BoA says increased risk level

TIRANA, Sep 29 – The central bank of Albania issued last week the 2007 Financial Stability Report that makes an analysis of the characteristics of risks in the financial activity of Albania showing an increased general level of risk.
This is the first issue of the Financial Stability Report, which will be published by the Bank of Albania on annual basis.
The risk spectrum has expanded during 2007 and the same tendency is expected to be maintained during the present year as well, attributed to the further growth of investments of the financial system in assets with higher return (and risk), to the domestic developments in the economy, to its opening and to the gradual integration with the regional and global financial markets.
But it also said that the financial system is presently protected from risks arising from internal developments and regional and global ones, adding no risks that may be materialized or which may harm abruptly and severely the activity of the financial system are identified.
It recommended to the regulatory authorities of the financial market, the financial institutions and to the public at large to enhance their supervisory prudence.
The report detects and assess the risks the financial system and its infrastructure are faced with, and in order to provide the public authorities with the possibility to identify the relevant measures for the necessary corrections.
During the year 2007, macroeconomic indicators had a stable performance, similar to the trend of the past several years. Annual economic growth is expected to be close to 6%, as in the previous years, despite the trade deficit deepening. As of end 2007, the Albanian Government met the objectives related to the level of income and public expenditure, budget deficit, and to the extent of financing of a part of expenditure with financial market domestic sources.
Monetary policy responded to the inflationary pressures which became more pronounced in the last quarter of 2007.
In addition to the negative effects on producer cost and money supply arisen as a result of the dry weather in summer and autumn and of the deteriorated energy situation at home, there were other negative consequences arising from the difficult situation the global markets of raw materials, energy and foods were going through. The inadequate structure of domestic production and the dependence on import remain among the factors which damaged the protective mechanisms of the Albanian economic to the regional and global developments.
In order to prevent the persisting inflationary pressures, the Bank of Albania raised the key interest rate on repurchase agreements twice to 6.25%. As of end 2008, the annual increase of the CPI reached to 3.1%, which is within the targeted band of the Bank of Albania and close to the 3% objective. During this period, the situation in the forex market presented as stable. The exchange rate of the lek to the foreign currencies fluctuated within the historical intervals for the period, reflecting at the same time the situation in the international financial markets.
The macroeconomic indicators for 2008 are expected to be within the objectives for a similar economic growth to the year 2007; however, there is greater vulnerability of the macroeconomic equilibrium to sectoral Financial Stability Report 2007 Bank of Albania performance, global economic growth and to the fiscal and monetary policy stance. Economic growth continues to benefit from the growth of banking credit and from the focus of government expenditure on investments which in turn improve the overall level of productivity. On the other side, the increased producer cost as a result of certain factors related to the raw materials prices and energy, the plausible trade deficit growth and the probable slowdown in the regional and European economic growth will have a negative effect on the Albanian economic growth. The year 2008 is characterized by the projection of a considerable government budget. At the same time, the need to finance several important investments will lead to an increased budget deficit.
Expenditure and budget deficit increase will trigger inflationary pressures in economy, which are expected to be active throughout the year, also given the continued unfavorable situation in the global markets of energy and foods.
Given the poorer performance of some sectors of the economy, construction for instance, this development may add to their difficulties.
Through its monetary policy, the Bank of Albania will attentively attend the effect of various economic developments on the level of prices and will timely and duly act with the necessary instruments in order to prevent the constancy of plausible inflationary pressures.
The economic openness and the integration of the Albanian financial system into the regional and global markets increase the vulnerability of our financial system to the unfavorable developments in the economic region and in the foreign markets. Despite the financial integration, the investments of distinguished and large financial and banking groups of developed countries in the emerging markets still represent a small share to the total group value.
This and the absence of developed markets in emerging countries have curtailed the influence of the financial crisis on these countries, at least in the short-term.
The recent figures for Albanian banks held by European banking groups do not reflect financial losses or issues originated from the financial crisis the developed markets are going through. The good liquidity situation of banks operating in Albania and the very limited use of group’s financing are additional factors which do not allow the transfer of elements of this crisis to banks and other financial instruments in the country.
However, the transfer likelihood of the financial sector crisis to the real sector of our partner trading countries remains a potential risk for the Albanian banking sector.