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- For the year ended 31 December
- Treasury bills tra d ed (number
- Corporate bonds tra d ed (number of
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- ______________________________________ Source : ASE. Insu r
- PUBLIC DEBT AND RELATED MATTERS Overview
- Public Debt (1)
- As of and for the year ended 31 December 2010
- Public Debt 3,805.3 4,134.4
- Interest payments 86.6 105.9
- Principal payments 262.2 319.4
- Public Debt/GDP (%) (4)
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_______________________ Note:
(1) The ratio of reserves for loan losses to non-performing loans. Source: CBA. Between 2010 and 2014, non-performing loans have increased annually in absolute terms and as a share of total loans. As of 31 December 2013, outstanding non-performing loans increased by 36.5% compared to 31 December 2012 (or to 4.5% of total loans as of 31 December 2013 compared to 3.6% of total loans as of 31 December 2012), mainly due to an increase in watch category loans (loans which are past due by 90 days) and to a change in the accounting treatment of a large (performing) loan that was transferred from the balance sheet of an Armenian bank to the balance sheet of its parent company. Non-performing loans increased substantially in 2014 compared to 2013. As of 31 December 2014, outstanding non-performing loans increased by 88.1% compared to 31 December 2013 (or to 6.8% of total loans as of 31 December 2014 compared to 4.5% of total loans as of 31 December 2013), as a result of several factors, including high growth rates in loans, a slowdown in economic growth and a decrease in remittances. Banking Supervision Key Prudential Requirements The principal laws regulating the Armenian banking sector are the CBA Law and the Law on Banks and Banking of Armenia, dated 30 June 1996, as amended (the “Banking Law”). The Banking Law (i) sets out the list of permitted and prohibited activities for banks and (ii) establishes the framework for the registration and licensing of banks in Armenia and the regulation and supervision of banking activity. The CBA regulates financial institutions in line with risk-based supervision principles and organises banking supervision through specialised-function units. The CBA also has the authority to revoke the banking licence of any bank that becomes insolvent, as well as under certain other circumstances. The CBA is currently drafting amendments to Armenia’s prudential standards in order to introduce Basel III principles, and has developed an indicative time-frame for local implementation (in 2015, the CBA postponed implementation from 2017 to 2020 to give flexibility to banks to fulfill the new Tier II minimum capital requirements). In particular, steps are being taken in Armenia to improve capital quality, implement new approaches to liquidity risk management and improve corporate governance, all of which are designed to gradually harmonise the regulatory framework governing Armenia’s banking system with Basel III. To improve corporate governance, the CBA made certain amendments in 2013 to the legislation governing internal control procedures in Armenian banks. Pursuant to these amendments, banks are required to have separate risk management and compliance functions. The amendments are expected to assist each bank in the timely identification, measurement, control and monitoring of different risks. The new requirements will come into force on 1 July 2014. As of 31 December 2012, each commercial bank in Armenia must maintain regulatory capital of at least AMD5,000 million. A bank’s Tier I capital ratio, i.e., the ratio of Tier I capital to risk-weighted assets, must be at least 8.0%, and a bank’s regulatory capital ratio, i.e., the ratio of regulatory capital to risk-weighted assets, must be at least 12.0%. To reduce foreign currency-induced credit risk, banks are required to assign a risk weight to foreign currency-denominated loans that is 50.0% higher than the risk weight that would be attributed to an equivalent dram-denominated loan. This approach effectively raises the prudentially-mandated ratio well above the corresponding BIS (Basel I) requirement. These requirements were strengthened following a relaxation of certain prudential requirements during the global financial crisis. See “—Monetary Policy of the CBA.” From 1 January 2017, each commercial bank in Armenia will be required to maintain regulatory capital of at least AMD30,000 million, which is expected to lead to consolidation of the country’s banking sector. The following table sets forth certain statistics relating to capital adequacy ratios as of the dates indicated: Capital Adequacy Ratios
