CBA CHAIRMAN: SUCCESSFUL INITIATION OF SECURITIES MARKET WILL CHANGE
CONDUCT OF MANY COMPANIES
YEREVAN, JANUARY 11, NOYAN TAPAN. We present the interview of NT
correspondent with the Chairman of the Central Bank of Armenia (CBA)
Tigran Sargsian.
NT: It is already a year since the CBA started the policy of inflation
targeting. Impression of an observer is that this policy has had
success, at least, infaltion was kept relatively low in the complex
situation in 2006. Is this impression correct?
T.S.: I think it is premature to make assessments. We see the prospect
in the following way: the first three years after adopting this
strategy should be transitional ones for us. During this period we
have to formulate clearly the rules of inflation targeting, make the
appropriate amendments in legislation and, more importantly, we should
create an opportunity to establish a correlation between the
short-term interest rates and the long-term credit interest rates and
the level of prices. At the same time, we received technical
asssistance and invited foreign experts who helped us to work out a
new set of instruments necessary for financial operations. Our aim is
that during these years the CBA can operate on the financial market
with this a set of instruments that will help with the identification
of transitional mechanisms. For this reason, it would be correct to
make an assessment in three years.
NT: However, some set of instruments is already being used this
year. Is it possible that it will change?
TS: In the next three years the set of instruments will remain the
same: we should be consistent so that the game rules will be
understandable for market participants. Thanks to these instruments
the relation between the short-term and long-term interest rates will
form.
NT: Can we say that in principle, the strategical directions exist,
and only the problem of their realization remains?
TS: We can. We should observe these rules consistently, use those
instruments, about which market participants are informed so that
these patterns will manifest themselves. Particularly, every week we
present our repo operations, offering market participants to use our
dram resources. The use of these rules in the long run dictates to
market participants such an environment, in which they would have a
clear strategy in managing their primary liquidity. They know that
every Wednesday the CBA offers dram liquidity to them, the CBA also
tries to remove excess money by selling its own securities. Observing
these rules in the long run will form the relation of these interest
rates.
NT: Nevertheless, these rules have functioned for a year…
TS: The rules function, market participants know them but it is
necessary that these rules impact participants’ behaviour so that in
the issue of liquidity management this set of instruments will become
a pattern for them.
NT: Can we, however, give some preliminary results for 2006? Is there
any correlation between the interest rates of repo transactions and
the rates formed in the Armenian market, and, as a consequence of all
this, between the change rates of monetary aggregates? Is there such a
dependence?
TS: That’s a good question. It is importnant for us that the rates of
repo transactions will be in line with interest rates. The 2006 data
allows us to conclude that we have already got a result: we managed to
guide the interest rate market and to form this relation. We are
satisfied with this.
NT: In 2006 the economic growth was again very high. In this respect
how the monetary and credit aggregates were changed in 2006?
TS: The growth of the broad money and the monetary base exceeded our
expectations, which we had calculated based on the expected indices of
economic growth. We envisaged a 10% GDP growth but it will be higher
(NT: preilmanary estmates show it is 13% or more). Last year the
growth of broad money and the monetary base made about 30%, while the
growth of dram portion of the monetary base – 42%.
It shows that a change in favor of Armenian drams is taking place in
broad money. Drams’ portion is growing more rapidly than that of
dollars. The same is true for deposits. We expect the amount of dram
deposits to become equal to that of foreign currency deposits
soon. (NT: In mid 2006, 62% of deposits with the Armenian banks was in
foreign currency).
NT: The impression is that in terms of market management, in 2006 the
bonds issued by the CBA played a more important role than repo
transactions did.
TS: Indeed, these bonds, which we started to issue in 2005, played an
important role in neutralizing excessive liquidity. They also gave the
CBA some extra resources to make foreign currency interventions in
order to neutralize exchange rate fluctuations and prevent the
extremely sharp appreciation of the Armenian dram. We’ll continue this
policy in 2007. Our bonds currently amount to 40 billion drams (some
108 million AMD). In 2006, the amount of foreign currency
interventions reached 220 million dollars, up from 102 mln dollars in
the previous year. By the way, thanks to purchase of this amount of
foreign currency, at the end 2006 he CBA foreign reserves exceeded one
billion dollars for the first time.
NT: The CBA has also undertaken the management of formation Armenia’s
securities market – something, at which several unsuccessful attempts
were made previously. How is this process proceeding? Of course, it
would be naive to expect considerable progress in a year
period. However, is there any qualitative change?
TS: The CBA Board has approved a new concept of development of the
securities market. The main ideology is the following: we gave up
supervisory relations with thousands of reporting issuers and aim to
identify a small group of promising open joint stock companies in our
market, as well as companies which intend to issue their securities
and operate in the securities market of their own free will – being
aware of this market’s importance and of the necessity to develop
their own business. We significantly reduced the number of reporting
issuers (those who have to sumbit reports to us) and sharply increased
the amount of the minimum capital, that is, only big companies are
presented, there are about thirty of them.
