Vladimir MUNTEANU: In 2018, the National Bank does not anticipate any economic shocks or surprises in the banking and financial sectors of Moldova.
Vladimir Munteanu returned to the National Bank in 2016, after having worked for 16 years, mainly, at the IMF and World Bank. Prior to that, between 1992-2000, he had held various positions at the NBM, the last one being the Director of the Department of Foreign Exchange Operations and External Relations, as well as a member of the NBM Monetary Committee. Currently, as the Deputy Governor of the National Bank of Moldova, he supervises such areas of high responsibility (although it’s hardly possible to identify any areas of low responsibility at the NBM) as monetary policy, banking operations and management of foreign exchange reserves, financial stability, economic and applied research, payment systems, combating the money laundering and financing of terrorism, as well as the coordination of technical assistance programs. The interview he gave to the InfoMarket agency on the eve of the new year we began with a discussion of the results of the NBM’s cooperation with the IMF.
InfoMarket: Speaking about the NBM’s obligations to the IMF regarding the implementation of reforms in the banking and financial sector and ensuring its stability, with what successes and, perhaps, failures, does the National Bank finish this year?
Vladimir MUNTEANU: Within the framework of the agreement signed with the IMF in 2016, 11 out of 16 preliminary actions fell to the share of the National Bank. They mainly aimed at strengthening the stability of the banking system, ensuring transparency of bank shareholders, improving the management of banks, reducing the banks’ risks through a change of risk management mechanisms. This program provides for 6 comprehensive reviews, which are to be conducted every six months, during which new obligations are specified. At the moment, the IMF Executive Board has already approved two reviews.
The BNM obligations supported by the IMF can be divided into two groups: one group refers to the National Bank, the second one - to the banking system as a whole.
To fulfill its mandate to its best abilities, the regulator must have independence; as a result, relevant legislative changes have been adopted in order to strengthen it, including the legal protection ensured to the NBM employees. Also, the management structure and the management of the NBM were significantly improved. Starting last summer, the NBM has a two-tier management system consisting of the Supervisory Board and the Executive Board. The structure of the Supervisory Board is worth noting: it is presided by the Governor of the NBM and includes two Deputy Governors, while four other members of the Board are external members, that were selected on a competitive basis and approved by the Parliament. Also, for the first time at the NBM, an Audit Committee was created with participation of independent experts. By the way, this type of structure was highly appreciated in many international forums in which we participated. It is designed to provide a system of checks and balances.
Apart from independence, the National Bank should have the right tools for the full implementation of the tasks assigned to it. For example, a risk monitoring system is being gradually implemented to ensure the successful management of banks’ activity, the macro-prudential supervision tools are being developed to ensure financial stability, as well as other necessary tools and procedures for the improvement of banks’ activity.
InfoMarket: The IMF Mission visited Moldova this November …
Vladimir MUNTEANU: Yes, and they came to the conclusion that, basically, Moldova met most of its commitments. And as a result, we reached an agreement at the experts level. The next stage consisted of the implementation of new requirements; this time they were four times fewer , although they were quite complex. The fact is that some prior actions imply a very serious technical component, they have their own specifics, therefore their implementation sometimes requires a long period of time and involve many stakeholders: for example, the development, discussion, adoption by the government and approval by the Parliament of new legal provisions. It is very important for us and our partners to make sure that these laws are correct in their essence.
It should be noted that on December 20th the Board of Directors of the IMF approved the second review, therefore, in the next days, we expect to receive the next tranche of financial assistance.
InfoMarket: The National Bank also has to meet a number of obligations to the European Union ...
Vladimir MUNTEANU: In recent years, the NBM has put a lot of effort in promoting the European integration.
