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It is not worth expecting decrease of interest rates in Armenia
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Recently, interest rate risks upset Armenian financial market participants more and more. About what rate adjustment is made now in the country and what is it due to spoke the Private Equity and Merchant Banking Director/Member of the Board of Directors of “Ameria” Group Companies Aram Karapetyan with ArmInfo Financial News Correspondent.

- The majority of bankers state that competitors oblige them to increase interest rates. Analysts explain this by the low liquidity and impossibility to fund assets from abroad. As a result, banks try to attract maximal volume of resources in the domestic market.  From the beginning of the year, deposit rates in Armenia raised by 1-2%, which in its turn does not exclude the increase of credit rates.

- It must be admitted that competition between the banks in any event always exists; particularly, competition for raising money from the market has really stirred up recently. This is explained both by external factor of world economy – the liquidity crisis - and by changing conditions of the Armenian banking system itself. Against a background of insufficiency of long-term resources and general increase of capitalization, banks have to struggle for additional resource base, under increasing necessity to expand the assortment and the quality of financial services, which, of course, increases rates on attracted funds.

The impact of consequences of global financial crisis on our economy is not as large-scale as it is, for example, in Kazakhstan or Russia. Lack of integration with international financial markets, in this case, is to our benefit. However, under such conditions, where the banking sector is the most developed one in the financial sector of Armenia, with dominance of foreign capital, certain impact of consequences of crisis are felt mostly through foreign investors, with increasing rates of international financial organizations.

- International crisis already has an effect on interest rates in Armenia particularly on long-term loans including mortgages. In particular, some credit companies, and even banks, no longer provide mortgage loans due to lack of resources: however, they do not declare about it openly, and some of them complicate the process of providing loans to the maximum extent, by introducing additional procedures. How stable will the banks remain under this situation, especially as the struggle for a client becomes tough?

- It must be said that the last crisis turns out to be a stability test for all financial systems of CIS countries. It is notable that banking systems, where private banks with foreign capital dominate (which is exactly what is happening in Armenia), revealed higher stability to face financial shocks. There are many judgments confirming that the banking system in our country is really stable.
The situation with interest rates in Armenia reflects not only external worldwide tendencies, but also the policy chosen by the Central Bank of Armenia, as well as the situation regarding liquidity in banks, which recently becomes rather low. In many respects, everything again sets against the lack of long-term resources.

Outwardly, the banking system shows availability of considerable liquidity, and correspondent account balances for the last six months even show a surplus of liquidity. In reality, for the last three months the liquidity drastically decreased and is supported mainly at the account of REPO agreements (mostly with the Central Bank), helping to maintain the liquidity of banking system, in fact, by short-term lending. This is a rather dangerous situation, but on the other hand, the toolbox of the CBA is rather wide. In this condition, it is not worth expecting decrease of interest rates.

- Is the increase of interest rates justified? Which level of interest rates is “fair” as of today?

- It is justified, moreover, such changes must be in the center of attention of all business entities - negligence in interpretation of such signals may be punished by the market itself. The active policy of inflation targeting implemented by the Central Bank, results in gradual adjustment of ratios (distorted in the last years) between main guiding lines forming the interest rates system in the Republic. At that, the refinancing rate is a peculiar pivot on which all other rates of economy are “beaded” in accordance with their parameters. In the course of the last 10 months, REPO rates have increased by 225 base points, reaching to 7% as of June. Accordingly, interest rates of CBA T-bills with 1-3 and 3-6 months of maturity have increased in March 2008, as compared to January 2007, by 127 and 130 base points, respectively, and reached to nearly 7,2%. The wave of adjustments in this way goes further across the financial system, and the stronger the system is the more sensitive it is to signals.

With regard to banks, we observe common increase of deposit and loan interest rates, or reduction of transactions on current conditions. Since funding sources of banks are different, averaged statistics is not a sufficiently indicator. Interest rate increase tendencies are observed more pointedly in our developing market of corporate securities. Last year, high activeness was observed in the area of corporate allocations: at that time, issuers successfully placed their issuances at the range of 9–10.5% yield. However, the change in the market situation of interest rates required corresponding adjustments, if, indeed, it is a market placement, rather than a transaction agreed upon in advance among a group of individuals. The last, in fact, failed experience of placement of securities of “Elite Group”, a successful construction company, demonstrates that efforts to allocate securities at last year’s effective rates may result in significant under-placement of the issuance.

The common practice of defining corporate bond yield is to determine the difference between the expected yield of the particular bond as of the date of its issuance and the yield of a comparable, or “brought to comparison” bond with corresponding interest rate. This difference must take into account qualitative parameters of the issuer, with adjustments by other issuers and by grouping into sectors, equity, industry branches, openness, financial stability, and other parameters. Based on this, the average indicator is calculated, which corresponds to the expected yield on the particular security. The change of base rates shifts the yield curve of the previous year: according to our calculations, this year issuers must orient themselves in the range of 1.5-3% shift in the yield of comparable securities.
- What can you say about the real loan interest rates? Recently, the Central Bank of the Russian Federation obliged the banks to disclose real (effective) interest rates. With this regard, the same situation is observed here: do the market players discuss among themselves or with the Regulator such an innovation in the country?

Interest rates, above all, reflect the risk, and in order to control it, banks introduce certain requirements to clients, such as property insurance and appraisal, etc. At that, the bank does not receive any direct benefit from it. In this case, the client itself is the immediate beneficiary, since, for example, in case of occurrence of the insurance event, the insurer will pay him the indemnity. Therefore, a question arises: why should a bank consider insurance costs in its effective interest rate? After all, the bank only wants to be assured that the loan security will be guaranteed. The Central Bank, in praesenti, is drafting a method for calculation of real interest rates: the works in this direction are close to completion.

- Under these conditions of interest rates increase, doesn’t it become complicated for the banks to expand credit product lines?

In the market economy, anything that is dictated by the market is appropriate. For example, a loan is received to perform some operations, mostly in addition to some other resources. This is already a factor showing that the loan is compared with such rate of return, which is expected to receive from the implementation of the project. An expensive resource, of course, reduces the rate of return, and the market will chop off projects with insufficient rate of return, and vise versa, fund those with higher returns. In this regard, the ability of business entities to adapt to changes is of great importance. Indeed, the adaptation “under the market” determines their success in the market.  

Introduction of new products in the market is dictated by the economic development and the demand for such products. However, it should be taken into consideration that the level of consumer education is not always sufficient. In many market segments, it is necessary to create supply market, deliver advantages of this or other product to the consumer, and then, the demand market will emerge.

- World price increases caused increases of food product prices in the Armenian market. The problem of containing inflation – what is it? – one more factor of increase of interest rates. How much does it dominate today?

The jump of inflation is felt all over the world and, particularly, in countries with transition economies, where the consumer basket, in the most part, consists of products affected most by the increase of prices. This is a normal process – so are measures and counteractions to inflations. The change of a refinancing rate signals about changing of conditions, and this must be perceived by financial organizations in the first place as a guideline to action.

- Thank you for the interview. 
 

The interview was taken by Lilit Aslanyan, ArmInfo,12.06.08

Updated 25.07.2009, 11:22
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