Banks are required to set aside sufficient capital to cover potential losses on loans and other assets, to review these provisions and to report them to the CBA on a monthly basis. CBA regulations set forth the provisioning requirements for the creation of loan loss reserves. For regulatory purposes, banks classify loans into the following five categories: (i) standard, (ii) watch, (iii) sub-standard, (iv) doubtful and (v) loss. Loans are classified based on the financial position of the borrower, the quality of the borrower’s servicing of the debt, the number of past due days and any other relevant factors. Assets are also classified by the CBA. In 2010, the CBA made changes to the provisioning requirements for foreign currency assets. Pursuant to these changes, each bank is required to make an additional 20.0% capital provision for foreign currency assets as compared to equivalent assets denominated in drams. For each reporting month, banks are required to maintain highly liquid assets equal to at least 15.0% of total assets. The minimum ratio of a bank’s highly liquid assets expressed in Group I currencies, which comprise the dollar, euro, Japanese Yen, British pound, the Swiss franc, Canadian dollar, Swedish krona, Danish krone and banking gold, to total assets expressed in Group I currencies is 4.0%. Should liabilities expressed in any Group II currency (being any currency that is not a Group I currency), exceed 5.0% of a bank’s total liabilities according to the month’s average daily calculation, then, for each Group II currency the following standard shall apply: the average ratio of highly liquid assets expressed in dollars, euros and the applicable Group II currency to total assets expressed in dollars, euros and the applicable Group II currency must be at least 4.0%. Banks are required to keep highly liquid assets for any reporting month of not less than 60.0% of demand liabilities for such reporting month. The minimum ratio of a bank’s highly liquid assets expressed in Group I currencies to demand liabilities expressed in Group I currencies is 10.0%. Should liabilities expressed in any Group II currency exceed 5.0% of a bank’s total liabilities according to the month’s average daily calculation, then, for each Group II currency, the following standard shall apply: the average ratio of highly liquid assets expressed in dollars, euros and the applicable Group II currency to demand liabilities expressed in dollars, euros and the applicable Group II currency must be at least 10.0%. A bank’s gross foreign currency position as a share of total capital must not exceed 10.0%. A bank’s maximum open position in any foreign currency as a share of total capital must not exceed 7.0%. The CBA performs stress tests at least quarterly on the Armenian banking industry. The tests follow best international practices and are designed to highlight the sensitivity of Armenian banks to changes in the credit or liquidity environment, to movements in interest rates and foreign exchange rates, and to changes generally in the macroeconomic environment (including possible contagion effects). Payment and Settlement Systems The CBA is empowered to assist banks in organising facilities for the clearing and settlement of interbank payments and may establish procedures and issue regulations relating thereto as it deems appropriate to ensure the efficient operation of the payment system. From 1996 to 2001, the interbank electronic payments system (known as BANKMAIL) and the Government securities accounting and settlements system (known as BOOKENTRY) were introduced, and the SWIFT system was put into more widespread use in international payments. A national payments and settlements system was developed in compliance with international standards, including the creation of a unified payment and settlement system, known as the Armenian Card or ArCa payment system. In 2013, an average of 64,000 non-cash payments were made daily in Armenia, on average equal to AMD138 billion per day. In 2013, compared with 2012, the daily average amount of non-cash payments carried out through the CBA’s payment and settlement systems increased by 10.0% (to AMD116.2 billion), while the number of daily transactions decreased by 9.0% (to 22,000). In 2013, the growth rate of non-cash payments was higher than the growth rate of GDP. As a result, the daily average non-cash payments/GDP ratio increased to 3.2% as of 31 December 2013, an increase of 0.6 percentage points (compared to 2012). In 2013, 108.0 million payment card transactions were carried out in Armenia, amounting to approximately AMD1 trillion. In 2013, non-cash transactions by payment cards amounted to AMD105.8 billion, an increase of 16.0% compared to 2012. Internet payments accounted for AMD24.3 billion of these transactions, of which card-to-card transfers comprised AMD121.4 billion and electronic commerce comprised AMD2.9 billion. In 2013, the total number of cards in circulation increased by 18.0% compared to 2012, reaching 1.6 million cards as of year-end 2013. In 2013, the share of non-cash payments by cards (including internet operations) in the total number of card transactions reached 9.5%, an increase of 0.4 percentage points from 2012. In 2013, compared to 2012, money transfers to individuals by banks and money transfer organisations (including SWIFT payments) increased by 5.0% to AMD941.2 billion, while the amount of outgoing transfers increased by 1.0% to AMD334.3billion. As a result, in 2013, net money transfer inflows totaled AMD607.0 billion, an increase of 8.0% compared to 2012. As of 31 December 2013, 19 commercial banks in Armenia provided and serviced payment cards; each of these banks also participated in the ArCa unified card payment system. In 2013, 85 new automated teller machines (“ATMs”) were installed in Armenia, with 1,255 ATMs in operation as of 31 December 2013. Commercial banks also installed 160 point-of-sale