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

Financial Stability ReportNumber 1region. Contrary to other countries in the region, also lending interest rates increased inBulgaria jointly with significant increase in deposit interest rates. This development wasnot observed in other SEE countries where only deposit interest rates increased in order tostrengthen domestic sources of financing. Because of an increase of domestic sources offinancing together with restrictive lending policies due to economic uncertainties, bankingsectors in the SEE countries turned out to be net exporter of capital. This is primarily truefor Kosovo and Albania where banks have been experiencing excess liquidity problems inrecent years. That might come as surprise as these are also countries which are the leastdeveloped in the region. This fact points out the important conclusion stating that it is notnecessarily the development of the financial sector which mitigate the growth potential inthese countries, and that one should look at other factors determining the growth in theSEE countries.The SEE countries have been affected by the global, but not in a way of financial contagion.Nonetheless, it represented turmoil which took place due to a lack of demand in most EUtrading partners and declining global commodity prices. The financial markets in the SEEcountries have experienced indirect negative impact through the decline of the foreigndirect investments, transfers from remittances, and restricted bank’s lending to the privatereal sectors. Therefore, the decline of the economic growth is likely to be greater in the SEEcountries than in the advanced economies where the crisis really originated. However, oneshould not overlook other factors determining the growth revival in the SEE countries asexplained below.8.5 Growth Potentials in the SEE CountriesAs it was shown, the SEE countries have established macroeconomic stability and pursuedfinancial market liberalization as suggested by early reformers in Central and EastEuropean countries. They all chose the monetary and exchange rate regimes which suitedtheir policy makers the best. They have all opened up the financial sectors to foreignerswith intention to be more integrated into financial markets and primarily because thosesectors almost did not exist before. Most countries have extensively started to export to EUmarkets although the structure of their exports still reflects relatively low level of economicdevelopment. As claimed before, the exports structure of these economies contributedsubstantially to less preferable economic development in recent years as raw materialprices helped to bring down inflation rates in the SEE countries, but negatively affectedcurrent accounts.Also, dependency on EU exports demand negatively affected growth dynamics in the region.Table 13 presents intra-regional trade flows which are relatively weak and request furtherexplanation. Namely, although landlocked the countries in region trade among each otherrelatively little. With similar exports structure they do not find their trade patterns ascomplements but rather compete with each other on primarily EU markets. Regionalcooperation is further mitigated by pending political problems which prevent theseeconomies to fully exploit their growth potentials.| 71