BSTDB president on Armenian economy, bank secrecy and global crises

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YEREVAN, February 19. /ARKA/. The Black Sea Trade and Development Bank (BSTDB) is an international financial organization founded in 1997 by Albania, Armenia, Azerbaijan, Bulgaria, Greece, Georgia, Moldova, Russia, Romania, Turkey and Ukraine. Since 1999, the bank has approved funding for 400 programs totaling 6.1 billion euros. The bank began lending to Armenia in 2004 and since then it has provided financing to 36 programs worth 241 million euros. In an exclusive interview with ARKA news agency, the President of BSTDB Dmitry Pankin speaks about the Armenian economy, the risks it faces, the volume of financing it can absorb and more.

ARKA – Mr. Pankin, could you provide some details regarding the outcome of the first year of the medium-term program of the bank designed for 2019-2022? What specific changes have occurred?

D. Pankin – The first year turned out to be quite interesting. The medium-term program designed for 2019-2022 was adopted with the view that the bank’s loan portfolio would be growing 10 percent annually, however, it surged by 40%. For a number of projects, we were granted sovereign guarantees, so in the middle of the year we had to make adjustments to the medium-term strategy. According to preliminary estimates, we expected the loan portfolio to reach about 2.1 billion euros, now we are setting the 2.5 billion euros goal. Accordingly, we set the loan portfolio growth rate for 2019 at 40%. The projection for 2020 is 30-35%. These are the main changes that have taken place. To finance development projects and ensure portfolio growth, we issued Eurobonds to the tune of $400 million, which appeared to be quite successful with demand far exceeding the supply, and we will continue this practice. However, we should not get carried away by that, since it is pointless to keep money on the market; it is easy to collect money, but then the question arises, where to channel them into and where to find projects. Therefore, it is very important that an increase in the loan portfolio goes in parallel with new additional issues of bonds.

ARKA – You said you were looking for good projects. Is this somehow related to the creation of an electronic trading platform based on the Russian Public-Private Partnership Development Center?

D. Pankin – It is an electronic base for infrastructure projects. We started with Russia. We are creating a base that will include information about municipal projects, for example, heat and electricity supply and others. In the future, we want this practice to gradually spread to other countries of the Black Sea region, so that we know what is being done, what projects are being implemented, and what could interest investors.

ARKA – That is, in the future, this scheme can be used in the founding countries of the BSTDB?

D. Pankin – Yes, of course.

ARKA – Economic growth in Armenia for 2020 is projected at 4.9%, and inflation – at 4% (± 1.5%). The World Bank’s forecast is 5.1%. This is the highest forecast not only in the region, but also among a number of the BSTDB founder countries (Russia, Georgia, Azerbaijan, Turkey, Ukraine, and Moldova). What is your overall assessment of the macroeconomic situation in Armenia?

D. Pankin – Economic growth indicators in Armenia are good. In 2018, there were some concerns due to an increase in the current account deficit, but in 2019 the situation improved, the deficit decreased, while export increased, including export of metals. International reserves provide coverage for about five months of imports, which is also good because the standard requirement is for 3 months. Inflation is not high. In the past there were concerns about the high level of public debt, which made 70% of GDP. Now the public debt is declining. By European standards, countries must maintain a balance of payments deficit of less than 3%, and that of debt – less than 60% of GDP. Macroeconomics indicators are fine. But the concern is the high level of unemployment – 18% and poverty, a high level of income inequality. Although per capita income has now increased significantly to $4,700, property stratification in Armenia is bigger than in other countries of the region, and potentially this can lead to some consequences.

ARKA – You have repeatedly said that the BSTDB is interested in financing infrastructure projects. During your first visit to Armenia in 2018 you had some discussions on that. In this regard, are there any results?

D. Pankin – There are no concrete results so far. In the near future we will continue the current programs with Armenian banks, as well as issue bonds to finance the National Mortgage Company. The World Bank and the Asian Development Bank are also participating in infrastructure projects in Armenia. When I worked at the Eurasian Development Bank, we ran several projects together with the World Bank and ADB. The latter two offer completely different terms, including cheap resources, and the yield is somewhere around 0.5%. Since we still focus on market attraction, it is quite difficult to us to provide loans for infrastructure projects at 0.5-1% rate. Now we would be very interested to see something in the field of renewable energy, an area that is very popular in many countries. We have many open lines in other banks specifically for such projects. As for Armenia, in the coming months we are unlikely to sign anything on renewable energy.
ARKA- But if there are good projects, then financing will be found.

D. Pankin – Yes, there are resources, what we need are good projects.

ARKA- If there are such projects, to what extent the Bank is ready to finance them? Are there any restrictions, or the project itself is important?

D. Pankin – It depends on the project. If it is big, then we will attract someone else. I think it’s quite realistic for Armenia to talk about the amounts of 20, 30, 40 million US dollars. We can consider smaller projects as well.

ARKA- What would you say about the issuance of bonds in the participating countries? In principle, the Bank has such experience in the Caucasus.

