Tuesday, 9 June 2009
Dear friends,
First of all, I want to apologize for my being late again, but I believe that was not my fault. We have just finished talks in the framework of EvrAzES which led to the signing of the Agreement on anti-crisis fund establishment. Russia will invest seven and a half of billions dollars, Kazakhstan – over one billion dollars, Armenia - one million dollars. These means will be spent on joint projects aimed at eliminating the negative impact of the global crisis.
As our Minister of Finance has already taken the floor, I shall try to reduce my speech which in principle takes up the conversation we had 3 months ago. For the construction of Armenia it is crucial for you have a clear idea of what we think about it. Why? Because the situation and forecasts vary every day and it is obvious that the ongoing anti-crisis actions have some operative character. From this perspective, it is impossible to formulate actions ahead because any action may be reconsidered in future. Therefore, it is very important for investors to understand how the Government is proceeding in this situation, and from this point of view, it is a unique chance to make our position predictable for you.
The implementation of the package of anti-crisis measures and the formation of the new model of society are two conceptually different positions. We have today discussed a set of anti-crisis measures together with the Head of the Government of Russia in a closed format. These are basically standard measures, proceeding from the logic of protected economy, that is we assume that it is the next cycle of crisis, which means that the governments and the central banks should conduct expansive policies, print much money, increase budget deficits, stimulate demand and thereby mitigate the consequences of the crisis.
But this approach has its opponents who think that in fact it is not the next stage of the crisis, instead we deal with the new economic model in formation which is not so much apparent at this point, neither it is clear what will the world be like after a new crisis. And from this point of view, as there is no complete vision of the future, it is impossible to develop an all-out concept of such anti-crisis action as would allow us to join this new model of society. For the time being, there are both pluses and minuses to the current situation.
The political situation in the country is stabilized, especially after the Yerevan municipal elections for which we have got the positive opinion of international observers. The opposition has won far fewer votes than during the presidential elections, which is supposed to stabilize the situation considerably. That is today Armenia lacks in such an aggressive opposition ready to go to the last that might lead to political instability. There is a certain stock of confidence in the Government on the part of international financial institutions, and those loans available from World Bank, the IMF, the Asian Bank, the EBRD are the proof of it. They have sharply increased the volumes of credits given to Armenia. Armenia’s regional rating remains stable amidst our neighbors’ lowering country ratings. It is first of all associated with the fact that we are attaching great importance to macroeconomic parameters, macroeconomic stability, and they actually deem we have sufficiently competent macro-management resulting in stable country ratings.
As far as exchange policy is concerned, you may know that we have operated a one-time national currency devaluation which was assessed as the best in the region by international financial organizations, because we managed to avoid all those negative consequences noticed in other countries. In particular, the financial sector did not suffer from depreciation, with no deposit outflow recorded so far. Moreover, we do not have any problems with the capital of banks, commercial banks’ liquidity is high enough, and the stability of the financial system is our comparative advantage. We are blessed with low rise in unemployment, and it is very important that the statistics we publish correspond to the facts, unlike other countries CIS. The IMF stated that some countries in the region have started drawing figures. We will refrain from such course of action. The logic of figure-drawing shows that the aspiration to be seen better consists in that these countries try to have investors, including major investors, have more favorable expectations for the future. While in fact it is fraught with serious consequences as in this way one can render bad service to these investors, and they can make incorrectly estimates about the situation and the risks to run.
The minuses are as follows: the global crisis is being protracted and nobody can tell when we shall reach the bottom. Therefore, it seems to be quite natural that our stock of resistance went down and due to this, macroeconomic parameters have lowered. The influence of Russia is much stronger than believed: first of all, this concerns remittances and investments, with about 85 % of financial injections coming from Russia. Here, the need for having a diversified economy comes to light. We have got a strong blow from the building sector, where we have a 30 % fall first of all in individual construction. Either the housing market has started to fall gradually. Of course, it cannot be compared to what is taking place in Russia: as yet we have had lower rates of recession in this area. It is connected with the fact that construction in Armenia is chiefly carried out with own resources rather than with borrowed funds. Practically, all sectors have experienced cutbacks in exports. The macro-situation is as follows: we have had a total of 9.7% fall in GDP over the past 4 months mostly due to shrinking construction as evidenced by corresponding indices.
Financial sector: The logic behind what we did in March consists in the following. Why did the international organizations find that we carried out a good enough transition from the floating rate to the fixed one and then from the fixed rate to the floating one? This approach was not applied in Russia and in Ukraine. As a result, the Central bank of the Russian Federation appeared to be in need of supporting Russian banks at the rate of 130 billion dollars so as to avoid a breakdown and much stronger capital outflow from Russia.
