Ardian Fullani: Imagine the future - for a better economic cooperation.
Economic chamber's and bank's responsibilities
Speech by Mr Ardian Fullani, Governor of the Bank of Albania, at the 10th Vienna Economic
Forum, Vienna, 7 May 2014.
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Dear Ladies and Gentlemen,
Dear colleagues and participants of the Vienna Economic Forum,
I am honoured and delighted to return and speak to such a constructive and important
economic forum, discussing with you the economic development topics, which affect the
present and the future of our economies.
The topic of this forum is very important for the economies of the South East Europe. It
creates the proper environment, which enables the examination of the problems faced by our
economies during the crises. We can certainly draw few lessons from what we have learned
during the recent years, following the global economic and financial crises. These
discussions and the harmonization of economic policies will help us to project a strong
coordinated economic structure for the long term future of our economies.
It is particularly important to converge here in Vienna and discus the cooperation issue
because one of the obvious outcomes (lessons) of the developments during the recent years
is that the economic developments in particular for small open economies of the South East
European region, are not local or regional anymore. Just like the flu, it is rather unexceptional
and highly transmittable from one economy to the other, from one sector of the economy to
the other.
Most importantly, European economies and their financial systems, among which the
Austrian financial system enjoys a significant share of the market, define the globalization for
the region and are, to a large extent, important determinants for the success or failure of
these economies. Given the large share of the European financial groups, they have and will
play an important role in the transmission of global shocks in the region. What is more
important, they have a significant role in the transmission of legislative and regulative shocks
carried over by European monetary and supervisory authorities. The size is such that even a
simple change in the future business plans of a single European financial institution can
transform into real shocks for the economies of the region.
It became evident during the crisis and afterwards that an increase in risk and uncertainty,
led to increased incentives for banks to withdraw from the Emerging Europe economies.
Though this was mostly prevented due to increased cooperation through institutions such as
the Vienna Initiative, the concerns from our perspective have not completely dissipated. In
this respect the business plan of EU based groups can play a potentially important role in the
nature and outcomes of this cooperation. The crisis showed few weakness in the model of
growth adopted by the emerging economies of South East Europe, but is also true that, to
some extent this behaviour was also encouraged by the development strategies of financial
groups in the region, as it is also true that there was also some weakness in the coordination
and collaboration between different European Union institutions, such as monetary policies
(ECB), fiscal policies (of member countries) and the inexistence of specific mechanisms
(such as bailout funds) to safeguard the European Union during difficult economic times.
This conference pays homage to these lessons, while acknowledging the importance of
coordination, by mutually collaborating in multidimensional institutional levels, within the
region and with our common partner countries. We in the region hope that our foreign
partners share this same view.
The Albanian economy and its financial market share similar characteristics with the other
economies of the region. Our main trade and financial partners come from the EU economy.
Therefore, developments in the EU are directly and indirectly transmitted and play an
important role in economic developments in Albania. Our reliance on EU affected not only
our economic development but also constrained the effect of policy measures.
Several European banking groups operate in the Albanian financial sector. These entities
brought into the Albanian market a lot of valuable know-how and experience, playing, thus, a
crucial role in the financial integration of the Albanian economy to the European Union.
However, EU supervisory regulations and risk requirements for European financial groups,
along with the approach in which they are implemented, are posing significant constrains on
our economy and the efficiency of monetary policy to respond to economic developments.
Faced with new and stringent capital and risk requirements, banks are trying to comply by
adjusting their future business plans and the size and composition of their balance sheets in
the economies of the region.
These tighter regulations approved by European Supervisory and Banking Authorities and,
subsequently, implemented by parent banks have already been accompanied by a
decreasing level of credit to the economy. Our research shows that further tightening of
crediting, due to the legal reforms currently under way, could have an important effect not
only on economic activity but also on commercial bank asset quality itself, in particular
situation with non-performing loans. A deterioration of economic activity would play out
mostly in the same way, leading to worsening of NPL ratio, leading to smaller banks' profit
and tighter capital constrains, along with slower growth. This second channel is seen as
arguably more dangerous, with the empirical research pointing out that the elasticities are
close to twice as large for a shock of similar size.
Such adjustments are imposing significant constrains on our economies. More directly, we
have observed a decrease in financial intermediation, by tightened lending procedures even
for economies or sectors that were doing ok during the crises. As a result, this was reflected
in stagnating investments and slowing down dynamics of the Albanian economy, both in the
private and public sectors. Moreover, current business practices and policy orientations are
imposing significant constrains in the efficiency of monetary policy transmission mechanism,
and the ability of authorities to provide much needed stimulus to the economy.
It is understandable that banks would have to be careful, prudent and responsible given the
current situation with non-performing loans; however, they must also consider the fact that
credit and financial intermediation is important for growth, which, in turn, can improve the
ability of economic agents to repay their loans. This is especially true for particular sectors
like agriculture and agro-business, which, so far, have not benefited from credit expansion,
but have large untapped potential for growth.
The era of an economic growth model, led mainly by the domestic consumption, is now
gone. Banks, their European headquarters and their supervisory authorities should work
together with authorities of host countries to develop a new long-term and sustainable
economic growth model. This new model needs to be based on investments in productive
sectors of the economy. Our products and services need to be competitive not only in the
home market, but they should also offer comparative advantages in the regional and
European Union markets. It is clear that cooperation is the only choice for the future.
For more than 15 years now, the European integration, in all its politic, economic and
financial dimensions, has been main driving force for the economic and social prosperity of
South East European region. EU represents the main trading partner, a large share of FDI,
by far the biggest investor in the Banking System. Our countries have undergone through
structural reforms, adaptations of regulatory and legislative frameworks, institutional
adaptations to adjust to these partnerships.
Led by the European integration process, countries of the region have also signed bilateral
free trade agreements among them. Our studies at Bank of Albania show that these free
trade agreements have positively affected trade flows among West Balkan countries.
However, these studies also suggest that trade flows among Balkan countries are below their
potentials. The aims of these bilateral free trade agreements are to create a regional free
trade area among West Balkan countries.
Authorities in South East European countries have shown signs of consistent regional
collaboration; however, they need to make additional efforts to unify and harmonize their
legal, institutional, regulatory and infrastructural frameworks. These efforts need to be
supported by a clear commitment by EU financial groups to the region's small open
economies. The development of the regional markets for products and factors, investment in
education and improvement of human capital, exploitation of economies of scale and
comparative advantages, will depend on the availability of credit and investment and the
financial support of the banking system. In this respect, EU financial groups will be
instrumental factors for building bridges of cooperation among economies of the region and
its transformation into a larger, better integrated, more competitive, more profitable and
prosperous economy, eventually leading to a prosperous economic future through economic
cooperation. In this respect, I encourage foreign groups to adopt a regional rather than a
country specific view when considering their future in the region. It goes without saying that
any policy that restricts commitment and exposure of EU financial groups in the region does
not support economic cooperation among our countries. It rather creates a struggling
environment and a less prosperous future for all economies of the region.
The Western Balkans region offers great opportunities and profitable perspectives for
EUbased corporations and financial groups. The harmonization of above-mentioned reforms will
create an even more attractive environment for different private entities interested in
investing in our region. I invite EU financial groups to see the region under this perspective.
European institutions and financial groups should support and become a positive force to
facilitate, smoothen and support regional economic cooperation, which will lead to a better
prosperous future and a faster European integration process of the region.
Thank you for your attention!