THE BALKAN REGION has so far seen little in the way of negative effects from the credit crunch. Growth has remained strong. In Croatia, for example, real GDP growth reached nearly 6%, according to the IMF. This growth was largely the result of surging domestic demand. As income expectations rose in the wake of economic growth, so too did financial activity among consumers. In Serbia, where GDP growth was 7.5% last year, the average net income in 2007 was 19.5% higher than in 2006, according to the National Bank of Serbia (NBS). With the expectations and promises following that country’s national elections in May of this year, employees’ income expectations have not fallen with the downturn in the global economy, especially considering that real net wages growth for the first six months of 2008 was up 4.3% compared with 2007.
The retail lending boom that was in evidence last year was caused partly by this high level of consumer confidence and by the arrival of large foreign banks, which now dominate the region. "Over the last few years, foreign banks have rushed in," says Michael Mueller, chief executive of RZB in Bosnia and Herzegovina. "Now over 90% of banking assets are in foreign hands, which makes competition in the market quite tough."
These institutions have been lending aggressively in the region as a way of gaining market share, diversifying risk, reducing credit concentration on the balance sheet and raising income. In the FYR Macedonia for instance, total gross loans to non-financial entities have been growing at an average annual rate of 29.1% over the past four years, with the biggest rise, 39.1%, in 2007.
The effect of combining the banks’ willingness to lend and the consumers’ desire to borrow created a credit environment that had not been seen before in the region, and had most certainly not been negotiated through a global economic downturn before. In response, the region’s policymakers implemented a number of measures, macroeconomic and supervisory, to contain the boom and offset any negative impacts of a possibly forthcoming downturn. But those efforts have been hampered by the lack of experience in the Balkan banking industry.
Euromoney was not the only one sounding the alarm. In late 2006, the IMF said that adequate enforcement capacity, a regular exchange of information between the region’s policymakers and good relations between the regulators and banks would be vital to effective implementation of any policies.
The policymakers were listening. In Serbia, the issue of cooperation on a national level with banks and at a regional level with other policymakers is high on the NBS’s agenda. "Domestically, the NBS, as the key policymaker for the majority of the financial system, has very positive experience with exchanging information and goals with the market," says Mira Eric-Jovic, vice-governor at the NBS. "The bank has several memoranda of understanding signed with other national monetary and supervisory authorities."
That memorandum of understanding is an agreement among 10 authorities: the Serbian central bank and the central banks of Greece, Macedonia, Slovenia, Albania, Bulgaria, Cyprus, Romania, Montenegro and Bosnia and Herzegovina. It is an agreement on high-level principles of cooperation and co-ordination. "The purpose of this memorandum is to promote a more structured cooperation in the field of banking supervision in order to enhance financial stability in southeastern Europe and to improve the effectiveness and efficiency of supervisory measures," says Milica Stojanovska, director of financial stability in the banking regulations and methodology department of the National Bank of the Republic of Macedonia.
Lack of coordination
The memorandum provides grounds for exchange of information in crisis situations and defines the roles and responsibilities of the relevant supervisors, recognizing the cross-border implications that an impending national crisis might have. Besides the exchange of information, the cooperation involves regular meetings of the contractual parties. But the memorandum might not be effective, and there is scepticism among the region’s bankers that the authorities really are working together effectively. "We’ve not seen much of that frankly," says Mueller. "Even within Bosnia, it is not very well coordinated between government and industry. But we hope that will come once all come closer to EU accession."
Many countries will look to their impending EU accession as a panacea to a plethora of financial worries. All European countries that are not EU members are working towards it. In Georgia, the president recently gave a speech in front of an EU flag, despite that country being some distance away from potential accession. In the Balkan region, Croatia, Turkey and Macedonia are candidates for accession, while Serbia, Montenegro and Bosnia and Herzegovina are listed as potential candidates. The prospect of increased contact with other EU nations is a big boost to the region. Many people from, for example, Romania have emigrated to countries such as Spain and Italy, from where they repatriate funds.
Thus far, the accession process has been relatively unaffected by the world’s economic downturn, according to Eric-Jovic at the NBS. "Due to the fact that major foreign banks that operate within the Serbian market were not significantly affected by last summer’s crisis, thus projecting only small-scale negative influence on the Serbian economy as a whole, we can say that our priorities and timelines projected prior to the downturn have not changed over the past months," she says.
But there might be stumbling blocks to EU accession and the financial safety and greater communication with other European regulators that it promises other than ill health in the banking sector. Bulgaria, an EU member since January 2007, has been issued with a strong indictment of corruption by the European Commission. The EC said that the fight against high-level corruption and organized crime was not producing results. Although it omitted threats from earlier drafts to delay moves toward the single currency, the EC did suspend hundreds of millions of euros in aid and barred four Bulgarian agencies from handling EU funds.