The CBBH Governor Senad Softić, Ph.D. for Anadolu Agency: Next year will be very challenging: 12/30/2022 Tweet The Governor of the Central Bank of Bosnia and Herzegovina (CBBH), Senad Softić, in an interview to Anadolu Agency (AA), said that the next year, 2023, would bring higher interest rates on loans, and because of that, as he stated, "the year ahead can be quite uncertain, marked by the restructuring of interests and business plans and policies, both for banks and their clients". Softić answered questions about the situation in the CBBH, about his role, about BH currency stability, and about the year we are leaving…. "The year at the end, and everything that it brought with it, was the continuation of a longer, challenging period. The situation also this year demanded that all of us, individually and together, put in a lot more effort in order to, in addition to everyday ones, realize a series of additional and extraordinary obligations, striving to achieve the best possible results, meet deadlines, improve operations. During 2022, the Central Bank of Bosnia and Herzegovina celebrated a very significant jubilee, specifically 25 years of existence and successful work contributing to macroeconomic, monetary and financial stability in the country. In the coming year, the Central Bank of Bosnia and Herzegovina will continue to be focused on performing its primary roles and tasks," Softić pointed out. When asked about interest rates, Softić said: "According to theory, when the reference interest rates of the world's leading central banks rise, domestic interest rates are expected to rise." - The era of low nominal interest rates is behind us – "In the current environment, banks will certainly have a certain motive to increase the interest rate on loans, partly because a part of the existing loan contracts are made with a variable interest rate, but also because of the global increase in interest rates, though this increase should be minimal. It should be borne in mind that the increase in interest rates on existing loans could result in an increase in loans with repayment issues and an increase in costs for banks on this basis, and further reduce the demand for new loans. Because of this, the coming year may be quite uncertain, marked by the restructuring of interests and business plans and policies, both for banks and their clients. However, in the medium and long term, the era of extremely low nominal interest rates is certainly behind us, and the interest rates will reach higher levels compared to previous years, and they will remain at higher levels for a longer time," stated Softić. Regardless of the big challenges, especially in the last three years, he underlined that the CBBH has successfully performed its legally stipulated tasks and obligations. "The full coverage of the domestic currency with the euro was always guaranteed. During periods of extraordinary pressure from clients on commercial banks at the very beginning of the pandemic, as well as the outbreak of the war in Ukraine, all the demands of the banks were always fully met, and it involved significant amounts of cash, convertible marks, but also euros. We adapted to new circumstances, and all functions, including the functioning of payment systems, ran smoothly. We were recognized by international institutions as an authority that, even in all challenging periods, significantly contributed to the fulfilment of the country's obligations in numerous processes and arrangements. We adjusted our investment policy in a timely and appropriate manner, in accordance with the trends in international financial markets, thereby strengthening the integrity of the currency board in very volatile times, such as this year," said Softić. He also referred to the credit indebtedness of companies in BH with commercial banks, which, as he stated, had amounted to KM 8.98 billion at the end of October 2022 and had been higher by KM 351.9 million, or 4.1 percent compared to the end of 2021, when it amounted to KM 8.63 billion. - Record levels of foreign exchange reserves - "Observed on an annual basis, the debt of companies at the end of October 2022 recorded an increase of KM 369.9 million or 4.3 percent. We expect that banks will continue to work with their corporate clients on formulating appropriate credit products. Banks have a good capital base, which gives them the possibility to take on a higher level of risk and to lend to the economy during the crisis period. What we would like to see is stronger credit growth caused by greater economic activity," said Softić. He stated that the foreign exchange reserves on November 30, 2022 had amounted to about KM 15.9 billion, adding that during 2022 they had recorded record high levels. "In the management of foreign exchange reserves, special attention is paid to the management of contingent risks. Circumstances on the international financial markets are significantly different compared to the beginning of the year, in terms of yields starting to rise significantly. Finally, after a long period of low and negative interest rates, which began in 2014, we left them in this year. From the aspect of investing, it brings its own challenges, but in accordance with the mandate defined by the Law, the Central Bank of Bosnia and Herzegovina continuously takes measures to adjust the portfolio, all with the aim of preserving the value of net foreign exchange reserves, i.e. monetary stability of the currency board, according to the best world practices. When investing foreign exchange reserves, the CBBH takes into account all relevant available information and expectations of market trends, primarily from the financial markets of the euro area, since, due to the framework established by the Law, foreign exchange reserves are almost entirely invested in the euro area financial market. In accordance with this, we have timely and adequately positioned ourselves for yield growth, in the context of the portfolio structure. This adequate positioning means, among other things, reducing the holding of assets that are subject to strong fluctuations in fair value, such as gold. Currently, in the portfolio of foreign exchange reserves, monetary gold is represented by only one percent. The funds were diverted into the assets which, unlike gold, bring interest income," said Softić. He emphasized that all accumulated profit from previous years has been in general reserves, which make up the largest part of the capital and reserves of the CBBH, and which protect the stability of the domestic currency. "An adequate amount of capital and reserves serves to absorb and mitigate shocks in case of possible unexpected and unpredictable events for every