Financial Stability Report No1 20 December 2010 - Banka Qendrore ...

Financial Stability ReportNumber 12. Executive SummaryThe global economy during the last two years experienced one of the most severe crises inits history, which started with the turbulences in the financial sector, leading to a generaleconomic crisis. Many developed countries entered into recession and financial sectordifficulties occurred almost in every country. The effects of the crisis were reflected also inKosovo, but the impact may be considered to have been moderate. Within the financialsector, Kosovo Pension Savings Trust (KPST) represents the most hardly hit sector, whichrecorded a substantial decline in the value of it investments in international financialmarkets during this period. Also, the performance of foreign banking groups that havesubsidiaries in Kosovo was affected negatively, but it was not reflected in the banksoperating in Kosovo. The global crisis was reflected in Kosovo also through the externalsector, where it was observed a decline of exports, remittances and foreign directinvestments (FDI). However, in the first half of 2010, the global economy performed bettercompared to 2009, as a result of expansionary monetary and fiscal policies taken in manycountries. As a result, most of developed countries are expected to record positive growthrates in 2010 and financial markets have started to recover. Improvements in the globaleconomy were reflected also in the economy of Kosovo during this period. In this context,the performance of KPST investments improved and it is observed a recovery of exports,remittances and FDI. These improvements reduce the risks of potential shocks to theKosovo’s economy arising from the external sector.The recent developments in Kosovo’s economy to some extent followed internationaldevelopments, which is typical for a small-open economy. In 2009 remittances, exports andforeign direct investments declined, with negative implications for the private sectorconsumption and investments. These developments increased the uncertainty of bankstowards the domestic economy, which was reflected in a slower credit growth. However, theincrease of public expenditures during this period to some extent compensated the negativeimpact of the contraction in private sector consumption and investments. As a result,Kosovo’s economy in 2009 recorded a positive growth rate of 2.9 percent according to theStatistical Office of Kosovo; nevertheless, this growth rate was lower compared to thegrowth rate of year 2008. In 2010, Kosovo’s economy is expected to record a real GDPgrowth of 4.6 percent (IMF program document), which mainly relies on the increase ofprivate sector consumption and investments. Kosovo’s economy continues to becharacterized with low inflation and budget deficit rates, while high current account deficitand high unemployment continue to represent a challenge. Overall, the economy of Kosovoduring 2010 is expected to have a better performance, which has positive implications forthe stability of the financial sector. In this regard, it increases the capacity of borrowers toservice their loans, thus contributing to the decrease of credit risk for the banking sector.This is expected to have a positive impact on the lending activity of the banking sector, thuscontributing to the further increase of consumption, investment and overall economicactivity.Kosovo’s financial system continues to be dominated by the banking sector, whose assetsrepresent 77.5 percent of total financial system assets. Total assets of the banking sectorrecorded a lower growth rate in the first half of 2010, which led to a slight decline in theshare of these assets to total financial sector assets. On the other hand, the share ofpension fund assets marked an increase, reflecting the better performance of KPSTinvestments abroad during this period. The market structure of Kosovo’s financial systemvaries in different sectors. While the insurance and microfinance institutions have amoderate degree of market concentration, banking market remains highly concentrated.Nevertheless, the degree of market concentration in the banking sector is continuouslydecreasing as e result of the continuous expansion of the activity of smaller banks, whichare increasing the competitive pressures in the market.| 11