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International Monetary Fund. Middle East and Central Asia Dept.

As in other countries around the world, CCA banking systems were adversely affected by the global crisis, and credit growth has slowed sharply. Policymakers in many CCA countries have taken measures to address banking sector stress. This note discusses policy options for restoring credit growth and thus laying the foundation for a resumption of high and sustained economic growth . 1 In the short run, such options include aiding banks to repair balance sheets and providing liquidity injections under specific circumstances. In the medium term, policies

International Monetary Fund. Middle East and Central Asia Dept.

perceived as credible, thus exchange rate risks are muted. Figure 6.1 MENA and CCA: Banking System Vulnerabilities Sources: National authorities; and IMF staff estimates. Note: OE = oil exporters; OI = oil importers. Country abbreviations are International Organization for Standardization (ISO) country codes. 1 Includes only lending exposure. Indirect exposure via collateral or investments is not taken into account. 2 Includes government and other public sector deposits. Risks to financial stability are higher in non-GCC MENA oil exporters. Significant

Padamja Khandelwal, Ezequiel Cabezon, Mr. Sanan Mirzayev, and Rayah Al-Farah

has impacted the CCA banking systems adversely. Credit growth has declined and officially reported NPLs have increased in Armenia, Georgia, Tajikistan, and Uzbekistan. In 2020, profitability decreased in Georgia and Tajikistan. Looking ahead, a significant adverse impact of the COVID-19 shock on asset quality and capital adequacy is expected to materialize with a lag in some countries (see Teodoru, Akepanidtaworn, and Xu 2021 ). 3. Financial Cycles in the CCA and Their Economic Implications A financial cycle is characterized by comovement in key financial

Iulia Ruxandra Teodoru and Klakow Akepanidtaworn
The COVID-19 crisis raises the risk of renewed financial sector pressures in the Caucasus and Central Asia (CCA) region in the period ahead. Bank distress and its economic and fiscal fallout have been recurring features of many CCA countries, as seen after the global financial crisis and the 2014–15 oil price shock. Strong policy responses have delayed the full impact of the COVID crisis so far, but financial sector risks will increase once public support is phased out. If these risks are not preemptively addressed, banks’ ability to lend during the recovery phase could be impaired and there may be a need for costly public interventions, as in the past.
Iulia Ruxandra Teodoru and Klakow Akepanidtaworn

this paper are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management. Publication orders may be placed online or through the mail: International Monetary Fund, Publication Services P.O. Box 92780, Washington, DC 20090, U.S.A. T. +(1) 202.623.7430 publications@imf.org IMFbookstore.org elibrary.IMF.org Contents Executive Summary 1. Introduction 2. Key Macro-Financial Risk Factors in the CCA Region A. CCA Banking Systems—Key Features B. Credit Risk C. Currency Risk D

Iulia Ruxandra Teodoru and Klakow Akepanidtaworn

quantifies their relative importance. Chapter 4 discusses near-term challenges and lessons from past experiences in rebuilding buffers in CCA banking systems. Chapter 5 concludes and provides policy recommendations to deal with current vulnerabilities and help secure durable financial stability and sustainable credit deepening in support of economic growth in the region. 2. Key Macro-Financial Risk Factors in the CCA Region A. CCA Banking Systems—Key Features CCA financial systems are dominated by commercial banks performing traditional financial intermediation

International Monetary Fund. Middle East and Central Asia Dept.

Russian FDI is large in some countries (see Figure 7.1 ): Banking linkages—direct cross-border lending from Russia is relatively small, while the asset share of Russian banks is significant (in the range of 10 percent of total banking system assets) in some countries. 3 Azerbaijani and Kazakhstani banks have subsidiaries in Russia, but their assets are limited (about 2 percent of the home country’s GDP). Exchange rate movements (given the highly dollarized CCA banking systems) and declining remittance income could, however, affect CCA banks through the debt

International Monetary Fund. Middle East and Central Asia Dept.

.6 Recent Gains in Competitiveness (Real effective exchange rate, index, Jan 2008 = 100; upward movement indicates appreciation) Sources: IMF, World Economic Outlook ; national authorities; and IMF staff projections. Credit Growth Has Slowed Substantially and Financial Sectors Are Under Stress The global financial crisis has led to mounting stress in CCA banking systems, which has caused a sharp slowdown in private-sector credit (Section B.2). Stress arose from three sources. First, nonperforming loans increased as loan dollarization was high and unhedged

International Monetary Fund. Middle East and Central Asia Dept.

/depreciation shock tends to increase the currency mismatch in CCA banking systems ( Figure 3.1.2 ). Deposits in dollars tend to rise by 0.1 percentage point in response to a 1 percentage point increase in the nominal effective exchange rate (NEER) on impact, while dollar-denominated loans increase by some 0.07 percentage point (a somewhat puzzling result which requires further analysis). The countries with the highest elasticities are Armenia for the case of loans, and Kazakhstan for deposits. Figure 3.1.2. Response to a Depreciation Shock 1 (Percentage points, one period

International Monetary Fund. Middle East and Central Asia Dept.

interest rate—sensitive components of aggregate demand is relatively weak. In addition, the size of CCA banking systems, as measured by total bank assets to GDP, is much smaller than in other regions (with the exception of Kazakhstan), thus reducing the leverage of monetary policy in general ( Figure 1 ). Figure 1 Weak Monetary Transmission in the CCA Sources: National authorites; IMF staff calculations; and Mishra, Montiel, and Spilimbergo (2010), “Monetary Transmission in Low-Income Countries,” CEPR Discussion Paper No. 7951 (London: Centre for Economic Policy