Improving the legal framework and harmonizing it with the EU legislation is an important obligation. Over the past few years the following laws have been adopted: the Law on Payment Services and Electronic Money, the Law on the Payment System Settlement Finality and Settlements for Financial Instruments, the Law on Contracts and Financial Security. An important achievement was the adoption of the Law on Banking Activity, which will replace the existing Law on Financial Institutions, and through which the standards of regulation and supervision of the banking system will be updated. The Law on Bank Recovery and Resolution, the Law on Additional Supervision of Banks, Insurers/Reinsurers, and Investment Companies of the Financial Conglomerate; Law on the The Central Securities Depository were adopted. Currently, the NBM is working on a draft of the new law on financial stability.
InfoMarket: Can we say today that the long-standing vulnerability of the financial sector has remained behind, and that the financial system has restored after the banking crisis?
Vladimir MUNTEANU: I think that, to some extent, this would be an overstatement. However, it should be noted that the banking sector has stabilized, that there are indicators that already show an improvement of the situation. Despite the fact that the overall level of loans continued to decline over this year, the number of new loans and deposits began to grow, and the total assets of banks have grown significantly since 2015. We see solid indicators of capital adequacy and profitability of banks.
InfoMarket: That is, against the background of the stabilizing banking system, there are also signs of the customer confidence being restored?
Vladimir MUNTEANU: I think that’s true. At the same time, we realistically look at the situation and we work on multiple tasks simultaneously. The part of our work is not visible to the majority, but banks feel it. Through our communication with the mass media and the banks we get their feedback, which shows that the NBM has tightened its prudential standards and its approach to banks’ compliance with laws and regulations.
InfoMarket: After shareholder inspections carried out in the three largest banks and the actions and events that followed, the NBM has announced that it will also inspect all other banks by the end of the year on shareholders' transparency. Has this been done?
Vladimir MUNTEANU: Today, the National Bank carries out intensive supervision of two banks, Moldova Argoindbank and Victoriabank. In the case of the Moldindcobank, we resorted to the "early intervention" mechanism, and it turned out to be a success, although there were serious apprehensions at the beginning as it was the first time we used this tool. As for the rest of the banks, in five of them the National Bank has already completed its inspections, the results for some of them have yet to be discussed at the Executive Committee’s meeting. Three more banks will be inspected next year, but these are the banks whose main shareholders are foreign institutions: BCR Chisinau, Mobiasbank, and Eximbank.
InfoMarket: During this year, the NBM has gradually loosened its monetary policy, should we expect it to continue in the next year?
Vladimir MUNTEANU: Indeed, in its recent statements on the forecast of the medium-term inflation, it was noted that the NBM forecasts a rapid decline in the inflation rate over 2018. Accordingly, we decreased the core interest rate. Depending on the trends of the medium-term inflation, the NBM should act in such a way as to maintain the inflation target, calculated on the basis of the consumer price index, at the level of 5.0% per annum with a possible deviation of ± 1.5 percentage points. The impact of our actions can be felt only several quarters later. Once in a quarter, the NBM makes a new forecast based on the latest market developments, and makes a decision depending on the medium-term outlook. This is why the medium-term inflation forecast and early decisions on monetary policy are so important for the National Bank of Moldova.
InfoMarket: When Mr. Dorin Dragutanu was the NBM’s Governor, we asked him why we set our inflation target at 5%, while in Europe they use 1% or 2% target, and he answered that 5% is the necessary level of inflation for such emerging economies as Moldovan. How relevant is this statement today?
Vladimir MUNTEANU: I think it’s still valid. The country is now recovering from a rather deep crisis that affected many areas of life: the economic and financial crisis, exacerbated by external factors, including geopolitical ones. Following the recent banking fraud, the approach to regulating banks has also changed, as a result of which the entire system passes through rather complex structural changes. The real sector of the economy must go through structural changes to ensure sustainable growth. Nevertheless, I would like to see the signs in the economy that would allow us to return to the topic of the optimal level of inflation as soon as possible.
InfoMarket: Can we say that in the next year the banking system will be updated and that many old procedures will remain behind?
