Financial Crisis in Armenia
Media Room
The Board Member and Development Director of Ameriabank Tigran Jrbashyan answers the questions of ARMENIA Today

- Mr. Jrbashyan, do you share the viewpoint of some economists that in March Armenian will feel on itself the “second wave” of the world economic crisis?
- I share the following viewpoint: in the general cycle of Armenia’s development, there are certain seasonal factors in the financial market, which in the course of the last 15 years fall on the end of March – beginning of April. This denotes that the specified period has always been tense for money-and-financial market. The international financial crisis will become an additional factor of seasonal aggravation, when reserves are exhausted, and accordingly, demand for additional currency funds occurs. This year it will happen in the background of general decrease of transfer volumes, due to crisis in Russia.
At the same time, I think that there will not be any catastrophic scenario of situation development. In my opinion, actions taken by the government, and the rather stable financial system of Armenia, will be able to face such effects. Yet, it is obvious that the tension will increase in the beginning of spring, in March-April. It is quite another matter: this tension should not result in drastic changes in the exchange rate of the Armenian dram and the banking system, unemployment, and hyperinflation. Frankly speaking, I do not expect occurrence of these phenomena.
- Is Armenia ready to meet the “blows” of economic crisis?
- I think that Armenia lagged in the implementation of “second generation” reforms directed at the increase of efficiency of functioning institutions. I talked about it some 3-4 years ago and projected that by being late, we would have to implement those reforms under more complicated economic conditions. Today, practically the principal challenge for Armenia’s economic development is not the financial crisis itself, since in my opinion the situation concerning crisis in Armenia is rather manageable. Under these conditions, Armenia is able to withstand the crisis due to many reasons. Here we deal with an objective reason as well, such as lower interrelation with global financial markets, which are the main crisis transmitting mechanisms in the world economy.
Accordingly, lower integration of Armenian banking system and financial market resulted in its higher security as compared to Ukraine, Kazakhstan and Russia. On the other hand, in addition to ties with the international financial market, Armenia acting in the capacity of raw material exporter – copper, molybdenum, etc., collaborates with economic entities. All this is interrelated and influences on the situation. On the other hand, transfers from Russia will have their impact, though not everything is so unambiguous here, since transfers, as a rule, are generated at the cost of lobar migration. Accordingly, because of the unfavorable economic situation in labor migration destinations, migrants will be returning to Armenia, and quite possibly, with the savings they earn by that time.
On the other hand, upon the return of these people, the problem of work places will occur. That is to say, the complex of challenges is rather difficult in that sense. Yet, the sizes of Armenia, low level of external debt, weak integration and sufficient capitalization of the banking system inspire optimism. In reality, in my opinion, today’s world economic crisis, in fact, is a credit crisis in the world. The statement that the crisis started from the real estate market was just one of the versions. It could well have started from credit cards market, car credits, consumer credits, since in fact the problem was in over-loaning to the economy. If we take the American economy as basis, the volume of public and private credits there exceeded the volume of gross national product by nearly 3.5 time, in Japan – by 2 times, and in Europe - 1.8. In practice, it turned out to be as follows – the volume of loan portfolio increased to the extent that its further growth would not result in the increase of the national product, whereas debts had to be covered.
The calculations recently published in America showed that the increase of loan portfolio by 1 US dollar caused the growth of GNP by 13 cents only. That is, the effectiveness of injecting debt moneys into the economy was very small. Accordingly, there was a need of a very strong adjustment, which is what we witness today. The same was true to Russia, which was excess loaned in the past 3-5 years, although in Russia’s case, contrary to 1998, the corporate sector of economy acted as a locomotive of increasing credit volumes. Whereas in Armenia, presently the aggregate volume of credits is less than 30% of total Gross National Product.
That is, if we look at the essence of occurrence of crisis (which in my opinion is an unjustified over-crediting of the economy), in Armenia it is the under-crediting of the economy. Accordingly, under the given situation, it is less probable that the development of global economic crisis towards Armenia will cause problems comparable by their scale to worldwide problems. However, the matter in concern is not what will happen during the crises, but rather in what positions countries and entities will occur.
