Country Reports

October 31, 2014

Suriname: Staff Report for the 2014 Article IV Consultatio

Description: This 2014 Article IV Consultation highlights that Suriname’s macroeconomic conditions weakened in 2013 as gold and oil prices declined. With those prices falling below recent peaks, the large fiscal and external sector exposures to the mineral sector continued their deterioration in 2013, along with a significant decline in international reserves. Growth is estimated at a robust 4 percent in 2013, supported by fiscal relaxation and strong credit growth. Strong fiscal consolidation is being implemented in 2014, and the fiscal deficit is expected to decline to 3.7 percent of GDP this year. Public debt is rising but remains relatively low at about 30 percent of GDP.

October 31, 2014

Suriname: Selected Issues

Description: This Selected Issues Paper carries out an empirical analysis of the effects of policies and external shocks on economic activity in Suriname. The estimates are broadly consistent with prior empirical findings. The results reveal a strong contemporaneous correlation between credit and demand, while the empirical link between exports and demand seems slightly weaker. The results for import demand point to a strong correlation between imports and exports. The export variable is highly significant and explains a large fraction of the total variation in imports. An increase in exports of 1 percent is associated with a 0.61 percent increase in imports.

October 22, 2014

Democratic Republic of the Congo: Financial System Stability Assessment

Description: This Financial System Stability Assessment on the Democratic Republic of the Congo highlights that the Congolese financial sector has recovered from the crisis of 2009 but is at a crossroads. Although reforms have been initiated, the system remains shallow, highly dollarized, and characterized by balance sheet fragilities. The authorities have announced a de-dollarization process; however, greater progress on reforms to strengthen the financial system is needed to support financial deepening and economic growth. The team’s analysis suggests that the financial system remains vulnerable. Resilience to shocks is undermined by the lack of risk-based supervision, lax regulation and weak enforcement of existing regulations, low profitability, and an excessive reliance on sight deposits. Steps are also needed to improve the capacity for micro- and macroprudential supervision. The implementation of risk-based supervision for individual banks is a critical prerequisite for effective crisis prevention. Assessments of bank-specific and systemic soundness are severely handicapped by weak supervisory data and other information gaps. There are significant weaknesses in accounting and auditing practices and, even if indicators suggest high capitalization levels, a more detailed analysis suggests banks are under-provisioned, partly owing to lax definitions of nonperforming loans and provisioning rules.

Notes: Also available in French

October 22, 2014

Cyprus: Selected Issues

Description: This Selected Issues paper on Cyprus models the evolution of the saving rate to help shed some light on its determinants, which could help inform medium-term projections. This paper suggests that household net wealth and unemployment are key determinants of the saving rate in Cyprus. Cypriot households dissaved in the period preceding the global crisis, as their wealth increased, and credit could be used to finance consumption. The data uncertainty, due to various data sources used and relatively short time-period may affect the regression results. Moreover, in the estimation, the endogeneity between household wealth and the saving rate, as well as between unemployment and the saving rate may have not been fully controlled through lags. Due to the lack of micro-level data, the analysis does not explore the distributional consideration with respect to wealth. Since wealth is likely distributed unevenly, high indebted households with limited wealth are likely to reduce their saving rate more than the average to support consumption in the face of economic stress. The forward-looking projections are also subject to considerable uncertainty and should be interpreted with care.

October 22, 2014

Cyprus: Staff Report for the 2014 Article IV Consultation

Description: KEY ISSUES Background: The large imbalances that accumulated prior to the global financial crisis culminated in a collapse of the banking sector in early 2013. In response, the authorities took unprecedented measures and adopted an economic adjustment program, supported by official financing, aimed at securing financial stability and fiscal sustainability. Recent developments and outlook: GDP contracted sharply in 2013. Wages and prices also declined, and unemployment increased. While bank deposit outflows have slowed, non-performing loans have risen sharply, and credit remains impaired. The outlook is difficult, with the recession expected to continue this year, followed by a modest recovery starting next year. Risks remain tilted to the downside. Reform agenda: The authorities need to overcome recent delays in the implementation of their adjustment program. A key priority is addressing high non-performing loans, which requires putting in place a strong private-sector debt-restructuring framework, including legislation to facilitate foreclosures, complemented by a modernized insolvency regime. Banks should continue to restructure and build strong capital buffers. Removal of external-payment restrictions must proceed prudently. Continued fiscal consolidation is required to ensure long-run sustainability, complemented by firm implementation of structural reforms.

