Macroeconomic Impulses of Financial Crisis in Armenia

1
Macroeconomic Impulses of Financial Crisis in
Armenia

• King Banaian
• St. Cloud State University
• 9.VII.09

2
Macroeconomic Impact of the Financial Crisis on
Armenia

• Some first principles
• Financial activities in Armenia
• Remittances as a form of contagion or
  interdependence?
• The economic effects of remittance drops
• Concluding thoughts

3
Your first econ class had this
Govt
Rest of World
4
Dividing the balance of payments
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Financial sector

• Source of concern over underdevelopment.
• Focus initially on financing SME sector
• Major advances in household services

6
Almost all loan increases in drams for households

• How much for mortgages and building? How much
  for consumer/auto loans?
• Interest rates in dram and forex nearly equal.
  No sign of expected depreciation of dram.

7
The dedollarization story, in one picture

• Mental model The dram is good, and we have
  promise that it holds value against dollar and
  euro and ruble. Keep the promise, and we will
  move the savings there. Inflation targeting
  helps keep the promise.

8
Banks increasingly lending long(intermediation
begins)
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But the music ends

• Fear of loss broken mental model
• People reverse the flow, hold fewer drams
• Banks seeing outflow, concern for valuations,
  decide to hold more reserves
• Like US, credit crisis the result of bank caution
• Regulatory?
• Combination ends boom in lending

10
Consolidated bank balance sheet
11
Drop in drams relative to deposits pronounced

• Also note rise in reserves held by banks

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Shock? What shock?

• What shock hit the economy then?
• Those responses should be rather fast, so timing
  appears to be October-November
• No spike in interest rates
• Trade deficit widening perhaps a sign?

13
Tale of two reports

• 31 October 2008
• Rising inflation, high credit growth, and a
  widening current account deficit have raised
  concerns about overheating.

• 3 March 2009
• Since November 17, 2008, Armenia has been
  confronted by a set of external shocks and now
  faces fading confidence in the currency and
  financial system.

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That same graph, extended 9 months
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Two risks

• Intermediation
• Exchange rate
• Both mean bank risk higher. High capital and
  liquidity means on average banks will be fine.
• But not all banks are average.

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What caused this?

• Construction sector nice presentation yesterday
  on end of rise in apartment rents
• Remittances all talk about, nobody shows
• Trade could mining have done this?
• I will only speculate on this does not seem big
  enough
• Export decline in 2008 just 7.2
• Imports rose much more

17
Remittance flows slowed in 2008IV

• Russia announces in January that it halves the
  number of work permits for CIS emigrants in 2009
  (Stratfor, 3 Feb 2009)
• Expectations of lower income would have changed
  household behavior

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Consumer confidence was already slipping
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So thats three BOP hits

• Foreign output shock reduces export of goods
• Shock reduces export of labor, and return flow of
  remittances
• Imports will fall, but not by as much.
• Small open economy this is element of increased
  interdependence of Armenia

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How big a shock?

• Two models to use
• Appendix in Banaian and Roberts suggests
  remittances alone would account for 3.5 decline
  in GDP
• Does not include FDI decline
• Mrktchyan, Dabla-Norris and Stepanyan dont
  provide a hard number but model predictions are
  borne up by the data
• Shock to consumption is unambiguously negative,
  quicker than a remittance shock.
• Again, shock is result of exposure to world
  economy

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And thats not a bad thing!

• Article in new The Atlantic on Moldova What
  crisis?
• Per capita income about half Armenia
• Complain about corruption and politics but not
  finance.
• Cash-only economy, but 5th on The Banker World
  Financial Health Index
• Is that good?
• Danger of isolationism

22
Not contagion but interdependence

• Proper diagnosis is important
• Question is how to make Armenia more stable as it
  opens to the world economy
• Market mechanisms
• Diversify

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Market mechanisms

• Banks need natural growth
• Perhaps too quick push into lending
• Dont addict banks to guarantees
• We Americans have some experience with forcing a
  secondary mortgage market. It will cost us 384
  billion through 2010. Dont imitate us.
• Exchange rate now generates a price useful as a
  guide to market evaluation of policy

24
Diversify

• By globalizing, Armenia exposes itself to new
  technologies, new goods, better prices
• Labor has opportunity to work for higher return.
• But trade in goods and labor has geographic
  tendencies.
• You cant pick your neighbors.
• But you can try to diversify

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Closing thought

• Contagion sounds like a disease to control
• Current crisis is not the result of contagion
• Natural response to external shocks
• Armenias crisis is unique, needs its own
  medium-term solution
• More stable production AND more stable trade, in
  goods AND labor, would be my prescription