Any crisis has healing and decisive significance for the economy, and the important thing is what will happen thereafter. Any crisis is followed by upturns – that is the dialectics of development. Countries and entities, whose economies will be more prepared to the follow-up upturn, the cycle, who will have necessary tools, technologies, investments and cash funds, will establish their rules of play, and win. In my opinion, today, the main challenge facing Armenian is the necessity to implement 2G reforms, which we currently perceive as basis for economic policy, so that at the time we overcome the crisis, we will have necessary national economic system able to support the growth of economy during the post-crisis period. Simultaneously, we must take steps to prevent and reduce the impact of the world crisis on Armenia. If not for such a dilemma and problem, I think that the issue of the world crisis will be milder and not so pressing. The main problem is whether we succeed in balancing the system, while we simultaneously take rather serious steps directed at the implementation of most serious institutional reforms: since any reform requires expenditures. It cannot happen that reforms are made, and the public does not pay for it. Therefore, the question in concern is as follows: Do we have the potential to do reforms and fact the world crisis concurrently?
I think everyone, both the Government, the Central Bank and the political and the business elite, understands this. It seems to me that we can come out of this situation with credit. There is no other alternative, since if we do not make the reforms, we will occur among “chasers”, and if we do, we have to restrain concurrently the impact of crises. Here is what we need to think about today – correct distribution of forces, determination of priorities, use of accumulated potentials – these are the mechanisms, due to which, I’m sure, we can not only come out of this situation with credit, but also lay grounds for post-crisis development.
- Since you talked about reforms, in your opinion, what steps should the authorities take in order to mitigate consequences of crisis?
Today, the rationale and the ideology of reforms in the first place are dilemmas between taking actions directed at mitigation of the world crisis and implementing reforms that will serve basis for the compatibility of Armenia’s economy in post-crisis period. This is the dilemma, which the Government solves each day. Under very hard conditions, it tries to address both issues. Often, they may contradict each other: there is a daily struggle between these two goals. 
Due to measures taken by all previous authorities of independent Armenia, our country as of this moment succeeds in forming certain “safety cushions”: high capitalization of banking system and low level of external debt. Now I see that the following is happening: reforms for post-crisis are being implemented. During that period, the hand is kept on the pulse, and there is a readiness to make necessary amendments in the applied policy in the event of occurrence of situations penetrated from and due to the world economy crisis. I think that today’s reforms are directed to post-crisis period. Specific changes conditioned by crisis are not observed yet.
However, it is obvious that there is some anxiety:  certain actions are taken, for example, to attract funds for small and medium businesses, concurrently accompanied by increase of public investments in infrastructure projects, to conduct negotiations on attracting stabilizing loans, and so on, which reflect on mitigation of the impact of crisis. Nevertheless, restructuring of institutions, adoption of new decisions and laws directed at increasing efficiency of such institutions are made in the first place with view of laying foundation for further development in post-crisis period.
- Do you think the revision of 2009 State Budget of Armenia is necessary, by reducing expenditure items and in consideration of the world crisis?
- No, I do think the revision of the state budget, to reduce expenditures, is the right thing to do today. Since under the conditions of world crisis, as the experience of many countries proves, it is the government, who acts as a source of investments called to substitute private capital investments, which under these conditions lack the possibility to make long-term financing and expand large investment activities. Therefore, I think that expenditure items of the budget should be fulfilled, moreover, the budget could have been more proactive, to some extent, and envisage larger volumes of capital investments. However, here arises a question: Where the money should come from, if taxes are not going to be paid due to decline of certain areas?
That is where the “safety cushion” mentioned earlier plays its role. Being among countries with small number of population, whose external debts are comparatively low, Armenia today is fully able to act in the international financial markets as a reliable borrower of financial capital and correspondingly, use external borrowings to support investment activity in the economy. I think one should not expect that reforms in customs and tax administration would cause immediate phenomenal and unprecedented results in 2009, in terms of increase of tax entries to the budget. It is rather oriented to post-crisis period. That is, if implemented in a targeted manner and thoughtfully, those reforms will be expressed as creating equal conditions for a play, and consequently, as stimulating business activity in the future.
For this year, in my opinion, tax entries, regardless whether received due to tax administration or businesses, could not have such a practical significance in terms of the increase. Yet, now we have to keep the hand on the pulse. Nowadays, Armenia has all opportunities to attract easily funds from external markets. Our ratings recorded positive growth, which is a unique phenomenon under the conditions of the world financial crisis.
International rating agencies increase the rating indicators of Armenia. Nowadays Armenia is the country, which, in principle, enjoys the trust of financial markets. There are few countries enjoying such reliability. I say this, since it has happened due to all previous governments, who succeeded in creating the “safety cushion” – the low level of external debt, and at the cost of it now it is the time to make capital investments. There is absolutely no sense in revising the budget, and if so, the revision should be made to increase expenditure items, in the direction of making capital investments at the account of external sources, and by no means should the expenditures be cut. 