terminals, bringing the total number of such terminals as of 31 December 2013 to 6,834, of which 670 were installed in bank branches. In 2013, the number of payment cards increased by 18.0%, bringing the total number of cards in circulation to 1.6 million. The number of active ArCa cards grew by 15.0% in 2013 (compared to 2012), bringing the total number of such cards to 565,000 as of 31 December 2013. The number of international cards grew by 20.0% in 2013, with Visa, MasterCard and other international cards increasing by 25.0% (to approximately 652,000 cards), 13.0% (to approximately 300,000 cards) and 5.0% (to approximately 48,000 cards), respectively. Regulation of Accounting and Reporting Rules The CBA is responsible for promulgating accounting and reporting rules and procedures consistent with IFRS. The Law on Accounting of Armenia, adopted on 26 December 2002, sets out the basis for accounting and financial reporting in Armenia. AML Legislation Armenia’s first legislation designed to prevent money laundering and terrorism financing was signed into law in 2004 and came into force in 2005. The second piece of legislation on money laundering and terrorism financing -- the Law on Combating Money Laundering and Terrorism Financing of Armenia (the “AML/CFT Law”) -- was adopted on 21 June 2008, came into force on 31 August 2008 and was substantially amended in June 2014 (with such amendments entering into force in October 2014). The amendments implemented recommendations from the IMF and the Council of Europe’s Committee on Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (“MONEYVAL”) and pursuant to the 40+9 Recommendations of the Financial Action Task Force (“FATF”). The AMT/CFT Law defines the role and responsibilities of the CBA and its national financial intelligence unit, the FMC in the fight against money laundering and terrorism financing. The AMT/CFT Law also governs the relationships between various stakeholders of the AML/CFT system (including the FMC, law enforcement and supervisory authorities and reporting entities), as well as sets out the framework for international cooperation. The AML/CFT Law lists the entities that are required to disclose certain financial transactions, as well as regulates the scope of information that such reporting entities must provide. Under the AML/CFT Law, financial institutions, including all banks, are deemed ‘reporting entities’ and are obliged to file reports with the FMC on all non-cash transactions in excess of AMD20 million, all cash transactions in excess of AMD5 million and all suspicious transactions or business relationships, regardless of the amount involved. To assist reporting entities, the FMC has shared with them a matching algorithm programme that is designed to recognise key words, phrases and metadata related to suspicious individuals and entities, including those designated under applicable sanctions regimes. By Presidential decree, the Interagency Committee on Combating Counterfeit Money, Fraud with Plastic Cards and Other Payment Instruments, Money Laundering and Terrorism Financing (the “Interagency Committee”) was established in 2002. It is the principal forum for cooperation and coordination among the country’s authorities responsible for preventing money laundering and terrorism financing. It includes representatives of the CBA, law enforcement bodies, the Ministry of Foreign Affairs, the Ministry of Finance and the Union of Banks, among others. The main responsibilities of the Interagency Committee include (i) the issuance of policy recommendations in the sphere of anti-money laundering and terrorism financing; (ii) the development of strategies to implement such recommendations; and (iii) cooperation with applicable national and international authorities. In 2005, the FMC was established as an autonomous unit within the CBA and, for purposes of the AML/CFT Law, acts as an intermediary between reporting entities and law enforcement authorities. The FMC carries out its work in accordance with the AML/CFT Law, Government decrees, CBA resolutions, decisions of the CBA chairman and the FMC Statute, approved on 8 May 2009 by Decision No. 117A of the CBA Board, and guidance from the CBA Board. The primary responsibilities of the FMC are to (i) gather and analyse information from reporting entities, state bodies and organisations, (ii) refer suspicious activity to the relevant authorities for criminal prosecution and (iii) cooperate and exchange information with international financial intelligence units. There are four departments within the FMC – the Legal Compliance Division, the Analyses Division, the Information Systems Design and Development Division, and the International Relations Division. The FMC prepares quarterly and annual reports on its activities. Armenia is a member of MONEYVAL and maintains observer status within the Eurasian Group on Combating Money-Laundering and Terrorism Financing. Both of these groups implement and enforce FATF recommendations. In addition, since 2007, the FMC has been a member of the Egmont Group of Financial Intelligence Units (the “Egmont Group”), which provides the FMC with the opportunity to cooperate with financial intelligence units from approximately 150 countries and exchange information with these units through a secured system. The