Vladimir MUNTEANU: I would say that we are confidently heading in this direction. We have already adopted the majority of legislative amendments, most necessary regulations have been developed as well, that is, the legal framework has been already created. What’s left is to implement it, and this is a key task that will take some time and has to done right. We expect that the country's three largest banks will attract new shareholders next year - the strategic investors, who will implement more efficient methods of work and will market new banking products; the above factors all combined should result in some material changes in banking business and a tougher competition in the market. As a result, both the customers of banks and the whole economy should benefit from such developments.
InfoMarket: How does the National Bank plan to promote non-cash payments in the near future?
Vladimir MUNTEANU: The government and state agencies make efforts to combat illegal payments, trying to stimulate payments through cards, including the payment of salaries. In cooperation with the World Bank, the NBM develops a program to promote non-cash settlements and a program to increase the use of non-cash settlements, as well as conducts the analysis of the shadow economy. In addition, the National Bank is at the final stage of preparing amendments to the law on non-cash payments. The law will provide for a number of measures for stimulating non-cash settlements, including the regulation by the National Bank of the amount of commission that banks charge for card payments, since there is a problem of very high commissions being applied right now. To be fair, it should be noted that these commissions do not depend only on our banks. Settlements for VISA and MasterCard are carried out through elements of these international systems, and these external commissions account for a significant part of commissions applied locally. The NBM, with the support of the USAID, has already analyzed the market, and it is not excluded that we will opt for the creation of an internal clearing system for Moldovan lei, to avoid using any external systems.
InfoMarket: Will VISA и MasterCard agree on that?
Vladimir MUNTEANU: We are not sure yet, but such practice exists in some countries. Besides, Moldova has a fairly well-developed network of companies that issue electronic money, the so-called "instant payments" - Mpay, Qiwi, etc. In Romania, for example, there is only one such company, while in Moldova we have seven. We also intend to modify the law on non-cash payments, which will be possible through mobile applications. There is a very good network of mobile services in the country, and I believe that the implementation of modern technologies is inevitable. Of course, we would like it to have happened yesterday, but first we need to adopt changes to the laws, regulations, prepare technological basis, etc. We do head in this direction. Recently, the NBM Governor and I visited Lithuania - it took them two years to implement these technologies. We aim to implement it faster.
InfoMarket: The government plans to devalue the Moldovan lei to 18.5 lei for $1 by 2020. Isn’t it too bold?
Vladimir MUNTEANU: With your permission, I will not comment on the exchange rate projections. We never do this, because the market can regard any figures as guidelines for the monetary policy of the NBM.
Since Moldova is a small and open economy, and applies floating exchange rate for the Moldovan Lei, the level of the exchange rate cannot be planned. At the same time, we monitor the market dynamics on a daily basis and, based on macro-indicators and periodic forecasts, make interventions on the foreign exchange market in order to mitigate any steep fluctuations. In addition, the competitive strength of our economy is not determined by the nominal exchange rate, but by the real effective exchange rate of our domestic currency against currencies of our main commercial partners. An effective real exchange rate is an indicator that represents both the weighted average exchange rates of Moldovan lei against the currencies of commercial partners and the difference in inflation rates with respect to them.
InfoMarket: As it was already noted more than once, this year the Moldovan lei exchange rate strengthens due to the increase in individual incomes and good exports figures ...
Vladimir MUNTEANU: Yes, over the past two years, the NBM has purchased about $ 800 million from the market as a result of the increase in foreign currency remittances to the country, including from labor migrants, as well as good agricultural performances recorded.
This year there was a significant growth (almost 19%) of foreign currency sales by individuals. First of all, this can indicate the improvement of economic situation in those countries where our migrants work. Although it is possible that this may also reflect the increase in the number of our citizens working abroad.
As for exports, excluding processed goods, they also recorded positive dynamics (+ 18.6%) for the 9 months of this year compared to the 9 months of the previous year.
