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Achieving sustainable growth in SEE:
Macroeconomic policies,
structural reforms,
socio-political support, and
a sound financial system
Governor Fullani, February 11, 2011
Main Messages
 There is no conflict between price stability
and financial system stability in the long run
 Global or even regional financial markets
require global or at least regional supervision
and crisis resolution mechanisms
 The role of anchors in the design and
implementation of macro-prudential policies
EU integration process
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Crisis in the region why and how?
 Pre-crisis conditions in the region
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Absorption-led growth
Based on fast credit growth
Growing trade and current account deficits
Considerable reliance in foreign funds and “cheap” exotic currencies
 Foreign made crisis:
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Sudden stop of capital flows, among others
 Home-grown crisis:
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Liquidity shortages
Exchange rate depreciation
Painful adjustments in income, trade and current accounts
Deterioration of the credit portfolio
Credit growth stopped
Economic activity stalled or grew at negative rates
 Saved by IMF and EU interventions
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Focus on Albania Before Crisis
 Our economy has been in a solid path of growth for the last decade,
with an average annual growth rate of around 6 percent.
 Both fiscal and monetary policies have been cautious, consistent and
disciplined in the pursuit of
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fiscal consolidation Before the crisis,
price stability in a low inflation environment focused on anchoring market
participants expectations for price developments in the economy.
 This steady economic performance has been supported
by a flexible exchange rate regime.
 Exchange rate that proved instrumental in encouraging
economic adjustments toward a more sustained foreign
position
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Focus on Albania Before Crisis
Financial system dominated by the banking sector.
 The assets of the banking sector make around 95 percent of the
total financial assets in Albania.
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Banking system with strong representation of well-known European
banking groups from Greece, Austria Italy and France.
 Growth in banking sector assets has been financed mainly from
internal resources
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deposits on average counted for around 80 percent of total assets.
loan to deposit ratio stood at around 50 percent.
 Financial performance indicators were very good.
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in the previous 4 years, the average return on equity has been above
20 percent while the average return on assets has been around 1.5
percent.
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Focus on Albania Before Crisis
Too many gaps were opening too fast
 Most of the credit growth went in the non-tradable
sector
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Mostly to services and construction
 More than 70 percent of total credit was in foreign
currency

EURO had the biggest share of the outstanding stock
 Fight for market share
 Financial illiteracy in the market
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Focus on Albania Before Crisis
Bank of Albania gradually introduced
regulatory measures that would:
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discourage rapid increase in lending,
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encourage banks to lend more in domestic
currency
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increase transparency toward clients on
banks products and services
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Focus on Albania Before Crisis
Bank of Albania gradually introduced
regulatory measures that would:
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improve the commercial bank’s governance and
transparency,
strengthen risk assessment and risk mitigation
strategies,
improve the capital adequacy and liquidity ratios,
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Different story - same results
 October 2008 financial sector
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fear and contagion resulted in deposits’ withdrawal
liquidity problems emerged (especially in foreign currency)
 February 2009, from global events and financial sector to real
economy
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expected decline in exports, remittances and economic activity
credit growth disappeared
fast but contained exchange rate depreciation
 Crisis deepens: From real economy to financial sector and back to
real economy
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the quality of the loan portfolio started to deteriorate
real economic growth slowed considerably, from 6 to 3 percent
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both trade and current account deficits reduced in size.
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 The flexible exchange rate proved instrumental in encouraging
economic adjustments toward a more sustained foreign position.
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Price Stability Vs. Financial Stability
 The overall and most important job for a central
bank: ensure the integrity of money and the
banking system
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the foresight of monetary policy is the size and duration
from the trough to the peak of the business cycle
the foresight of banking supervision the size and duration
of financial gaps in the banking system
the foresight of financial stability the size and duration of
financial gaps in the economy
 Price and financial stability do not conflict but
complement each other in the long run.
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Triangle of information sharing and
decision making
Monetary Policy
Banking Supervision
Financial stability
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Defining policy priorities
 Central Bank policy shifted its focus toward financial
stability
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Regain trust in the banking system
Prevent foreign exchange market failures
 Fiscal policy provided necessary stimulus in the
economy
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Increased capital expenditures market a reversal of the
consolidation trend in fiscal policy
 Monetary policy provides additional stimulus after:
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Deposits reversed the declining trend
Fiscal position reached the limit of sustainable behavior
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Same policy - different results
 Albanian economy and banking sector coped
relatively well with the impact from the international
crisis.
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economic growth remains positive in the range between 3
and 4 percent,
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inflation has been stable and within the range determined
by the Bank of Albania,
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exchange rate and non-performing loans developments
have stabilized to pre-crisis levels,
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banking system remains liquid, well capitalized and
profitable.
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Joint efforts of supervision and
crisis response mechanisms
Once new products are developed and tested
in some markets, they will follow the same
pattern of marketing in other markets as well.
 Build bridges of continuous communication
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supervisors in the SEE region
home-host supervisors
local bank managers
headquarters of the mother institutions
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Joint efforts of supervision and
crisis response mechanisms
 Financial systems in SEE are inter-connected, this
issue deserves more attention in the future
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common problems need common solutions
simultaneous problems need simultaneous actions
 Vienna initiative
 Financial regulation and regulatory arbitrage was a
serious issue before and throughout the crisis.
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assess the benefits of more regional approach to
regulation
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Anchors of macro-prudential policies
 Good anchors make for good preconditions
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IMF programs
EU integration process
 Domestic anchors as a long term solution
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sustainable fiscal and monetary policies
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counter cyclical policy response
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policy coordination.
 Structural reforms must continue with particular focus on
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markets
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education
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regional model of growth and cooperation
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Thank You
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