- What monetary-credit policy should the Central Bank of Armenia implement, in consideration of impending consequences of economic crisis?
- I think that today the CBA adequately responses to elimination of inflation pressure. That is, in practice, the imported inflation is substituted by imported deflation. This is apparent, since until September, the entire world was under the inflation pressure, and many economists felt that and assessed the situation as follows: such inflation bulge, which had happened since the beginning of 2008, served as a prerequisite for the follow-up recession. That is, certain speculative moods in commodity markets caused increase in prices of oil, grains, metals, etc.
That drastic increase should have been compensated by further decrease, which in fact happened. Since in reality, no one could estimate the price of USD 150 for a barrel as adequate. Correspondingly, in my opinion, the tough monetary-credit policy implemented by the CBA under such conditions is fully justified, due to which, in essence, we were able to overcome imported inflation shock available in all countries. At present, the main problem, which currently is being addressed, is occurrence of the following change: instead of imported inflation, we may start to import deflation.
By the way, it is not so straightforward to valuate what is worse – inflation or deflation: since deflation causes the so-called “delayed demand”, when the consumer sees that prices go down, but chooses not to buy the particular good today, delay the purchase and buy it tomorrow at a lower price. The delayed demand results in such situation, when the consumer does not buy the good, and manufactures are short of resources, i.e. economic recession occurs. It results from this that even a small deflation is more notable and dangerous for the economy, than a small inflation. It seems that economists all over the world have agreed that there should be a certain level of inflation, which allows the economy to develop and promote consumption and demand. Currently, we face a situation, when serious deflation bulge is happening in many countries. Actions taken by central banks of developed countries are directed at decreasing refinancing rates.
Today, in practice refinancing rates all over the world are established at uniquely low levels: 0.25% in the USA economy, 0% in Japan, and the European central bank has lowered the rate up to 0.5%. The world faces a rather serious problem of deflation: therefore, central banks alleviate monetary-credit policy, attempting to reduce the impact of deflation. Injection of money into the economy is happening.
What is happening in Armenia? Due to the tough combat against inflation and the monetary-credit policy, our refinancing rate and the money base reserve is very large, and accordingly, today the CBA has more freedom to implement policy more appropriate at a given point of time, than other countries. At the time when central banks in many countries often were viewed as a tool to boost economic growth, in Armenia the principal goal of the CBA was inflation. Accordingly, nowadays, the opportunities of the CBA to soften the monetary-credit policy are significant, too.
The CBA may decrease the refinancing rate during the upcoming year and then, remaining on comparatively high level and therefore more attractive for attraction of external capital than other countries, gradually reach to a zero level observed in most developed countries. And this is happening now. The process of reducing the rate started in December. Today it is obvious and the CBA has announced about softening the monetary-credit policy and shifting the focus from combating inflation to deflation combating. The next issue is the stability of our national currency, which is also ensured by large reserves of our monetary-credit policy accumulated in the preceding period. I do not think that the national currency may devaluate to a very high and critical point. Nonetheless, we soon will witness devaluation of the national currency, but it will be rather smooth and there will not be extreme drastic falls. Even if conditioned by speculative phenomena, the correction will be very quick.
According to my projections, this year the national currency will fall in the range of 7-10%. I do not mean that there will not be short-term take-offs, yet in general, the situation will not be disastrous.  Such collapse of national currency as nowadays is happening in Russia, undoubtedly will not occur here. Nonetheless, it is clear that the situation in Russia, in terms of psychology, is reflected on all CIS countries. It is also clear that it will also affect transfers: however, there is not doubt that the situation in Armenia radically differs from that in Russia. Therefore, I do not think that there will be a “collapse” here. Instead, there will be certain, and most importantly – predictable, steady and smooth devaluation.
- How do you assess the condition of the banking system in the country? How able is it to face the coming “third wave” of crisis?

The banking system, in my opinion, today is capitalized rather well; it has rather high level of liquidity. However, this does not mean that the banking system does not have problems. I think that we will witness a number of mergers, takeovers and acquisitions in the Armenian banking system. It is natural that the strong ones will survive and the weak ones will be forces out of the market. I think that shifting to such rough rules of play will salvage the banking system. If correct steps are taken and in case of implementation of the scenario that we currently have, the banking system will come out of the crisis stronger and healthier than it was before the crisis.


Since the crisis establishes its rule of play, doesn’t it? It requires more efficient and coordinated work than in pre-crisis period when particular tension was not felt. I think that post-crisis period is very important for both the banking system and the economy of Armenia. It is important in what condition our economy will meet the year of 2010.

Updated 25.07.2009, 11:22
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