Central Banker of the Year 2015

Central Banker of the Year, Global and Americas

Julio Velarde, Peru

Much of Peru’s recent economic success is due to the country’s open-market attitude and a development model based on investment – its investment rate is 28% of gross domestic product (GDP). But this success is also explained by the buoyant commodities cycle of the past decade. This has now started to slow, making monetary policy that much harder.

The Banker recognises the efforts and achievements of the Central Reserve Bank of Peru, which navigated through the changed environment with speed and orthodox measures. Furthermore, it intensified its work to move credit away from foreign currency and improve the stability of the country’s financial system – something that, because of Peru’s recent growth rates and the high level of dollarisation of corporate credit, is a particularly challenging undertaking. 

Julio Velarde, governor of the central bank since 2006, says: “A good portion of credit, 38%, is still in US dollars; many corporates issued notes in US dollars over the past couple of years – there was very strong pressure on currency management.”

The sol has been trading at its weakest level in years as Peru’s economy started to slow and the US Federal Reserve moved toward raising interest rates. The currency dropped by almost 6% against the dollar towards the end of 2014, when currency markets experienced increased volatility. 

“We don’t want the exchange rate to be too far from fundamentals; we only intervene when we believe it is going beyond fundamentals,” says Mr Velarde. “In this case we are talking about a tapering tantrum. It overshot [the sol depreciated too much against the dollar], it was unsustainable and it was going to be reversed.”

This resulted in sales of the bank’s reserves and, in an effort to support the economy, in prompt decreases of the overnight interest rate, which was 3.5% in mid-December 2014.

In such an uncertain environment, Mr Velarde is keen to highlight the bank’s work in keeping inflation under control. “I’d say keeping inflation low enough, compared with other countries, and despite a high depreciation [of the sol in recent years], was a big achievement,” he says.

Mr Velarde describes the bank’s inflation target, at 2% with a range of plus or minus 1%, as ambitious for an emerging market. “We had a very low core inflation [compared to other countries in Latin America], close to 2% since 2001, with the headline inflation [under 3%], which is the lowest in the region despite the fact that Peru has been the fastest growing economy [in Latin America] over the past few years.” 

Data from the International Monetary Fund confirms that Peru has posted the fastest growth and slowest inflation in Latin America over the past decade, with GDP growth averaging 6.6% and inflation 2.93%. The central bank estimates that inflation will be close to 3% for 2014. While growth in output is expected to hover around 4% for 2014, the bank believes it will rise to 6% and 6.5% for 2015 and 2016, respectively.

Central Banker of the Year, Europe

Giorgi Kadagidze, Georgia

A well-capitalised and stable banking sector, which has shown resilience against major shocks, has been a key feature of Georgia in recent years. So much so that in a study programme funded by the World Bank, the governor of the National Bank of Georgia, Giorgi Kadagidze, shared Georgia’s experience of banking supervision with delegates from the central banks of Kazakhstan and Tajikistan in 2014.

“The recent financial sector assessment programme [by the International Monetary Fund] noted the improvements that have been made [in Georgia] over the past years, which – according to the assessment – have resulted in an advanced, risk-based, comprehensive, forward-looking, and in some instances even a leading supervisory approach,” says Mr Kadagidze. “The assessment confirmed that we are on the right path, pursuing well-established international standards, including the Basel core principles and other international best practice guidelines.”

Still, Georgia has a high level of dollarisation, which remains a major challenge for Mr Kadagidze’s monetary policy in the coming years. In 2014, Mr Kadagidze stimulated a de-dollarisation process, among other measures, by a widening of the collateral base of the National Bank of Georgia (NBG) which improved the availability of domestic currency resources and promoted lending in lari. 

The NBG has also supported the development of the local capital markets. In 2014, the first lari-denominated bond was issued by the European Bank for Reconstruction and Development. Following this example, other international financial institutions (IFIs) are expected to issue in lari in 2015, according to Mr Kadagidze. 

“Issuance of local currency bonds by IFIs will further support the supply of long-term lari resources on the market and the de-dollarisation process in general,” he says.

The thinly traded lari faced some fluctuations in early December, the impacts of which were mainly felt by those whose income was in lari while borrowing in dollars. 

Mr Kadagidze responded to the events by saying: “We will use all the instruments at our disposal to ensure that the current events do not have a negative impact on inflation and the financial situation of the population.”

Given Georgia’s high economic growth rates (its gross domestic product growth rate was 5.2% in the second quarter of 2014), the national currency is expected to appreciate in the medium term. Indeed, by mid-December the lari had already recovered most of its losses.

Central Banker of the Year, Asia-Pacific

Dr Atiur Rahman, Bangladesh

Dr Atiur Rahman’s work exemplifies how central banks can play essential roles in providing capital for environmentally and socially aware development without compromising on growth or macroeconomic stability.

“Initially it was not easy. Central bankers are a bit of a conservative, sceptical bunch. They thought it was going to be a disaster,” says Mr Rahman.

He believes that supporting agriculture and small and medium-sized enterprises could avert financial crises. “In many developed countries central banks only create money [and] liquidity in the air. They don’t do much on the ground, which could stop speculative financing and increase liquidity with small deposits. Financial systems would be more stable and have diversified loan portfolios [if this happened],” he says.

