The The CCurrent urrent EEconomic conomic SSituation ituation and the and the RRole of the Central ole of the Central BBank ank

of BHof BH

Conference on the Current Situation in the Economic Sector of Una-Sana Canton

Kemal Kozarić. Ph.D. Governor of the Central Bank of BHIn Bihać, December 18, 2009

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Main Main EEconomicconomic Indi Indicatorscators in BH for 2008 in BH for 2008 andand 2009 2009

2008 July, 2009

GDP KM 24.7 billion

GDP per capita KM 6.435

Real growth rate 5.5% -3.0 %p

Average annual inflation 7.4% 2.0%p

Inflation, end of period 3.8% -1.4 % (October, 2009)

Unemployment rate in BH 23.4% 24.1%

Average salary at the BH level KM 752 KM 785 (September, 2009)

Real average salary growth 11.1% 7.9%

External debt KM 4.19 billion (16.7% BDP ) KM 6.65 billion (after SBA signing)

Current account deficit KM 3.67 billion (14.6% BDP ) KM 0.31 bilion. Q1

Import coverage by export 41.2% 44.4 %

Direct foreign investments (estimate)

KM1.3 billion

Foreign exchange reserves KM 6.29 billion KM 6.1 billion (December, 2009)

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How small and open economies can defend themselves from external shocks?

The response of fiscal authorities on the economic crisis caused by the external shocks (Stand-by Arrangement worth EUR 1.2 billion);

The response of monetary authorities (maintenance of liquidity, financial stability);

Commercial banks behaviour during the crisis; Vienna initiative (nine banks); The crisis influence on the citizens, clients and companies; Lessons: Do we learn a lesson for the future?

Key Key IIssues for Bosnia and Herzegovinassues for Bosnia and Herzegovina

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The worsening of economic indicators The worsening of economic indicators for BHfor BH

Domestic risks for financial stability have their sources in potential vulnerability of fiscal position of BH and in structure of current account deficit funding (GDP growth in previous years was 6% in average, while projection for 2009 is -3%).

The worsening of fiscal position in BH in 2008 is recorded as on income, so as in expenditure side (16%).

Previous decisions about social benefits. public administration salary increase and increase of current government spending in 2008 contributed to the fiscal position worsening on expenditure side.

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The worsening of economicThe worsening of economic indicators indicators for BHfor BH

In 2008, the deficit of current account amounted to KM 3.68 billion (14.6% of the GDP) and compared to 2007 it is increased primarily because of trade deficit deepening in amount of KM 1.33 billion.

During the first nine months of 2009, the export is reduced by 21.4% and import by 26.1%; foreign trade deficit decreased by KM 2.12 billion or 29.5% compared to the same period of 2008.

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With the analysis of products groups, manufactured in the domestic market we have found out the following data on import and export disproportion:

Products groups Export ImportTrade deficit

Group share indeficit

Export in

overall deficit

Import in

overall deficit

Food. of which: 121,426,885.5

511,413,763.5

-389,986,878.0

5% -1.6% -6.8%

products of meat, fish and crustaceans

21,950,915.1 89,223,123.4 -67,272,208.3 1% -0.3% -1.2%

sugar and sugar products 33,720,505.2134,428,440.

7-

100,707,935.51% -0.5% -1.8%

cocoa and cocoa products 11,319,848.0110,598,088.

2-99,278,240.2 1% -0.2% -1.5%

cereal based products 30,509,336.9131,001,258.

6-

100,491,921.71% -0.4% -1.8%

vegetable based products 23,926,280.3 46,162,852.6 -22,236,572.3 0% -0.3% -0.6%

Water 8,937,738.9123,834,400.

7-

114,896,661.82% -0.1% -1.7%

Beer 2,883,881.9122,795,308.

2-

119,961,426.31.6% 0.0% -1.6%

Vine 4,973,629.7 32,698,858.4 -27,725,228.7 0% -0.1% -0.4%

Tobacco and products 9,731,087.8138,209,027.

0-

128,477,939.22% -0.1% -1.8%

Drugs 33,292,049.1202,690,193.

9-

169,398,144.82% -0.4% -2.7%

Potential risks Potential risks forfor the the financial financial stability:stability:

Trade deficitTrade deficit

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Financial sector in BHFinancial sector in BH Financial sector in BH comprises:

Banking sector; Microcredit sector; Leasing companies; Insurance companies; Investment funds.

Financial mediators assets in 2008 recorded a significantly slower annual growth (only 5%) compared to the previous year (33.4%).