NT: What is the amount of the minimum capital?
TS: It is 500 million drams. Besides, we work with enterprises which
have many owners. Thus we aim to choose several dozens of enterprises
which would agree to operate in an open and transparent way, present
thier financial reports, share their programs with the public, pass a
stock exchange listing and, based on it, to issue their shares or
bonds. This will enable to organize stock exchange trade in the
primary market and to carry out secondary circulation if these
securities. If we succeed in all this, we can fix that the securities
market started functioning in Armenia. Naturally, it is necessary that
these enterprises undergo audit by internationally recognized audit
companies, which will certify that the reports of these enterprises
are real. Besides, the game rules in stock exchange trade should be
such as to create trust of investors, both Armenian and foreign ones.
For this purpose we have cooperated with the Stockholm Stock Exchange
(OMX) for a year now. OMX is now conducting a study of our market to
reveal, amoung other:
What potential for corporate bonds exists in our market?
What are development prospects? What kind of legislation do we have?
What infrastructures are in Armenia?
Based on the OMX’s report, we’ll start the second stage of the
securities market development. Today we are implementing rating of our
enterprises. About 40 enterprises have received a CBA rating, which
will allow the best of them to issue their bonds, while the CBA will
help with the issue and placement of their bonds on the stock
exchange. The first one is Cascade Credit company that has
successfully issued and completely placed its bonds.
Our purpose is also to bring big and famous enterprises to the stock
market so that they will issue their securities, which would allow
tens of thousands of people to acquire these securities. We are
negotiating with the management of these enterprises, offering them to
use this exceptional opportunity and presenting those opportunities,
which they would have when operating on the stock exchange. This is
most important for enterprises intending to extend their capacities
and increase productivity.
It is also very important that the cooperation with the OMX will
enable us to form a marketplace in Armenia, which will integrate with
international marketplaces, thanks to which our enterprises will be
able to directly place their securities in international financial
markets. It means that some alternative sources of finance will be
offered to enterprises with development prospects. There will be no
difference between Armenian and international markets.
NT: How many enterprises can meet these requirements at present? The
stock exchange will function only in the event that it is liquid, that
is, there are many securities which can be bought and sold.
TS: If we have an agreement with five big enterprises, that’s enough
to organize an active market work. The volumes of these five
enterprises in a few years may exceed several billion dollars. So they
can sell more securities than tens and hundreds of small
enterprises. If the start of these five is successful, many will try
to enter this market.
NT: So how many potential enterprises are there at the moment?
TS: Now we are working with thirty non-banking enterprises. Time and
the OMX study will show how many of them will pass the examination and
enter the stock exchange.
NT: What about the introduction of modern standards of corporate
governance in banks, which is also among the CBA’s goals announced in
early 2006?
TS: It is proceeding well, although we are not fully satisfied with
its process. Our purpose is to bring two or three Armenian banks into
international market so that they can place their bonds in
international financial market, for example, the London Stock
Exchange.
NT: Do you believe that now all the Armenian banks already meet the
requirements of modern corporate governance? Was there resistance on
their part when shifting to these principles?
TS: There was. Any changes occur with difficulty and are painful
because people have worked in those conditions for years. Therefore we
help them, invite experts, explain. Some people resist, punitive
measures have been imposed, there have been bankrupts. This is a
market, and only winners remain. In general, banks are more prepared
to enter financial market than other companies in Armenia. If two or
three of them complete all this process successfully, we’ll be happy
instead of them (smiles).
NT: What is the situation in other sectors of the financial market?
TS: Let’s start from the largest sector – insurance. In 2006, we
closed eight non-performing insurance companies and in 2007 we’ll
finish this "cleaning" action. In addition, we have put into
circulation a new draft law on insurance, which should be in line with
European standards. We expect it to be passed by the National Assembly
soon. We also create subordinate legislative acts and take steps to
interest foreign insurance companies in operating in Armenia. Despite
a decline in the number of insurance companies, the turnover in this
sector increased in 2006.
The main provisions of the development strategy in this sector are:
1. "Cleaning" of the field of insurance companies.
2. Creation of infrastructures
3. Creation of actuary companies
4. Creation of a single system of accident statistics.
5. Introduction of compulsory insurance rules.
It is the preparatory stage of the insurance system development, it
will take at least three years, as these problems are quite difficult
to solve. For example, for road accidents, it is necessary to ensure
that none of these accidents has been left off the registration list,
which in its turn requires not only time and joint work of various
departments but also qualified staff, whose lack is felt
everywhere. The same is true for fires, health care and other sectors.
Ae regards the pension system, the government has approved its
concept. We expect that the respective law will come into force in the
second half of 2007 and the reforms of the system will begin.