October 17, 2014

Singapore: Staff Report for the 2014 Article IV Consultation

Description: KEY ISSUES Outlook and risks. Following an upturn in 2013, growth is expected to moderate somewhat during 2014-2015, narrowing the positive output gap. The impact of recovering demand in advanced economies is likely to be offset by the ongoing real appreciation of the currency and the gradual tightening in global monetary conditions. Transitional costs related to the economic restructuring (see next paragraph) are also expected to dampen growth in the near term. As a very open economy, Singapore is particularly exposed to external risks related to a protracted period of slower growth in advanced and emerging economies, a continued buildup and eventual unwinding of excess capacity in China, an abrupt surge in financial market volatility as investors reassess underlying risks, and geopolitical risks. Medium- and long-term challenges. The authorities focus squarely on the implementation of their medium-term economic restructuring plan. With the aim to boost the productivity of labor and land, the plan could set the stage for a new era of sustainable growth. However, productivity improvements may take some time to materialize. For example, the slowing inflow of foreign workers, a key part of the reform agenda, could moderate potential growth and lower competitiveness in light of the tight labor market. The social safety net is being strengthened in the context of a rapidly aging population. Policy assessment. Singapore continues to implement a strong set of macroeconomic and financial sector policies. The moderately tight monetary policy remains appropriate but the fiscal stance is looser than would be warranted by cyclical considerations. The 2014 budget focuses on noncyclical considerations, including support for companies’ efforts to raise productivity and additional social spending on healthcare for the elderly. The authorities’ plan to raise social and infrastructure spending by 1-2 percent of GDP over the medium term should help reduce the large current account surplus. Financial regulation and supervision is among the best globally and Singapore is a frontrunner in implementing global regulatory reforms. Macroprudential policies have contributed to cool the housing and car permit markets and good progress has been made in implementing key short•term FSAP recommendations.

October 16, 2014

Vietnam: Staff Report for the 2014 Article IV Consultation

Description: KEY ISSUES Context. Economic performance has improved over the last year. The recovery is taking hold, although domestic activity remains weak, in part constrained by weak banks and inefficient state-owned enterprises (SOEs). Inflation has declined, the current account remains in large surplus, and international reserves have increased. The authorities place a priority on preserving macroeconomic stability, tackling banking sector vulnerabilities, and reforming SOEs, though implementation has been gradual in some key areas. Outlook and risks. Growth is projected to recover gradually over the coming years, with the current account returning to a deficit and inflation contained. On current policies, public debt is projected to reach 60 percent of GDP. Risks include weaker trading partner growth, geopolitical tensions, slow structural reforms, and delayed fiscal consolidation. Early conclusion to key trade negotiations would be growth-positive. Fiscal policy. Deficits have been sizable and rising public debt requires attention. A medium-term growth-friendly consolidation is recommended, based on enhancing revenue and rationalizing unproductive expenditures while preserving crucial social and capital spending. This would ensure public debt sustainability with space to address contingent liabilities from banking sector and SOE restructuring. Monetary and exchange rate policy. The current monetary policy stance is appropriate. Greater exchange rate flexibility would help buffer external shocks, facilitate improved reserve adequacy, and help lay the groundwork for shifting toward using inflation as a nominal anchor over the medium term. Banking sector reform. Several policy measures have been taken recently, but the overall gradual approach will likely continue constraining credit growth and keep the system susceptible to shocks and significant asset deterioration. A more expeditious recognition of nonperforming loans, bank restructuring and orderly resolution would support robust credit creation and macro-financial stability. State-owned enterprise reform. Progress is being made. Implementing restructuring plans and accelerating equitization would help ensure more efficient resource allocation, strengthen banks, and deliver higher future growth. Reform should also focus on strengthening corporate governance and ensuring a level playing field.

October 14, 2014

Republic of Korea: Financial Sector Assessment Program-Detailed Assessment of Compliance on the Basel Core Principles for Effective Banking Supervision

Description: SUMMARY, KEY FINDINGS, AND RECOMMENDATIONS The Republic of Korea has a moderate level of compliance with the Basel Core Principles for Effective Banking Supervision (BCP). Building upon the 2003 FSAP recommendations, the authorities have taken resolute steps to strengthen the regulation and supervision of the banking sector. However, the assessment identified gaps that need to be addressed and although the Republic of Korea counts with a strong—albeit overly complex—regulatory framework and with thorough supervisory practices, a number of areas require attention so that the Republic of Korea can meet the highest standards of supervisory effectiveness. Those areas include: broader powers to apply minimum capital requirements to individual banks; full implementation of Pillar 2 and ICAAP; and a more comprehensive approach to conglomerates. The application of Basel II to Financial Holding Companies (FHCs) would complement the transition to group supervision which began through the introduction of the FHC Act. Despite the deficiencies identified in the assessment, the current supervisory structure has been reasonably effective and the overall vulnerability of the Korean banking system has diminished since the 2008 crisis with stronger capitalization across the sector. Supervision of the banks is structured around sound off-site supervision techniques and onsite inspections. Strengths lie in sophisticated offsite monitoring capabilities and an extensive onsite capability. The FSC-FSS collects and analyzes a broad suite of information including detailed financial and management information. The supervisory approach relies heavily on off-site monitoring and notifications of exceptions, which are supplemented by biannual full-scope on-site examinations. The existence of multiple points of responsibility, where subject matter experts are responsible for different areas of surveillance poses challenges of coordination and to derive an overall understanding risk to an institution. The Republic of Korea is one of the first countries to be assessed under the revised Basel Core Principles (BCP) issued by the Basel Committee in September 2012. Like other countries being assessed under the new methodology, the Republic of Korea has agreed to be assessed and rated not only on the essential criteria but also on the additional criteria. It is important to note that since last assessment, conducted in 2003, the bar of the standards has been raised twice by the BCBS (the BCP methodology was revised in 2006 and again in 2012). This assessment, consequently, is not comparable with the previous assessment and, as prescribed by its methodology, should not be compared or across countries. Within the revised BCP methodology, more is expected of supervision and regulation, and much of what was considered “desirable” is now considered essential, with the lessons of crisis and evolution of financial markets and international standards. The assessment also brings a new relevance to observed implementation and practices.