We have developed another strategy which might face certain risks in Kazakhstan, Ukraine, Russia, consisting in the flight of money from the banking sector and, first of all, from those accounts which were in national currency as everyone expected devaluation. Phased devaluation might lead to a panic: people would start withdrawing money from the banks to convert it into cash dollars at exchange bureaus. Then, they would think about where to invest them. This logic prevailed in many countries and, as we had not faced such a situation before, we have a rate enabling that the passive part which in was drams could be translated into dollars, and at that point we had about 50 % ratio of active/passive parts, in other words, 50 percent - in drams, 50 percent - in dollars. There was a period when savings in drams prevailed, and the ratio was 60 to 40 due to the fact that over the past 4-5 years we had had a strengthening national currency leading to increased savings in drams. And it was not but for such a sharp difference when people might change expectations and behavior reckoning that the national currency would go stronger, they should switch over to depreciation-oriented positions. We provided such a cushion and allowed for this ratio to change sharply. The ratio became 80 to 20 that is we currently have 80 percent in dollar deposits and 20 percent – in dram.
This policy of ours made it possible to avoid capital flight and provide for banking sector stability. As a result, the central bank had to convert into dollars a sum of about 700 million dollars. We had the needed reserves, and today the banking sector has a very high level of dollar liquidity, about 700-800 million dollars on corresponding accounts with commercial banks, they are ready to offer credits in dollars and, from this point of view, they do not have any problems whatsoever. They are facing problems connected with dram liquidity, which means that liquidity meets the normative requirements, although people want to have credits in drams while the banks are reluctant to such crediting. The situation is as follows as seen from this perspective, from a macroeconomic point of view: the real sector is experiencing specific problems – crisis-related problems. This means that real sector risks have sharply increased in Armenia for the past one and a half year. This also means that commercial banks estimate these risks, and that the behavior of commercial banks is very logical in these conditions. Higher risks lead to higher interest rates. But on the other hand, to get over the crisis the real sector needs long and risk-free money, while commercial banks are not prepared to such behavior because they assess the risks to run. And to overcome this emergency situation, State intervention seems to be necessary, namely the State should cover these risks and stimulate the flux of money from the financial sector to the real sector. All countries have faced this problem: both developed and CIS. Developed countries started applying unprecedented tools, with central banks applying new tools by means of which they offered money to commercial banks – such tools as would help money flow to the real sector, in particular by allocating liquidity to commercial banks, when central banks accept more of trade bank rather than government securities as a pledge, making commercial banks take interest to securities.
As the securities market is insufficiently advanced in Armenia, we have enterprises having released such obligations which the Central bank accepts for realization of repo transactions, but the number of such enterprises is insignificant, and this tool cannot be effective. Therefore we want to think up new tools which would help that this money got in real sector.
What tools can be? The first is a granting on the part of the Government of guarantees to real sector for reception of loans at commercial banks. That is the Government declares, that risks of return of the credit of this or that enterprise which has special value for our country, it incurs, and as there are no risks commercial banks under lower interest rates grant a loan. The second direction is State participation in the capital of enterprises to supply such enterprises with money resources.
Other direction is that we have made the decision to stimulate construction in Armenia, and for this purpose we give guarantees to those developers who satisfy to the certain parameters which we have published and if they these parameters, we give them a guarantee, and commercial banks give out to these developers - builders credits. The first such credit is already out with the government’s guarantee, and we hope that this process will go on because you may know that in general the multiplication effect of construction in a total national product the highest and if construction starts to work, and very much many sectors of economy which serve construction, start to work. Therefore, especially as seen from the point of view of Armenia’s economic organization, the boosting of construction in those areas of above 30% of project density is of paramount value to us. This is promoted also by our program on construction in a zone of earthquake, we this year shall allocate about 24 billion drams, and the next year too 24 billion drams from financial resources which we have received from Russia.
Basically, I last time to you told about a package of anti-recessionary measures, what logic is incorporated in this package of anti-recessionary measures. Now I can already report to you on concrete decisions which are accepted by National Assembly, the Government of Armenia. Basic value has a package of anti-recessionary measures which are connected to the tax laws. Our policy is very simple if it interests you, you can visit the government’s website or the website of the tax service where it is very precise and the program of reforms of tax sphere is in details painted. If to speak is simplified, first our purpose is a large business, these are oligarchs which taxes, as is known, do not like to pay, and we should create such field that all of them would be equal before the law.
The second direction is a creation of favorable conditions for small and average business, and we carry out serious enough and radical actions which soften tax burden for small and average business. We also have made the unprecedented decision, have forbidden all inspections and checks in small and average business, at us about 22 services which have an opportunity to carry out checks and supervision, we him have forbidden to carry out in 2009-2010 checks in small and average business.