financial institution. In accordance with the Law on the Central Bank of Bosnia and Herzegovina, capital cannot be subject to distribution," stated Softić. Given that one of the demands of international financial institutions is that the Central Bank of Bosnia and Herzegovina has a greater role in controlling the banking sector, Softić clarified the assumed role of the Central Bank in this matter. Successful banking coordination - "The laws define that banking supervision is at the entity level. Also, in accordance with the Law on the CBBH, for the purpose of preserving the stability of the banking and financial system, the banking coordination was established, including Entities' Banking Agencies, the Central Bank of Bosnia and Herzegovina and Bosnia and Herzegovina Agency for Deposit Insurance. Our mutual cooperation is supported by the cooperation and support of the state and Entities' Ministers of Finance, and we all cooperate within the framework of the Standing Committee for Financial Stability chaired by the Central Bank of Bosnia and Herzegovina. This successful cooperation has proven to be good, especially in recent years during which we were exposed to crises. As one of the last examples of joint activity and action, I cite the successfully completed restructuring procedure of Sberbank BH d.d. Sarajevo and Sberbank a.d. Banjaluka at the beginning of this year, which occurred as a result of the war in Ukraine. Through joint action, we removed all earlier risks associated with the previous owner, the stability of the banks was preserved, the protection of clients and depositors was ensured, and thus the stability of the entire banking system in Bosnia and Herzegovina was achieved and, most importantly, such a message was sent to the public," said Softić. The Governor of the CBBH also said that there have been more than enough funds for lending in the system, and sole domestic sources have been currently sufficient to support the stronger activity of commercial banks. "At the same time, banks' exposure to the government sector, securities and loans, in proportion to total bank assets, has been stagnating for several years, now. In October 2022, banks' exposure to the government sector accounted for 8.1 percent of the banking sector's assets. We do not see that the government sector is pushing out the private sector from the commercial banks," Softić assessed. While forecasting on the trends in upcoming 2023, Softić said: „There will be no recession“ and „We project certain GDP growth“. "It is not „too wise“ to give definite projections, because we are not in a classic business cycle and uncertainties are very pronounced, and significant factors are influenced by global trends. One thing is certain, the next year will be very challenging. It is realistic to expect a significant slowdown in economic activity, but we do not expect a recession in 2023. According to the latest macroeconomic projections, in the coming year we expect real GDP growth of 0.9 percent. In addition to the above, our economy is strongly influenced by the economies’ trends of our main trading partners, where slowdowns are expected." said Softić, and added: "When we talk about economic growth, what is important is that we also see some factors that could result in a significant upward revision of the projection of economic activity in the coming years. The granting of candidate status for membership in the European Union (EU), especially if it is accompanied by a strong reform momentum in Bosnia and Herzegovina and by adopting consolidated budgets for all levels of government, could generate significant growth in economic activity. At the same time, growth in economic activity would not necessarily be accompanied by growth in inflation. I believe that, already in the medium term, a serious commitment to improving macroeconomic conditions and the business climate in country, resulted in the weakening of negative trends on the labour market and the growth of private investments, which, I believe, we all hope for". - Acknowledgments to the Central Bank of Bosnia and Herzegovina - Governor Softić also reminded about the recent award given to the Central Bank of Bosnia and Herzegovina for the best bank management in Central and Eastern Europe and for an exceptional contribution to the economic development of Bosnia and Herzegovina. "It is a pleasure when the efforts of the Central Bank of Bosnia and Herzegovina are recognized. Confirmations of the good work of the CBBH also came from international financial institutions - the International Monetary Fund, the European Central Bank, the European Commission, rating agencies and other institutions that emphasize the importance and role of monetary policy and of the currency board, which enjoys credibility among the public and is a key condition for monetary stability, and thus a prerequisite for macroeconomic stability in the country. In this regard, recommendations were made to continue protecting the integrity of the currency board and the independence of the CBBH. In addition to the unquestionable fulfilment of currency board basic functions as the monetary authority, the CBBH has always, within its mandate, contributed to the fulfilment of the country's internationally assumed obligations. There has been particularly emphasized the reputation of the CBBH in domestic and international circles as a quality and credible source of data, of information and analysis that is exchanged through cooperation with relevant institutions or distributed publicly through the dissemination of data and regular publications. The very fact that the CBBH is reputed to be the most stable and one of the most successful institutions is recognition for everything we have done in the last three, extremely difficult years, but also an obligation to constantly improve the existing standards. The successful implementation of all tasks and activities would not be possible without the maximum professionalism and engagement of all members of our institution. Capital Finance International recognized all of this and awarded CBBH with two awards for 2022. I would especially like to emphasize the contribution of the members of the CBBH Governing Board. Acknowledgments are confirmation that we work well and in the interest of citizens, the economy and the state, but even without recognition, our path would be the same. And that's why we strive for the Central Bank of Bosnia and Herzegovina, that is, all of us together, to continue to carry out tasks and obligations in the way we have done so far - successfully, dedicatedly and responsibly," concluded the Governor of the Central Bank of Bosnia and Herzegovina, Senad Softić.
