ANDORRA i el seu Sistema Financer and its Financial System 2007 2007 and its Financial System Financial and its i el seu Sistema Financer / Financer Sistema seu i el ANDORRA A B A ASSOCIACIÓ DE BANCS ANDORRANS A B A ASSOCIACIÓ DE BANCS ANDORRANS ANDORRA and its Financial System PRESENTATION After several years of rapid growth, the global economy faces significant challenges to be able to continue expanding at the rate achieved in recent years. This situation is especially pronounced in the most developed countries such as the USA or Japan or those in Europe. The world’s gross product has grown at a rate of 3.95%, which is lower than in previous years, whilst a rate of 3.7% is forecast for 2008. This slowdown in the global economy is due, inter alia, to the burst of the real estate bubble in the USA, the international financial crisis, the weakening of the US Dollar against major currencies, and high oil and food prices. Oil prices have risen sharply during 2007, starting the year at a price of US Dollars 60 a barrel, reaching historic highs in June, and closing 2007 at a price of US Dollars 91 a barrel. During 2007 the growth rate of developing countries has remained stable at 6.9%, while transition economies have achieved growth rates of up to 8% due to rising prices of basic products and high domestic demand. Emerging economies continue to achieve solid growth, especially China and India. Nonetheless, inflation rates in these countries are higher than in advanced economies because of the relative importance of energy and foodstuffs in the basket of products acquired by these emerging countries. During 2007 the European economy has mainly been affected by turbulence in the international fi- nancial markets due to the lack of confidence in these markets resulting from the mortgage crisis in the USA. The European economy has grown at a rate of 2.9%, 0.2 percentage points below the rate reached in 2006. Growth in the Euro Zone has been 2.6%, slightly down on the rate of 2.8% achieved in 2006. The German economy, which accounts for 30% of the GDP of the Euro Zone, has grown at a rate of 2.5%, 0.4 percentage points down on 2006; whilst the United Kingdom has grown at a rate of 3% during 2007, 0.1 percentage points below the figure obtained in the previous year. The interest rate fixed by the European Central Bank (ECB) has stood at 4% during the second half of the year, with a year-on-year change of 0.50 percentage points. This reflects a certain degree of stability compared to the previous year, during which the rate increased from 2.25% to 3.50% over a twelve-month period. Nonetheless, during 2007 the Euribor has continued to rise at a year-on-year rate of 0.80 percentage points to 4.79% at year end. The outlook is that it will continue to increase in the medium term. The abovementioned stability has continued during the first half of 2008, during which the ECB interest rate has not risen. Despite this, the Euribor has continued to increase to a rate of 5% during the same period. The year-on-year growth rate of Spanish GDP has been approximately 3.8% in 2007 and although it has been 0.1 percentage points below that recorded in 2006, the Spanish economy has grown at one of the highest rates in Europe, only being surpassed by Greece with a growth rate of 4%, Finland with growth of 4.4%, and Bulgaria which has grown at a rate of 6.2%. PRESENTATION ANDORRA The outlook for 2008 is that the Spanish economy will slow down at a faster rate that in 2007, primarily because of the crisis in the real estate sector and a reduction in consumer and household confidence indicators to 2004 levels. The French economy has closed the year with a growth rate of 1.9%, 0.3 percentage points below that of the previous year. Consumer spending has risen at a rate of 2.1%, compared to the rate of 2.3% reg- istered in the previous year, contributing 1.2 percentage points to the increase in French GDP. Another significant factor affecting economic growth during 2007 has been the rapid slowdown in exports and imports from 6.3% to 2.7% and 7.1% to 4.1%, respectively, which has led to a 0.4 percentage point drop in the economic growth rate. The French Government has announced that the growth rate of between 2% and 2.5% forecast for 2008 will not be achieved and will stand at between 1.7% and 2%. The economic situation in the Principality during 2007 has been affected by the poor climatic condi- tions during the 2006-07 ski season, with a 24% reduction in the number of visitors, while economic indicators such as imports have reflected a certain slowdown in the commercial sector. Nonetheless, the Andorran economy has