market exchange rate, but not by the exchange rate the
CBA uses in settlement operations with the Government because the
Government is the CBA’s principal client. This is the first
If you have noticed the mass media do not any more publish the
CBA-set exchange rate, but that formed on the market. However, these
are mostly operations performed by commercial banks on the foreign
exchange market, which constitute 70% of the foreign exchange market.

The second conceptual amendment is that the calculations of the
exchange rate for the budget will be based not on the estimates of
the real effective exchange rate of the CBA. The exchange rate will
be fixed for a particular date – for example, 15 or 30 says before
the approval of the state budget by the Government for society not to
be guided by this exchange rate. The exchange rate for next year is
impossible to forecast.
On the other hand, for budget problems to be prevented, all the major
budget transactions effected through the CBA – USD incomes and
expenditures – will be effected at special exchange rates set for
transactions with the Government. By and large, the Government will
neither sustain losses nor gain profits from the operations, because
the CBA and the Ministry of Finance will effect transactions that
will smooth budget risks.

ARKA: What is your personal estimation of the quality of economic
growth in Armenia as an economist? Preliminary expectations of 2006
and forecasts for 2007? Which economic fields and segments must be
more actively developed, and what needs to be done for that? What are
the specific tasks of the Government’s economic policy in particular

T. Sargsyan: The principal engines of economic growth in Armenia will
be construction, the service sphere, extractive and manufacturing
industries, which have accumulated a very serious potential for
export-oriented economic growth.
The fourth important direction is the chemical industry, where the
Government is implementing very serious projects involving the
`Nairit’ plant and the Vanadzor-based chemical complex. If the two
giants are re-operated, they will stimulate the operation of over 200
small and medium enterprises serving the giants. In general, it will
ensure a rather high economic growth.
These are the major industries that have accumulated potential, have
real development projects that are supposed to determine the economic
Of course, I cannot but mention agriculture and manufacturing
industry. Unfortunately, the country’s agricultural sector did not
record high economic growth in 2006. But we hope that the investment
projects being implemented in the sector will soon produce their
results, and agriculture, along with the processing industry, will be
another engine during the next few years.
As regards high technologies, we must first of all keep an eye on
Armenia’s intellectual potential, education level – how many
specialists and of what level come out of our higher schools. Only
after that can we make any judgements on the potential we have in
this sphere. Of course, rather serious investments are made in the
sphere, but the share of these technologies in the GDP still remains
insignificant, and the development is first of all accounted for by
investments in education.
I think that economic growth will be within 10% in Armenia because
the previously launched projects must be completed. This growth is
obvious for the implementation of these projects alone, other things
being equal.

ARKA: Has the sovereign rating assigned to Armenia produced any
results? Have foreign investors changed their attitude to Armenia?
What is your general assessment of the country’s investment

T. Sargsyan: I think that the assignment of rating to Armenia was one
of the most important events of last year. Armenia finally appeared
on the world’s financial map. All investors are not just speculating
on the country’s credit worthiness, risk. They are really aware of
our world rank, of the interests rates supposed to be in such
conditions, of the specific estimates for investors to implement
their projects in Armenia. This was certainly a most important event
in 2006, and the history of ratings is of high importance.
It is also very important for us that in 2006 the country’s rating
underwent positive changes in some parameters. Specifically, our
commercial companies, banks can receive higher ratings of their
currency position that Armenia’s country rating due to positive
changes in the macroeconomic situation.
Our main goal is to make efforts to improve the situation in the
country for all the ratings to be gradually raised, and for Armenia
to be more attractive for investors. This is the first step.
The second step is the assignment of ratings to commercial
enterprises. Last year the VTB Bank Armenia received a rating, and a
number of Armenian banks are expected to receive international
ratings in 2007 and prepare for initial public offering (IPO).
The CBA-assigned ratings are of high importance as well. In this
aspect we have made rather serious progress as well – the number of
rating-seekers has doubled. This means that the number of enterprises
wishing to operate is open and that of the ones wishing to use market
instruments is increasing.
If, in 2007, companies manage to issue bonds acceptable for the CBA
in performing REPO-operations, it will contribute to the market
attractiveness, and the CBA will get new instruments for an effective
monetary policy. P.T. –0 –