An interesting article about the current financial situation in Armenia that appeared in business new europe was reprinted on Hetq Online. Although I am not a financial adviser or banker, I can’t say that I agree with everything that was reported in the article.
Here is one excerpt that is interesting to note:
The growth of banks like AEB [Armeconombank] has slowed considerably, but they are still in profit and see 2009 as a hiccup rather than a disaster. Armenian banks find themselves in a frustrating position now: they have the liquidity to make loans, but they can’t find anyone to lend to.
According to AEB’s Web site, the bank is currently offering mortgages for five-year terms at an annual rate of 14 percent. These types of plans, plus or minus a percentage point payable in five or seven years, have been offered for a while now by Armenian banks, and they’re obviously not great offerings by any means. I’ve seen rates as high as 20 percent or even more being advertised for short-term loans.
By contrast, mortgage rates in the US are now around 5.25 percent for a 30-year term and that’s now considered on the high side. And the rate for a 15-year mortgage is only 4.69 percent.
Thus the Armenian mortgage lending business can best be defined as basically legitimized loansharking.
But really, who would agree to sign on to such terms? Cash poor businessmen most likely, or people who have come into lots of money quite suddenly and have diversified their funds into several different sectors, be it real estate, consumer trade or what have you.
Imagine the following scenario. A new house becomes available in a part of Yerevan where having a home is considered very trendy these days, like Nork-Marash where lots of expensive homes have been built. The buyer, finding himself short on cash but eager to buy a house in a prestigious area, takes out the loan. The percentage rate doesn’t necessarily make much of a difference to him, he just needs some cash handed over to him fast so he can buy the home. Five years gives him plenty of time to pay off the loan in monthly payments while most of his capital funds continue to be tied up elsewhere.
No ordinary Armenian citizen could ever afford such a loan, not with a $200 monthly salary on the low end or even $2000 at the top tier. It doesn’t make any logical sense to consider such a mortgage loan, and it is certainly not a viable option anyway. So these loans being offered by Armenian lenders have never made much sense.
What about the over $1 billion in loans coming from Russia and IMF? Some of it is supposedly going to soften the drop in the GDP while another chunk is trickling down to businesses via the banking sector, like construction companies, to help them offset losses as a result of the crisis. It’s true that housing prices have fallen considerably since the beginning of the year, but a three-room apartment in central Yerevan can still fetch around $150,000, depending on the specific location, perhaps even more. For a tiny landlocked country like Armenia, that’s astronomical. By comparison you can buy a villa in the coastal town of Guardamar, Spain for under 100,000 euros.
Yet despite the construction crunch, building continues unabated. A new crane has just gone up at the foot of the slope that reaches the “Monument” area. Sure, some sites seem to be dormant, but that’s been the case for the last five years. Construction of a building starts, then comes to a halt for months on end before it resumes again. The cycle continues over and over. That’s why it’s been taking so long for these high-rise buildings to go up. That’s been the case throughout the Yerevan construction boom, it’s nothing new. These same companies that are supposedly hurting are getting money to support their business efforts. But do they really need the money? No one can tell. Try performing an audit on them to find out.
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