Germany Is Sharply Increasing Its Inter-Governmental Financial Coope

Lilit Aslanyan

2009-08-07 12:22:00

Armenian-German inter-governmental negotiations took place in Bonn

The parties discussed their plan of action for 2009-2010. Germany
satisfied a number of Armenia’s requests for financing. In 2009-2010
that country will lend Armenia much more than before: 117.5mln EUR
against 74mln EUR in 2007-2008 with part of the money to be granted.

Mr.Gevorgyan, what specific sectors of the Armenian economy will
receive the 117.5mln EUR to be lent in 2009-2010?

As a result of the talks, we have decided to provide Armenia with quite
big additional financing for different sectors of its economy. The
energy sector will receive 41.5mln EUR: 18mln EUR will be lent in
the framework of the second stage of the program in the field of
renewable energy; 1.5mln EUR will be granted for advising. The program
to modernize three plants of the Vorotan Cascade of Water Power Plants
will receive additional 22mln EUR with the total sum amounting to
51mln EUR. As you may remember, in 2008 Germany and Armenia agreed
on 29mln EUR for the Vorotan Cascade program. But later Fichtner
consulting company said that this money was not enough for the program.

Germany will also lend up to 40mln EUR for the repair of water
supply and waste water disposal systems in Gyumri, Vanadzor and
nearby settlements.

This is the second stage of the program to repair water supply and
sewerage systems in Gyumri and Vanadzor. The 25mln EUR lent for the
first stage has not yet been fully spent. The additional financing
will help to fully modernize the systems. Besides, 11mln EUR will be
granted for Caucasus Initiative program.

Much money will be lent for mortgage crediting. During the
Armenian-German inter-governmental consultations in Feb 2009, Armenia
applied for additional 20mln EUR for the program to develop a stable
mortgage crediting market.

During the last talks Germany decided to grant the
application. Presently, the mortgage crediting program of the German
Government is the only long-term source of financing in Armenia.

Besides, Germany has decided to grant Armenia 4mln EUR for the creation
of a bio-sphere reserve on the basis of Shikahogh state preserve. 1mln
EUR will be provided for the development of a program in the field
of environment protection and the conduct of regional conferences. As
compared with other fields, this financing may seem quite small but,
in fact, this is the biggest money ecology has received so far.

This time Germany will not lend money for small and medium-sized
business, unlike the other foreign sources. Why?

Today, SMEs enjoy the biggest financing. They are receiving money from
the Armenian Government, on the one han d, and from the World Bank,
on the other. Presently, a group of Armenian banks are considering
the possibility of borrowing a stabilization loan from Russia. So,
we decided to finance the sectors the other investors are not ready
to finance. However, I would like to remind you that one of the first
programs to support small and medium-sized business in Armenia was
launched by GAF in 1999 with the financial support of KfW.

Mr. Gevorgyan, could you specify the terms and the schedules of
the crediting?

These are not final amounts yet. For example, I have said that the
program to repair the water supply and sewerage systems in Gyumri
and Vanadzor will receive up to 40mln EUR. It means that the program
may receive less as this money will be borrowed from the market,
where the situation is constantly changing. So, the final terms
will be known only when the contract is signed. There will be a big
grant element in this program. The Germany Government will fund the
interest on the loans: our objective is to ensure affordable interest
rates for Armenia and to deepen our cooperation with the country. So,
the more we lend the bigger the funding will be.

As regards the schedules, they depend on a number of factors. First,
the Armenian and German governments yet have to sign an agreement
to be ratified by the parliaments. So, it depends on how quickly the
governments and the foreign ministries will do this work. After that
KfW will sign a credit agreement with the Ministry of Finance and the
Central Bank of Armenia. And, finally, the German-Armenian Fund (GAF)
will see if it is expedient to make changes to the terms considering
the influence of the crisis.

We are going to reduce the number of tranches as each tranche implies
certain transaction expenses. The first tranches for the mortgage
crediting and renewable energy programs will be issued at the end of
this year or the first quarter of 2010, at the latest. As regards,
the Vorotan Cascade program and the project to repair water supply and
sewerage systems in Gyumri and Vanadzor, this money will be provided
only after the conduct of tenders and the development of specific
plans of action.

It is not the first year you have managed KfW programs in Armenia. What
specific changes should be made in the terms of mortgage crediting in
our country? Are you planning to increase the number of participant
banks? High competition could substantially soften the terms of
crediting, couldn’t it?

Irrespectively of any given situation, Germany provides Armenia
with quite soft loans. However, we must not forget about future. Our
credit programs last for three years, at longest. And what will we do
afterwards? I think that it is better to keep the terms stable than
to face difficulties when some three years after the interest rates
suddenly grow by, say, 05%-6%. Even if we revise the interest rates
of our mortgage loans, they must not be much lower than the market
rates as not all the market players are involved in our program and
this may result in certain imbalance.