The assets increase in 2008 is recorded with all financial mediators except with investments funds (assets decrease by 28% in comparison to 2007).

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The structure of financial sector in BHThe structure of financial sector in BH Banking sector dominates in BH financial system. The

share of this sector’s assets in financial system’s assets in the end of 2008 amounted to 80.9%. An the end of 2008, 95% of overall assets and 88.4% of average share capital were concentrated in banks with majority foreign ownership. The big percent of foreign ownership is a potential risk, because the strategic decisions are made out of reach of BH monetary authorities.

Table 1: The value of financial mediators’ asset

 

2005 2006 2007 2008

Value, millions of

KMShare,%

Value, millions of

KMShare, %

Value, millions of

KMShare,%

Value, millions of

KMShare, %

Banks 1) 11.440 76.9 14.622 79.5 19.570 79.8 20.815 80.9

Investment funds 2) 1.793 12.0 1.553 8.4 1.762 7.2 1.225 4.8

Leasing companies 3) 660 4.4 1.025 5.6 1.378 5.6 1.600 6.2

Insurance and reinsurance companies 4) 676 4.5 708 3.8 853 3.5 890 3.5

Microcredit organisations 5) 314 2.1 486 2.6 946 3.9 1.213 4.7

Overall 14.883   18.394   24.510   25.743  

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Financial stability report Financial stability report The financial stability represents the state of financial

system that can apsorb shocks without significant disorders and whose function has no negative impacts on the economy.

Financial stability report (IFS) 2007 i IFS 2008 are available on www.cbbh.ba

IFS should influence on: The improvment of understanding (and encouragement of

dialogue) of the risks for the financial mediators in macroeconomic environment (awareness);

Warning of financial institutions and other acters on the market on a possible collective impact of individual actions (procycling);

Creation of consensus on financial stability and improving of financial infrastructure (creation of sinergy between all parts of the financial sector).

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Financial stability report Financial stability report CBBH quarterly compiles the selected indicators of

financial soundness (FSI) on state level for deposit institutions, based on the data which are provided by the entity banking agency for banks under their jurisdiction.

FSI are grouped in five categories:capital, the quality of assets, profitability, liquidity and foreign exchange risk.

An the end of 2009, FS indicators reported the reduction of their values, especially in categories as the quality of assets and profitability.

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Stress testsStress tests They represent the type of analysis that is used for the

identification of potential risks in system and the measurement of system capacity of shocks absorbing, which are less probable ,but have powerfull effects.

This type of analyses usually involves two types of scenarios: mild and extreme. The mild scenario covers both the credit risk and interest rates

risk. The stress test results do not indicate the risk that is present in case of shocks from mild scenario.

The extreme scenario includes, along with the credit risk and interest rates risk, also the foreign exchange risk and liquidity risk. The results obtained according to this scenario indicate that the probability of extreme scenario is very small.

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FSI for deposit institutionsFSI for deposit institutions Worsening of the bussines conditions, then the general

decline in population standard as a result of the economy crisis, led to significant increase of non-performing loans, which caused the worsening of assets quality (NPL 2.8% in total assets).

The increasing of non-interest expenditures by 6.5% at the end of the second quarter, 2009 compared to the same period of 2008 resulted in revenues decrease by 42% and thus in overall profitability of banking system.

Table 2: FSI for second quarter of 2008 and 2009   Q2 2008 Q2 2009

 Foreign owned

banksBanking system

Foreign owned banks

Banking system

Net capital per risk weighted assets (CAR) 14.7 16.1 15.6 16.3Non performing per total asset 1.9 2.0 2.8 2.8ROAA 0.2 0.3 0.1 0.1ROAE 2.8 2.5 1.4 1.3Non-interest expenditures per total income 90.5 90.4 94.3 94.4Liquid funds per total funds 31.8 32.2 28.2 28.5Net open position -3.8 -1.3 1.0 2.0

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Total claimsTotal claims

Loans (in KM millions)