FMC participates in plenary sessions and working group meetings of the Egmont Group. Armenia actively cooperates with its international partners on matters related to sanctions. The CBA requires banks to conduct relationships with clients according to the “Core Principles for Effective Banking Supervision” (“CPEBS”) published by the Basel Committee on Banking Supervision. All banks and other financial institutions employ officers whose responsibility is to ensure internal compliance with CPEBS. The CBA is authorised to carry out on-site and off-site inspections of AML/CFT issues arising in the financial sector and has dedicated budget resources and personnel to carry out such inspections and communicate to the FMC any breach of the AML/CFT Law or related regulations. Representatives of the FMC are also involved in inspections carried out by the Financial Supervision Department of the CBA. Stock Market The Armenian Stock Exchange (“ASE”) was established in 2000 as a joint-stock company and is the only recognised stock exchange in Armenia. It was renamed NASDAQ OMX Armenia on 27 January 2009 after becoming a member of the NASDAQ OMX Group, Inc. in 2008. The following table sets forth certain statistics regarding trading on the ASE for the years indicated:
______________________________________ Source: ASE. Insurance Sector Under the CBA Law and the Law on Insurance and Insurance Activities, which was adopted in 2007, the CBA is responsible for the supervision of the insurance sector. The CBA also issues and revokes licences of insurance companies, registers insurance brokerage companies, sets minimum capital and other requirements for insurance companies, adopts corresponding regulations with respect to insurance supervision, examines insurers’ activities, imposes sanctions on insurance companies violating legal requirements and performs forced administration, liquidation and bankruptcy procedures. The CBA is a member of the International Association of Insurance Supervisors. As of 31 December 2014, there were seven insurance companies operating in Armenia; none provide life-insurance services. Three of these insurance companies have at least 50% foreign participation in its equity. In addition, as of 31 December 2014, there were two insurance brokers in Armenia. As of 31 December 2014 (compared to 31 December 2013), there was a decrease in the assets, liabilities and shareholders’ equity of insurance companies in Armenia, although levels remained higher than at 31 December 2012. Total assets of insurance companies equalled AMD43,421 million as of 31 December 2014, compared to AMD50,007 million as of 31 December 2013 and AMD38,351 million as of 31 December 2012. Total liabilities of insurance companies equalled AMD27,662 million as of 31 December 2014, compared to AMD34,038 million as of 31 December 2013 and AMD24,296 million as of 31 December 2012. Total capital of insurance companies equalled AMD15,758 million as of 31 December 2014, compared to AMD15,968 million as of 31 December 2013 and AMD14,054 million as of 31 December 2012. As of 31 December 2014, the largest insurance companies in Armenia in terms of net assets were Ingo Armenia and Rosgosstrakh Armenia. PUBLIC DEBT AND RELATED MATTERS Overview The Law on State Debt of Armenia (the “Law on State Debt”) defines the state debt of Armenia (the “Public Debt”) as the (i) aggregate debt incurred or guaranteed by the Government, state bodies and agencies of Armenia on behalf of Armenia; and (ii) aggregate debt issued or guaranteed by the CBA to non-residents of Armenia, foreign states and international organisations. The Public Debt is comprised of Internal Public Debt and External Public Debt (each, as described below). Public Debt may be incurred to finance the public deficit and provide liquidity to the Government, to support the balance of payments and replenish Armenia’s foreign reserves and to develop the country’s market for Internal Public Debt. Local governments are permitted to issue both domestic and foreign debt, although such debt is not part of the Public Debt (so that it is not an obligation of Armenia). As of 31 December 2014, Public Debt amounted to U.S.$4,441.5 million, of which U.S.$3,785.2 million was External Public Debt and U.S.$656.3 million was Internal Public Debt. As of the date of this Prospectus, over 90% of the outstanding debt from the 2013 Eurobond issuance is classified as External Public Debt. According to the Law on State Debt, Public Debt as of the end of a particular year must not exceed 60% of the GDP of the previous year. The ceiling for Public Debt is set out in the annual message on the budget (the “Budget Message”), which forms part of the draft State Budget. Under the 2015 Budget Message, the ceiling for Public Debt is U.S.$4,861.0 million, of which U.S.$4,037.0 million is allocated to External Public Debt and U.S.$824.0 million is allocated to Internal Public Debt. Under the MTEF for 2015-2017, the ceiling for Public Debt in 2016 is U.S.$5,343.1 million, of which U.S.$4,411.5 million is allocated to External Public Debt and U.S.$931.6 million is allocated to Internal Public Debt. The following table sets forth certain key statistics with regard to Public Debt for the periods indicated: Public Debt(1)
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