The whole package of measures on granting tax privileges for stimulation of this or that sector, simplification of customs procedures, etc. is provided, but meanwhile to brag of results it is not necessary, because we actually need about 3 years to put in order tax administration. Also it is necessary, that there was a trust of people to tax system as a whole, and we can achieve it, if the large enterprises will pay taxes, and not only taxes will pay, but also their activity will be transparent that all members of a society were sure, that these large enterprises pay taxes.
How to achieve it? Here too we have made an unprecedented legislative decision which consists in that larger enterprises, irrespective of the form of the organization, are obliged to carry out external audit and to publish his results. We understand at what the annual turnover makes 500 million drams in one year and which capital makes 500 million drams as the large enterprises. It is no more than two millions dollars. And this means that about 600 enterprises the next year are obliged to publish results of audit on activity for 2008.
Now sharp enough discussion goes in National Assembly concerning the new legislative initiative of the Government which enables tax service to have tax representatives on 120-ти the large enterprises. In Armenia today about 160 thousand enterprises it is registered, from them 65 thousand are subjects whom taxes actively pay, from them 15 thousand are what make about 90 % of our tax gathering, and actually we are interested with activity only hundred enterprises. And because of these hundred enterprises where we want to introduce our tax inspectors, we now have sharp enough political debate in National Assembly.
You may know those large projects already started, among which the construction of a new nuclear power plant, the construction of the Armenia-Iran railroad. You may know that we have already signed an agreement with Iran on the start of railway construction works. Also, there is the construction of the Yerevan - Batumi regional highway, financed by the Asian bank, the National Assembly-approved formation of the All-Armenian Bank. Works in these directions are underway already. Power projects, there is a package in financial sector, this application of the tool of refinancing dram credits further. Thus we shall pour in through commercial banks dram liquidity in the industry, using this tool when we beforehand declare what credits are of interest to us and with what parameters. Knowing about these parameters, banks give out credits to these enterprises and then receive money in the Central bank. Refinancing occurs, and we now start for the new project on this mechanism.
For today the project of crediting of small and average business operates, and we expand those spheres where this mechanism will work, that is it will be not only the enterprises which meet to parameters small and average, but also large business will have too an opportunity to receive dram liquidity.
In agriculture we carry out subsidizing interest rates, and at last session of the Government have made the decision that we shall absolutely subsidize the interest on agricultural loans which are given out in frontier villages.
Here Minister of Finance already sounded figures - how many we shall receive credits, that is the problem today consists not that we do not have money, and that we do not have actually real and effective projects which we could finance because and at commercial banks very high dollar liquidity, and at the state it turns out that unlimited credit resources. But serious projects at us, unfortunately are not present, as we today have created anti-recessionary fund, where order 10 billion dollars. The problem is that it is necessary to develop competent business - projects and to receive credits under these projects. And, certainly, from this point of view very important that we could put in order our market that the competition was fair and that activity of the enterprises was transparent. Armenia - the small country and if any enterprise starts to swindle all about it at once find out. And at once the trust to the Government, tax inspection and to the competitive environment is lost and then to collect taxes begins very difficultly. Therefore reception of trust has for us paramount value.
The State policy priorities are fixed by the council on national competitiveness. I last time told you that we have created such new structure, which in logic of the Armenian world, because the council on competitiveness features not only representatives from the government, but also representatives of a private sector. We develop joint projects, and as priority directions in our Council on competitiveness we have fixed education, as the strategic purpose for us, public health services, and also development of tourism and the organized rest.
Now we pass to a package of actions which we carry out in the Armenian world on the basis of state-private partnership. We hope that the All-Armenian bank will start operating this year. We are investing about 20 billion drams in this bank and are going to engage private resources.
Luys Bank is a private bank which will be engaged in financing of educational programs, in particular, talented guys will receive an opportunity to be trained in the best high schools of the world and we shall finance them.
Start of project CANDLE is the international research center in the field of physics, he during realization, the project "Cyclotron" - manufacture of isotopes with subsequent use in medicine, the Belgian government has allocated to us about 18 million euro for this project, Tatev project -creation of a historical and cultural center near to Tatev monastery, this project too has got support of the council on national competitiveness. The initiator of this project is Troika-Dialogue Company, led by Ruben Vardanyan.
Last time we in Moscow have put forward idea of creation in Armenia the mirror enterprises, in particular, invited you that your knowledge, skills which you have saved up during the activity in Russia, you could transfer on territory of Armenia. Because crisis is simultaneously and chance for Armenia to involve capable people which these heavy crisis days are ready to organize business in territory of Armenia at direct support of the state as we for this purpose have necessary financial resources. Tax contracts for large innovative projects mean that we are ready to subsidize large innovative projects - about 20 percent of direct subsidies from the budget.
You are awaited in Armenia.