InfoMarket: What is the probability of a sharp decline in remittances from labor migrants and, as a consequence, an increase in demand for foreign currency and depreciation of the Moldovan lei?
Vladimir MUNTEANU: Both the IMF and other international financial institutions forecast growth in the coming years both, in Europe and in the countries of the former USSR, where our citizens work. Accordingly, there are no prerequisites for a sharp drop in remittances, unless, of course, some significant unforeseen events will occur.
Given that remittances are mainly consumption-oriented, including consumption of imported products, the demand for currency from importers will also be determined by their dynamics.
As a rule, the decline in remittances causes, on the one hand, a decrease in the exchange rate of the Moldovan lei and prevents the growth of imported products consumption, which negatively affects the demand for foreign currency. On the other hand, the devaluation of the Moldovan lei has a positive impact on the competitive strength of exports. As a result, the trade balance improves, and the exchange rate stabilizes at a new level of equilibrium.
In any case, there are no grounds for concern for two reasons: the NBM has enough foreign exchange reserves to cover a possible deficit on the foreign exchange market (for more than five months of imports of goods and services); the dynamics of individual remittances from abroad also strongly correlates with the dynamics of imports: when remittances decline, the import of consumer goods and services also falls. Thus, the decline in remittances is partially offset by a decrease in imports, and the situation is leveled.
Of course, this is not a reason to relax, because, as I already noted, our economy still has to complete the process of comprehensive structural transformation, and, in order to achieve a sustainable economic growth it is extremely important to ensure that the current economic, financial and monetary policies are well thought out and balanced, especially in conditions of excessive structural liquidity in the banking sector. Provided the right approach is applied, this liquidity will be gradually channeled into lending of the real economy.
InfoMarket: Do you hold any confidential information about any possible surprises that we can expect next year?
Vladimir MUNTEANU: No such information. There are positive expectations only. Besides, the financial sector does not like storms and "surprises" ...
First of all, from January 1, 2018, Basel III comes into force. Accordingly, new approaches will be applied in different areas, starting with bank management, calculation criteria, capital adequacy, etc. New accounting standards IFRS-9 will come into force. But we do not foresee any shocks and surprises.
The new Basel III rules will be implemented in stages. Besides, some of the provisions of Basel III cannot be applied on the local market because it still has to develop in order to apply such tools. We have been working with banks in this direction since 2016. The departments of banking regulation and banks’ supervision of the NBM have worked with each bank individually, and all have already submitted us their implementation plans. We are working hard and getting ready.
InfoMarket: And are there any who are least ready?
Vladimir MUNTEANU: The implementation of Basel III rules is a process, and the first checks will not be performed on January 1, 2018; this is only the date when the new law will enter into force. The first indicators we will have by April, the next ones - by the middle of the year.
InfoMarket: We cannot overlook the issue of cryptocurrency. In its time, the National Bank has already expressed its position on this issue, drawing attention to huge risks associated with this phenomenon.
Vladimir MUNTEANU: Such warnings were published by many central banks of the world, including the European Central Bank and the Federal Reserve System. The positive aspect of using cryptocurrency is the possibility to employ the most advanced technologies. Apart from this, according to our opinion, the cryptocurrency is an extremely speculative and risky instrument.
Firstly, the monetary authorities do not issue cryptocurrency, therefore it is unclear who controls its issuance and what it is backed by. It is probable that its quantity is limited in order to create a greater demand, but this is speculative. Besides, bitcoin is characterized by extreme volatility (sharp fluctuations of cost), yet the market capitalization keeps growing – it has exceeded $ 400 billion.
Look at the huge work carried out by central banks in all countries of the world, and how much effort is invested in the coordination of foreign exchange and monetary policies at the international level, and yet the results are not always ideal.
Authorities in many countries think about instruments of regulating cryptocurrency, especially in terms of combating the money laundering and financing of terrorism.