Usually, priority is given to low interest rates but I believe that
the problem of repayment period is more important. As you may know,
we lend money for five years even though our terms provide for an
opportunity to prolong this period for three years.

As for the banks, they can lend money for 10 years as we encourage
long-term crediting – up to 15 years. We had participant banks who
actively credited for 12-15-year periods. So, as far as any changes
are concerned, I think that we better consider prolonging the repayment
periods. Of course, this will depend on the situation on the market. I
suppose that we should also increase the maximum amount of a loan per
borrower. At the first stage, the maximum amount was 12mln AMD. This
sum stimulates borrowing for repair and modernization but not for the
purchase of a house. So, I think that we should increase the maximum
amount to 18mln-20mln AMD especially as the present financing is much
bigger than the money we had at the first stage.

We are going to discuss this problem with the mortgage market

However, specific terms will be known only after the contract is

Today, our program covers eight banks and two cr edit companies but I
believe that it should embrace more organizations. I think that all
credit companies and banks meeting the Central Bank’s requirements
should be allowed to take part in this program.

Mr.Gevorgyan, the participation of new banks and credit companies
in the mortgage crediting program is certainly a good news for
borrowers. My question is how quickly the participant banks will be
able to spend the expected 20mln EUR?

The demand for mortgage loans is still high. But I am not sure that
the 20mln EUR will be spent as quickly as the 12mln EUR lent for
the first stage. Quickness is not our priority. What we really care
for is to supply the market with resources so as to ensure stable,
predictable and long-term offer. I think that 20mln EUR is just as
much as our present-day mortgage market needs.

As you may know, since the beginning of this year the amount of
mortgage lending has decreased mostly due to decline in housing
purchase crediting.

However, the crediting of home repair is actively growing due to
dropping prices of construction materials. There is one more factor:
some construction projects in Yerevan are just 70%-80% ready with
no money left and their contractors are forced to borrow additional
funds. I am optimistic and believe that the recession in housing
purchase crediting will not last for long.

Mortgage lending in Armenia is focused on Yerevan, which is also true
for KfW program. Do you plan to enlarge the geography of lending at
the second stage of your program?

We can hardly expect more active lending in the regions in the
coming years.

In the regions risks are higher as people living in the country have
low or unstable income. That’s why our banks are more conservative
in the regions than they are in Yerevan. Even if they decide to lend
money, they do it at higher interest though, in theory, the regions
should enjoy softer lending terms. That’s why 80%-85% of the mortgage
lending portfolio is concentrated in Yerevan. If is for the banks
to decide whom and where to lend money and nobody can force them to
change their "geographies."

KfW lends money all over Armenia. Even more, we try to stimulate
borrowing in the regions. At the second stage we will pay enhanced
attention to this problem. The German Government even demands more
active crediting in the region. This demand will be fixed in the credit
agreement and we will develop mechanisms to encourage local banks
to credit more actively outside Yerevan. Besides, we are considering
ways to help relatively poor people to buy houses.

Do you mean social housing program?

A newly married couples need to buy new houses or to exchange their
one-room flats for two- or three-room apartments. Not all of them
can borrow money on current terms. So, they need support. In some
countries the government covers the prepayment for certain social
groups (poor families or newly married couples), funds the interest,
prolongs the deadlines or provides guarantees of repayment. An employer
may also act as a guarantor. There are lots of different ways of how to
support such people and many of them are being considered in Armenia.

Mr.Gevorgyan, the problems in the field of crediting and the lack of
new products, particularly, in mortgage lending, are making heavier
the impacts of the crisis? What can our economy and financial-banking
sector expect in the second half of 2009 and 2010?

I think that 2009 will be the hardest for Armenia. I have
all grounds for making such a forecast. 2010 will be a year of
stabilization. Armenia will try to stabilize the situation in its
economic and financial sectors. This will be followed by slow growth
in lending activity. For example, by the end of 2010 half of the
20mln EUR to be lent under the KfW mortgage crediting program will
have already been spent. I am optimistic – at least, as far as our
projects are concerned – especially as today we are observing quite
positive dynamics.

What do you think about the general investment situation in our
country? Is it consonant with the global tendencies?

Relations between private and state investors in Armenia are at a
low level yet. Investors regard Armenia as a quite risky region. As
a result, we are forced to borrow money at high interest unless
it is granted by donors. So, even if the international rates drop,
in Armenia the rates will remain the same and may even grow due to
shortages of resources. Ideally, the changes on the global market
should have influenced our market but the real situation is different.