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Inflation a bigger regional worry than credit crunch, says capital markets panel

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Herbert Stepic, Chief Executive Officer of Raiffesisen International Bank-Holding AG.

Cristian Popa, Deputy Governor of the National Bank of Romania.

Medet Sartbayev, Deputy Governor of the National Bank of Kazakhstan.

While the credit crunch has squeezed western economies, it has had a limited impact on most of the EBRD’s countries of operations, which are more concerned with rising inflation. So speakers at the Capital Markets Panel in Kiev concentrated largely on how they were tackling inflationary pressures rather than on the likely effects of restricted liquidity.

Russian Deputy Finance Minister Dmitry Pankin said his country’s banks had not required federal assistance following the international credit squeeze as the market had enough liquidity. “We are not worried about turbulence in the world financial markets due to our huge currency reserves. Our biggest worry is inflation. Last year it was 12 per cent and this year it looks to be the same,” he said.

In 2007, Russia’s budget expenditure rose 40 per cent and curbing that growth is not easy, the minister warned. “It is difficult to explain to the population that rising budget expenditure will make inflation go up and then the investment climate will be bad and we will lose in the long term. The short-term demand for pensions and in other areas is very high.”

Cristian Popa, Deputy Governor of the National Bank of Romania, said credit growth had been very fast and a “deceleration” was needed to bring the growth rate from around 50 per cent to around 20 per cent.

“We have had an increased inflation rate, which stands at 8.6 per cent at present. We have introduced measures to bring that under control,” Mr Popa said. “Policies need to work together to contain the imbalances in the economy.”

Ukraine’s year-on-year inflation rate hit a record 30 per cent in April. Oleksandr Savchenko, Deputy Governor of the National Bank of Ukraine, attributed this to rising food and energy prices and steep credit growth. “We introduced tighter monetary policy one month ago. The era of cheap money policy is finished in Ukraine.”

He predicted that bumper crops this year – which are expected to be 50 per cent higher than in 2007 – would have a dampening effect on inflation and help mitigate the worldwide food shortage. “Food represents 52 per cent of the consumer basket in Ukraine, so food prices have a big influence on inflation.”

Unlike most countries in the region, Kazakhstan has been deeply affected by the worldwide liquidity crisis. Nevertheless, Medet Sartbayev, Deputy Governor of the National Bank of Kazakhstan, predicted that his country’s economy would weather the storm. “Kazakhstan has enough exports to withstand all these challenges: oil, wheat, uranium and other commodities.”

After Kazakhstan, Ukraine is the next country in the region where funding will flow in at a much lower rate due to the credit crunch, according to Herbert Stepic, CEO of Raiffeisen International Bank-Holding. “The economies of emerging markets are still strong but there is a reduced readiness to grant liquidity,” he said. Nevertheless, this will bring some benefits.

“We see a cooling of the overheated lending process, for example in Romania, Ukraine and Russia, which experienced high credit growth fuelled largely by private consumption. That will come down due to the lesser availability of funds,” Mr Stepic said. “GDP growth will be reduced but still high. Lending will be reduced but banks will have time to breathe. Countries that have a solid economic policy will be less affected, especially where exchange rates are concerned.”

He added: “Governments and central banks need to be prudent to fight inflation. Primary deposits are needed. Lots of money is still hidden under pillows and mattresses, but it’s the cheapest source of funding.”

The final panellist was George Handjinicolaou, Deputy CEO of the International Swaps and Derivatives Association. He pointed to the importance for emerging economies of developing derivatives markets. “Countries coming into the global economy need to find ways to finance their activities and offer investors alternative opportunities.”

To that end, Mr Handjinicolaou urged countries in the region to introduce legal reforms to ensure derivatives contracts are legally binding. “You want to make sure that collateral is really enforceable,” he said. “We are prepared to work with authorities and institutional parties to see how we can bring to the fore this emerging part of the global economy.”

By Mike McDonough, Communications Advisor
19 May 2008