Year Month Short-term loans Long-term loans Total loans

1 February 6 7 8(6+7)

2005 1,837.00 5,707.10 7,544.10

2006 2,218.10 7,089.80 9,307.90

2007 2,752.10 9,196.90 11,949.10

2008 3,724.20 10,825.70 14,549.90

2009 September 3,695.70 10,464.20 14,159.90

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Credit Credit abilityability and interest rates and interest rates Banks restrictive approach in crediting in 2009, the

extensive risk assessment Change of the focus from savings to consumption –

deposits claim led to significant increase of deposit and lending interest rates

Years Month

Interest rates for KM loans

Short-term loans Long-term loans

Private companies and associations

Population

Private companies

and associations

Population

1 February 3 4 5 6

2004   9.92 9.78 8.23 10.78

2005   9.03 9.32 7.69 9.91

2006   7.66 9.55 7.39 9.34

2007   7.03 10.54 7.13 9.95

2008   7.42 9.14 7.36 10.93

2009 September 8.28 9.82 7.87 8.99

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ClaimsClaims In the end of June 2009 total claims from non-

government sector noted 2.3% decrease compared to the end of the previous year and the annual growth rate of 1.5%.

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Claims and credit riskClaims and credit risk Interest rates growth for newly approved loans and old

loans with variable interest rate increases the risk of loans repayment.

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Capital market in BHCapital market in BH The fall of domestic capital market is caused by

economic and political situation in country, as well as, by the world economic crisis.

Turnover on both stock exchanges in 2008 decreased by 63% compared to 2007.

Reported decline in value of the shares in the end of 2008 in range from 60% to 70%.

Table 3: Market capitalization

  2006 2007 2008

In KM millions in % GDP In KM millions in % GDP In KM.millions in % GDP

SASE 11.405 59.65 15.518 71.71 7.809 31.11

BLSE 7.460 39.01 7.748 35.80 3.686 14.68

Total 18.864 98.66 23.266 107.51 11.494 45.79

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Capital marketCapital market

Net assets value of funds at the end of 2008 decreased by 30% compared to the end of 2007.

Future development of capital market will depend as on world markets events, so as on political and economical events in the country, on the efficiency of the privatisation process and the reform of the pension system.

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Insurance marketInsurance market Insurance market in BH is still not enough developed.

Lack of citizens habits to take the additional insurance, along with the the obligatory one.

Adverse economic conditions in the country.

Opposit to the assets, which have increased by 4.3%, the profit of the insurance companies decreased by 37.6% in 2008 compared to 2007.

Insurance premium in 2008 was 1.8% of the GDP.

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Insurance marketInsurance market

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Leasing marketLeasing market Significantly increased funding through leasing in

previous years.

Law regulations is hindrance for the leasing companies bussines throughout the country.

According to the laws on leasing in RS (November, 2007) and FBH (December, 2008), monitoring over the leasing companies bussines is done by the entity banking agencies.

At the end of 2008, leasing companies have tightened their criteria for assesing the creditworthiness of clients and shifted the focus of financing from the real estates to the movable properties, primarly vehicles and equipment.

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Leasing marketLeasing market

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Microcredit organizationsMicrocredit organizations Microcredit organizations bussines in BH is legaly

regulated since 2007 and the supervisors role of the microcredit sector is assigned to the entities’ banking agencies.

Microcredit sector assets in 2008 amounted to KM 1.21 billion, which is by 28% bigger than in 2007.

The largest part of MCOs assets is related to the loans (92.1%). and in the loans structure even 97.3% are loans to the households.

Profitability indicators in 2008 are on significantly higher level than in the banking and other financial sectors : ROA is 3.8% and ROE is 18.1%.

Significant risk for increase of the NPL.

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Recommendations for the financial Recommendations for the financial sectorsector

Further development of awareness that the financial stability is not only the responsibility of the Central Bank of BH, but all actors of the financial market and government policies.

To Develop the control in all segments of the financial sector.

To Keep working on further development of cross-border supervision.

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Recommendations for the real sectorRecommendations for the real sector To encourage development of the infrastructure in the field of standards, certification and quality in accordance with the EU regulations,To direct ourself on the development and strengthening of domestic capacitities, especially subsidies for food production,To develop the power supply capacities,Special attention should be paid to country´s export capacities and to the raw material component of export, this branch should not be exploited, instead, we need to focus on development and export of final products groups, To discipline the fiscal policy and maintain the budget balance,To perform the analysis of deficit and subsidize sectors, whose production can substitute the import.

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Recommendations for governmentsRecommendations for governmentsTo stop the policy of raising the salaries in the public sector, which is present from the beginning of the current year,The introduce the adequate exemptions and subsidies for the farmers, To continue the privatization process,To establish the strategy for development and preservation of domestic agriculture,To strengthen the activities to attract direct foreign investments,To create the appropriate social policy to protect the poorest,To keep working on long-term creation of the political stability.

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Thank you for your attentionhttp://www.cbbh.ba