grown at a rate of 3%, which proves that the tourism available in Andorra is sufficiently diverse enough to replace skiing with other activities such as shopping and other leisure activities such as visiting health and fitness centres. Standard & Poor’s estimates that the Principality’s GDP per capita for 2007 is Euros 30,510, exceeding that of countries such as Germany, Spain or France and similar to other comparable nations. The same report also awards the country a rating of A-1+ in the short term and AA in the long term. Andorra is at a point of inflection where it needs to promote innovative projects that are outward looking and result in sustainable growth in its economy, population and wealth. As a result, during the second half of 2006 and the start of 2007 the Andorran Government imple- mented a strategic plan that ended in February 2007 with the presentation of Andorra 2020. This three- pillared plan comprises 20 initiatives. The three main pillars of the plan are as follows: ■ Revitalise tourism and commerce; ■ Promote new economic sectors; and ■ Modernise the Andorran economic framework. The 2020 Agency was incorporated to lead, coordinate, plan and manage the development and im- plementation of the 20 initiatives included in this programme. Furthermore, the Office for Business Innovation (“Oficina per a la Innovació Empresarial (OIE)”)was also incorporated to promote innovation and new economic sectors. Moreover and in order to modernise the Andorran economic framework still further, a new companies law and an accounting law were approved during 2007. In 2008 a new law on foreign investments has been approved, this will enable foreign investors to invest in up to 100% of the capital of companies in over 200 activities, including the audiovisual sector, e-commerce, aesthetic medicine and wellness, ANDORRA PRESENTATION training, industrial production based on new technologies and research and development. This will en- able Andorra to begin a new phase of modernisation and diversification of its economy. In 2007, the International Monetary Fund (IMF) has published a new evaluative report, based upon a visit undertaken in September 2006, stating that it has not identified any macroeconomic risks that could affect the structure and positive performance of the Andorran financial sector. Furthermore, it has emphasised that the limited size of the local economy facilitates evaluating the credit risk associated with the loans portfolio. The soundness of the financial sector, the rise in demand for other activities within the service sector, and the implementation of the 20 initiatives comprising Andorra 2020 Programme will help to ensure the sustained future growth of the Andorran economy. PRESENTATION ANDORRA CONTENTS I. The Principality of Andorra Page 9 I.1. Introduction to Andorra Page 11 I.2. History of Andorra Page 14 I.3. Andorran institutions Page 15 II. Legal framework Page 21 II.1. Legal system Page 23 II.2. Tax system Page 25 II.3. Legislative framework of the financial system Page 30 II.4. Developments in the financial system’s regulatory framework Page 34 III. Economic environment Page 41 III.1. Introduction Page 43 III.2. General information Page 44 III.3. Main economic variables Page 50 III.4. Public sector Page 56 III.5. Economic sectors Page 60 IV. Banking sector Page 81 IV.1. Introduction Page 83 IV.2. Association of Andorran Banks Page 84 IV.3. The banking sector Page 86 V. Information of interest Page 113 V.1. Andorran banking groups Page 115 V.2. Other information of interest Page 125 CONTENTS ANDORRA I. THE PRINCIPALITY OF ANDORRA I. THE PRINCIPALITY OF ANDORRA I.1. INTRODUCTION TO ANDORRA The Principality of Andorra is a European micro-State located in the Central Pyrenees between Spain and France, members of the European Union, sharing a southern and western border of 64 km with Spain and a Northern border of 57 km with France. The capital of Andorra is Andorra la Vella. ANDORRA Andorra covers a surface area of approximately 468 km² and is larger than the other small European States such as San Marino (61 km²), Liechtenstein (157 km²) or the Principality of Monaco (1.5 km²). The Andorran flag and coat of arms are shown below: I. THE PRINCIPALITY OF ANDORRA ANDORRA 11 The official language of Andorra isCatalan , although Spanish and French are also widely spoken due to the economic and social contacts with these neighbouring countries. English is also used for com- mercial and financial purposes. The Principality of Andorra does not have its own currency and therefore adopted the Euro, like the other member states of the European Union, on 1 January 2002.