One of his initiatives supports tenant farmers with no access to financial services or collateral. Bangladesh Bank lent Tk5bn ($64.7m) at bank rate to non-governmental organisation (NGO) BRAC in exchange for a guarantee, and BRAC in turn organised farmers’ loans. Some 1 million tenant farmers received loans as a result of this invitation, 55% of which are women. The project has a 99% recovery rate.

Bangladesh Bank also established a project to assist street children in June 2014. This was particularly important as without guardians, these children tend to be excluded from the financial sector. Bangladesh Bank set up a Tk2bn refinancing fund for banks to lend to NGOs, including Save the Children, which in turn set up savings accounts for the children for as little as Tk10. Some 14 million such accounts have now been opened. “When they turn 18, they will have money, and they can start small businesses,” says Mr Rahman.

Bangladesh Bank is also promoting and undertaking green financing and bank operational management. Such efforts have not distracted the bank from its core duties, however. Inflation in Bangladesh dropped from 7.5% in 2013, to 6.5% in 2014, while the central bank’s reserves have tripled to $22bn during Mr Rahman’s mandate. 

Also, Bangladesh gross domestic product has grown by at least 6% per year in the past five years, with a standard deviation of only 0.22%.

Central Banker of the Year, Middle East

Hamood bin Sangour al-Zadjali, Oman

For a number of years, Oman has been the quiet achiever among the Gulf Co-operation Council countries. Gross domestic product growth has been strong, averaging between 4% and 5%, while non-oil activity has come to the fore as the government has limited hydrocarbons production to promote a more diversified economic model. Within this mix, the sultanate’s financial sector has been a model of health; low non-performing loan ratios, coupled with strong earnings and respectable capitalisation levels, have all leant themselves to the success of the country’s banks. Stress tests conducted in early 2014 found that Oman’s banking sector would maintain system resilience across all scenarios.

Hamood bin Sangour al-Zadjali, the executive president of the Central Bank of Oman (CBO), has overseen much of this progress. Through his careful management of the country’s financial sector, Oman has avoided the boom-and-bust cycles of economic mismanagement experienced elsewhere in the Gulf. 

Credit growth in the year up to November 2014 was 9.5%, outpacing the 2013 average of 8.7% off the back of a healthy macroeconomic environment, supported by a number of large-scale government infrastructure projects. Meanwhile, headline inflation averaged 1.1% in 2013 with a similar figure expected at the close of 2014.

Mr Al-Zadjali’s stewardship of the CBO has seen the introduction of minimum small and medium-sized enterprise lending requirements for the country’s lenders, with a 2013 decree stipulating that 5% of total loans must be geared towards this business segment. With an initial deadline set for December 2014, the country’s commercial lenders were granted a one-year extension in order to comply with the new requirements, now set for December 2015. 

In October 2014, the central bank implemented the Gulf region’s first national sharia-supervisory board. This board will oversee the development of the country’s Islamic banking sector, while issuing country-wide edicts on issues of sharia compliance. While national sharia boards have been implemented elsewhere, notably in Malaysia, Oman’s decision to adopt this system contrasts sharply with the dominant system of sharia self-regulation that is prevalent across much of the Gulf. This is expected to be advantageous for Oman, with accelerated product development and reduced operating costs for Islamic lenders expected over the medium term. 

Central Banker of the Year, Africa

Ernesto Gove, Mozambique

Mozambique is no longer the poorest country in the world, as it was in the 1990s. Indeed the country is now posting some of the highest growth rates in Africa, with hopes of more to come. As it tools up to become a major exporter of coal and natural gas, the Bank of Mozambique under governor Ernesto Gove, has been keeping inflation well under control while building foreign exchange reserves.  

Mozambique’s economy grew by 7% in 2013, reflecting strong activity across the board, including mining, construction and transport. The International Monetary Fund (IMF) is forecasting 7.5% growth in 2014 and expects inflation not to exceed 3%, well below the government’s ceiling of 6%.

While the central bank has more than halved its base rate from 16.5% in early 2011 to the current 7.5%, this has not stopped local banks from charging about 20% for loans. That is one reason why Mr Gove wants to attract more foreign banks to Mozambique – so that competition will lower lending costs. But he is also keen to foster local banks, so that they too can participate in the new coal and gas industries now being developed.

The latest IMF mission to Mozambique congratulated the central bank on its commitment to keep money growth in check, saying this would help to moderate the recent rapid pace of credit expansion to more prudent levels.

Mr Gove would like to see more companies tapping the country’s minuscule capital markets, for both debt and equity. Since foreign investor participation would be required to grow the markets, the governor advocates the dismantling of Mozambique’s current capital controls.  

Maintaining currency stability is one of the bank’s priorities. The metical has had a volatile 12 months, as falling commodity prices take some of the shine off Mozambique’s upcoming natural resource projects. The current account deficit is substantial, but this is caused by imports for big projects financed by foreign direct investment.

Foreign exchange reserves are looking healthy, up from $2bn in 2009 to hit an all-time high of $3.2bn in August 2014. From less than two months of import cover, the position now ranges between four and six months.