October 14, 2014

Republic of Korea: Financial Sector Assessment Program-Detailed Assessment of Compliance on the CPSS-IOSCO Principles for Financial Market Infrastructures?BOK-WIRE+ and KRX CPP

Description: EXECUTIVE SUMMARY Korea has a well-developed payment, clearing, and settlement infrastructures. BOK-WIRE+ is the real-time interbank gross payment and settlement system, and the backbone of the infrastructure where the final payments of various markets are settled. It is operated by the Bank of Korea (BOK). The Korea Exchange (KRX) is the main player in the securities and derivatives market, operating three exchanges and offering clearing and settlement services for all securities and derivatives traded on the KRX. While the authorities have decided to establish a central counterparty (CCP) for over-the-counter (OTC) derivatives at a future date, discussions are ongoing on the desirability of transforming the current trade reporting systems into full-fledged trade repositories (TRs). The planned CCP for OTC derivatives should ensure full compliance with the Principles for Financial Market Infrastructures (PFMI) before being launched, taking into account lessons learned from the assessment of the CCP for exchange-traded products. BOK-Wire+ is largely compliant with the PFMI, and is overall sound. It is subject to comprehensive and transparent risk management frameworks comprising clear policies and guidelines, governance arrangements, and operational systems including regularly tested default and business continuity procedures. All transactions once settled in BOK-Wire+ are deemed final and irrevocable, as well as bankruptcy remote. There is room for improvement in certain areas to enhance the level of compliance of the BOK-Wire+ with the PFMI. It is recommended that the operator of BOK-Wire+ improves the collateral risk management framework by adopting regular testing of haircuts and an independent validation of haircut procedures at least annually. The BOK should provide more clarity in the regulations regarding settlement finality and queue management, particularly with regard to revocation of queued transactions. It should also fully implement the disclosure framework, including disclosure of relevant rules and regulations in English. Finally, BOK’s oversight powers should be strengthened, to include linked financial market infrastructures (FMIs) and participants, particularly to obtain authentic information and enforce compliance.

October 14, 2014

Republic of Korea: Financial Sector Assessment Program-Detailed Assessment of Compliance on the IOSCO Objectives and Principles of Securities Regulation

Description: SUMMARY The Korean authorities have made significant progress since the last FSAP in revising the securities regulatory framework, with the current framework achieving good overall compliance with the International Organization of Securities Commissions (IOSCO) Principles. Importantly, the earlier legal impediments to international cooperation and exchange of information have been removed. Since 2011, Korea also applies the Korean International Financial Reporting Standards (K-IFRS) that follow the International Financial Reporting Standards (IFRS). Although the regulators’ responsibilities are defined in legislation, the complexity of the structure obscures the transparency of the decision-making processes. The responsibility for deciding on a particular supervisory or enforcement action can lie either at the Financial Services Commission (FSC), Securities and Futures Commission (SFC), or Financial Supervisory Service (FSS), depending on the nature and gravity of action, but it is not always clear which one of them is ultimately in charge. The process is further complicated by the use of pre-deliberation committees at various levels. Self-regulatory organizations—the Korea Exchange (KRX), the Korea Financial Investment Association (KOFIA) and the Korean Institute of Certified Public Accountants (KICPA)— also play a role in the regulatory and supervisory processes. Publication of additional information on the decision-making structure and processes would be beneficial. Operational cooperation and coordination between the various authorities is currently addressed by having the agencies represented in each others’ decision-making bodies. However, the full participation of the Minister of Strategy and Finance at the FSC Board has the potential of compromising the independence of the FSC’s supervisory and enforcement decisions. Consideration should be given on how best to mitigate the potential for undue political influence arising from such governance arrangements by, for example, restricting the participation of the Minister of Strategy and Finance in the supervisory and enforcement decisions. Attention should also be paid to ensuring that the various arrangements for gathering commercial input provide for equal and transparent treatment of market participants.