- International Monetary Fund
- Published Date:
- May 2017
I am privileged to open this conference organized by the Bank of Albania and the IMF, with the gratefully acknowledged financial support of the Swiss Government.
This conference focuses on the economic and financial consequences for the Western Balkan countries of negative euro area interest rates and, more broadly speaking, of the recent standard and non-standard monetary policy measures implemented by the ECB. It has an ambitious agenda since it aims at discussing and analyzing the consequences of recent ECB monetary policy from three important perspectives: financial stability, reserve management, and monetary policy. The conference aims at providing policymakers in the region and beyond with a forum for discussing the recent policy challenges, the policy responses, and their effects.
Western Balkans refers to the six EU candidate and potential candidate countries in the region: Albania, Bosnia and Herzegovina, Kosovo, the Former Yugoslav Republic of Macedonia, Montenegro, and Serbia. Taking a regional perspective is useful given the similarities in economic structures of the countries concerned. To a large extent, these similarities reflect the common background of transition to a market economy and the common goal of joining the European Union first and the euro area later. Such common goals represent a fundamental policy anchor for the countries in the region.
Economies in the region are strictly interwoven with the euro area via different, important channels.
First, the trade channel: euro area countries represent our main trading partners, accounting, in the case of Albania, for approximately 75 percent of our exports.
Second, via capital flows in terms of foreign direct investments (FDIs), portfolio flows, and banks’ funding. FDIs from the euro area represent 64 percent of total FDIs in Albania. Subsidiaries of banks headquartered in the euro area have a significant market share in several countries in the region. In Albania, this share has been declining, but it is still above 55 percent.
Finally, remittances from the EU are an important source of income and foreign currency inflows in the region. In the case of Albania, they represent roughly 6 percent of GDP, and the majority of them are from euro area countries.
Countries in the region have, therefore, been strongly exposed to recent economic and financial developments in the euro area. Let me name just a few of these relevant developments.
Low inflation rates in the euro area were transmitted to our economies, hindering the achievement of our price stability objective. Since September 2012, core inflation in the euro area and non-euro area EU countries has decoupled from the average in the rest of the world. The synchronized disinflation across Europe points to a spillover of low inflation from the euro area to the Western Balkan’ region.
Countries’ susceptibility to inflation spillovers from the euro area should vary with the degree of trade openness and the rigidity of the exchange rate regime. The share of foreign value-added content in aggregate demand is over 50 percent in Albania. This ratio is higher in smaller Central and Eastern European (CEE) countries, which are more exposed to disinflationary spillovers from the euro area through the trade channel. Spillover also took place in countries, like Albania, though our state-of-the-art Inflation Targeting framework, and the flexible exchange rate regime insulated us somewhat from the strong disinflationary forces from abroad.
Negative euro area policy rates as a reaction to low inflation rates have several repercussions. Their first impact is, of course, positive in countries that witness a degree of cyclical convergence with the euro area and that faced a similar shock to prices and economic activity. Inasmuch as negative rates have been successful in preventing disinflation across the euro area, they have helped central banks across the region to deliver on their mandate of price stability. Furthermore, countries in the region may have also benefited from portfolio and capital flows from euro area countries, encouraged by negative euro area interest rates and the large-scale asset purchase programs of the ECB.
However, negative euro area interest rates also pose challenges to our monetary policy frameworks:
First, they complicate the estimation of the lower policy rate bound in our economies.
Second, they alter the relative incentives toward domestic and foreign currency denominated assets and liabilities, presenting both opportunities and challenges in the attempt to limit the euroization of our financial systems.
Third, they lower the return on our FX reserve assets, which turned, at times, negative, in a context in which, unlike other countries, the scope for currency diversification is more limited. This presented peculiar challenges to our required reserves’ system and the modalities with which banks’ required reserves are remunerated.
In addition, our domestic financial systems have been affected through the presence of subsidiaries of euro area banks, in turn exposed to the regulatory tightening of the European banking sector as a reaction to the vulnerabilities exposed from the financial market crisis. We should eventually all benefit from a stronger, better capitalized, and more resilient banking system.
However, in the short-term, the adaptation to this new regulatory environment presents challenges as a result of a few factors.
First, the deleveraging mode of several European banks in pursuit of higher capital ratios.
Second, the adoption of new lending standards at group levels that do not always reflect the peculiarity of each market.
Third, the criteria to be met to establish the equivalence in the regulatory and supervisory frameworks to benefit from lower risk weights are not clear.
All these factors result in different business behaviors between subsidiaries of euro area banks and other domestic and foreign owned banks, which is quite evident in Albania.
These spillover effects are not unique to Western Balkan countries, but have also affected other countries in the proximity of the euro area. The conference, therefore, benefits from the participation of some of these countries, like Czech Republic, Romania, and Switzerland, and their willingness to share their experience.
We have very distinguished speakers to discuss these topics in depth in the coming two days so that we can all benefit from the experience of each other. I am sure that you will be able to provide invaluable insights into these challenges and your policy response. It is my honor to welcome you all to Tirana.
I do hope you will find the conference useful.
To conclude my introductory remarks, let me take this opportunity to issue a few thanks to our long-term partners and conference co-organizers.
The Swiss Government via its State Secretariat for Economic Affairs – SECO – has supported the Bank of Albania throughout the years via various initiatives and the sponsorship of important technical cooperation projects. In the context of this well-established and successful cooperation, they are sponsoring the organization of this important conference.
I would also like to highlight the valuable technical assistance provided by the IMF, which has contributed to capacity building at the Bank of Albania throughout the years. This fruitful cooperation continues, as evidenced by the joint organization of this conference and some of our presentations.
Therefore, let me express our sincere gratitude to Ambassador Graf and Miguel Savastano, Deputy Director of the Monetary and Capital Markets Department at the IMF and author of seminal papers you are well acquainted with.
Gent Sejko, Governor of the Bank of Albania