D. Pankin – Yes, we have such experience in all countries of the Caucasus – in Armenia, Azerbaijan, and Georgia. Moreover, it is preferable for us to issue bonds in national currencies. In Armenia, the funds raised from the first issue of dram bonds – 2 billion drams – were provided to finance the projects of the National Mortgage Company. A new issue of dram bonds is planned for this year, tentatively in the amount of $10-20 million. The funds raised will again be sent to the National Mortgage Company.

ARKA – The lending provided by the bank as a rule, is in US dollars or euros. What about financing in the national currencies of the participating countries?

D. Pankin – Of course, it is more interesting for us to provide lending in national currencies. It is important to understand that lending in euros or dollars is normal if we are lending to a company that has export earnings. The Zangezur Copper-Molybdenum Combine produces and exports copper, raising revenues in foreign currency, and, accordingly, it can borrow in foreign currency. But for local small enterprises, loans in foreign currency pose a certain risk, since they work in the domestic market. Therefore, they should take loans in the national currency.

ARKA – You think that for countries like Armenia, SMEs are very important. And what should be the optimal share of SMEs in the GDP of our country so that we can talk about real benefits for the economy?

D. Pankin – It’s hard to say. I do not see large projects in Armenia. There is, for example, metallurgy, but it contributes about 20% of GDP. But Armenia has more opportunities for small enterprises. Therefore, I believe that creating a convenient environment for small businesses is very important. Perhaps this is not enough in other countries, such as Russia, Azerbaijan, and Georgia, where large structures are close to the state, and are more monopolized. I think that Armenia could stand out because of its more free and market-oriented economy regarding small enterprises.

ARKA – In January 2020, the Armenian parliament approved amendments to the law On Bank Secrecy, lifting restrictions on disclosure of bank secrets. Many were perplexed, thinking that this could scare off investors. Do you agree with that?

D. Pankin – Regarding banking secrecy, the banking system is more focused now on combating money laundering as a follow-up to regulatory and supervisory functions. In all countries today, there is an increasing tendency towards an open banking system, which should pass on all information to tax and regulatory authorities. The conclusion is that the banking secrecy is being reduced to minimum.

ARKA – But still, will any restrictions remain?

D. Pankin – It seems to me that now there should be some general trend in banking regulation. It goes one way, then the other – there is a complete de-liberalization, a decrease in supervisory and control functions, a decrease in regulation, so that market mechanisms flourish. And then, as soon as all this leads to some kind of bubbles, financial crises, a wave of tightening the screws, strengthened supervision and control over the banking system follows. The main task is to find a correct balance. This is always the hardest part.

ARKA – Today, the founders of the BSTDB are 11 countries. Are there any other candidates who want to replenish this list?

D. Pankin – Yes, Serbia, Northern Macedonia, but on the level of talk so far.

ARKA- Do you think that the founding countries may at some point abandon the dollar and accept their single currency as the unit of account?

D. Pankin – Honestly, I don’t really believe in the idea of a single currency. First, there must be a qualitatively different level of macroeconomic interaction between the member countries. Let us, for example, look the EU, which had first of all to ensure coordination of economic, financial, budgetary policies. And because this coordination was quite bad and ineffective, they got all these crises, when Greece’s debt of 200% almost led to the collapse of the European monetary system. The transition to a single currency is a very long and complicated process. There is also a second point. If we consider the EU, there are large economies of Germany, France, and Italy with a comparable share in GDP. In the Eurasian community, Russia accounts for 85% of total GDP. It would be logical to assume that the Russian ruble could become such a unit of account. But other countries are not ready to recognize the ruble as a single currency and I don’t think it will be right to invent some kind of currency or something artificial.

ARKA – According to the estimates of the PwC audit company, 2020 will be a year of slowdown in global economic growth to 3.4%. Many experts predict a large-scale crisis by 2025 due to high debt, rising money supply and low rates, the infusion of huge money into the capital of companies around the world, and trade wars. How would you comment on this situation, do you agree with such forecasts?

D. Pankin – Crises have always been and will be. Today, economic policy and understanding of economic processes have changed so much that there will be no great crises of the 1920s, when everything collapsed by 50%. That is, everything goes more smoothly. And yet, a crisis, as a rule, occurs when it is not expected, and when everyone is waiting for it, it is no longer a crisis.

ARKA – But the situation is just like that, and we see that there is high debt, low rates …

D. Pankin – Low rates – so what? There are claims that bubbles are swelling in the securities market, the real estate market, and more. It is difficult to say how real these bubbles are, maybe this is a certain correction in the stock market. And will it lead to a crisis? – Not a fact. A certain drop in stock prices may occur, but it will not necessarily lead to a crisis. As for the trade war, this has been said for many years. Indeed, there are US-Chinese problems, but so far they have managed to come to an agreement. Of course, there is a risk that at some point they will not and there will be a sharp deterioration in the situation, a decline in the Chinese economy, which will cause a drop in demand and prices for raw materials, and lead to a crisis in other countries. This cannot be ruled out, but so far I would not argue that this is inevitable and could happen in the coming year.

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