Analytical Country Report
Adrian Lupusor
Head of Monetary Sector Department
“Expert-Grup” economic think-tank email: adrian@expert-grup.org
phone: +373 22 536859

Defining the Gravity of the Problem

Real lending rates have always been among the highest in Central and Eastern Europe
Real lending rate (nominal minus GDP deflator), average 2005-2010, %
GEO
ALB
MDA
AZE
HRV
ROM
CZE
HUN
SVK
SVN
BGR
MNE
BIH
LTU
LVA
EST
RUS
UKR
BLR
-5 0 5 10 15
Source: World Bank

Access to financing is identified as one of the most problematic factors for doing business
Ease of access to loans ranking, Global Competitiveness Index 2011-2012
GEO
LVA
ROM
HRV
RUS
HUN
SVN
MDA
LTU
ALB
BIH
UKR
MNE
BGR
SVK
EST
CZE
AZE
POL
0 20 40 60 80 100 120 140
Source: World Economic Forum

Though much lower than pre-crisis levels the difference between nominal and real lending interest rates denotes a strong inflationary environment
45
40
35
30
25
20
The share of bank loans to GDP, nominal and real interest rates for bank credits in national currency, %
Bank loans to GDP Nominal lending rate Real lending rate
25.2
27.5 29.1
29.5
32.0
31.5
34.5
40.2
39.8
41.6
33.9
38.0
15
10
5
0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
(e)
Source: National Bank of Moldova and own calculations

Lending interest rates have traditionally been higher for households than for firms
Monthly lending interest rates, average, for credits to companies and households, %
Source: National Bank of Moldova

1. Firms are more creditworthy as they are able to provide more collateral;
2. The strong spike in the share of nonperforming loans in total banks’ credits was mainly driven by consumer loans;
3. Central bank’s credit facility which provided access to long-term loans at preferential interest rate

The Main Credit Costs Determinants

The Main Components of Lending
Interest Rates

Factor no. 1: High Costs of Financing
Real Deposit Interest Rates, average 2005-2010, %
-5 -3 -1
MDA
ALB
GEO
HUN
EST
HRV
MNE
ROM
BGR
LVA
BLR
SVN
AZE
CZE
LTU
BIH
1
Source: World Bank
3 5

Factors driving up the costs of financing banks’ balance sheets
1. Low level of disposable income in Moldova which limits households’ savings;
2. Limited confidence in Moldovan banks;
3. High macroeconomic uncertainty;
4. Poor spectrum of saving instruments.
Poor access to long-term resources => maturity mismatch => banks are forced to keep their balance sheets as liquid as possible

Bank liquid reserves to bank assets ratio (%)
SVK
ROM
MDA
HRV
ALB
CZE
BLR
SVN
EST
LVA
UKR
LTU
AZE
GEO
RUS
HUN
BGR
POL
0 0.05
Source: World Bank
0.1
0.15
0.2
0.25
0.3
0.35
0.4
0.45

Factor no. 2: Poor Competition and
Low Banking Sector Efficiency
Share of foreign owned banks' assets in total banking assets, 2010, %
Source: EBRD

Moldovan banking system is one of the most inefficient in the region
Profit Efficiency Scores in Central Eastern Europe, 2008
Source: Lupusor and Babin (2011)

Risk premiums on lending (lending rate minus T-bills rate)
GEO
AZE
ROM
MDA
MNE
ALB
BGR
LVA
CZE
SVN
LTU
HUN
POL
0
Source: World Bank
5 10 15 20

Main causes fueling the risk premiums
• Macroeconomic instability amplified by political instability, especially starting in 2009 and continuing onwards.
• Poor lenders’ rights and burdensome procedures for collateral execution which favor the debtor.
• Absence of well-functioning credit information
(history) bureaus.
• Poor management of most companies applying for bank credits and low quality credit applications.
• Maturity mismatch problem

Consequence: The of banking loan portfolios in
Moldova has traditionally been one of the highest among the region
Share of non-performing loans in total gross loans, average 2005-2010, %
MDA
ROM
MNE
LTU
POL
LVA
ALB
HRV
RUS
BIH
HUN
SVK
BGR
CZE
GEO
BLR
EST
SVN
0 2 4 6 8 10
Source: World Bank

Central Bank’s Action to Reduce the
Lending Interest Rates

1. The reduction of credit costs is not the primary prerogative of the National Bank of
Moldova (NBM) due to its IT strategy.
2. NBM has a very limited range of instruments which could be used for making interest rates more affordable.
3. NBM is a net debtor of the banking system and not a net lender.

1. Monetary policy inertia: NBM adjusts its policy rate to macroeconomic news very slowly;
2. Keeping an accommodative monetary policy stance;
3. Long-term credit facility for commercial banks
4. In 2011, NBM set the required reserves rate at
0% for deposits with maturities longer than two years.

Outcomes of High Interest Rates
Problem

The main outcome: narrow access of firms and households to banking credits
The share of bank credits in GDP, average for the period 2005-2010, %
Source: World Bank

Poor intermediation function of commercial banks due to:
1. shrinking demand for loans due to their low affordability
2. banks’ preference to lend to companies with better credit histories
SMEs are strongly disadvantaged: whereas SME sector account for about 98% of the total number of enterprises and 59% of total employment, it received only 31% of total banking loans in 2010.

Paradox: high liquidity levels paralleled with low banking sector penetration
Correlation between the banking liquidity and the share of banking credits in GDP, average for the period 2005-2010, %
Source: World Bank and own calculations

The Global Competitiveness Index confirms the lending rates issue in Moldova
• Access to financing is constantly recognized as one of the most problematic factor for doing business in Moldova
• Moldova’s rank according to the ease of access to loans, in fact, decreased in comparison with the pre-crisis level: 102 nd place out of 134 according to the 2008-2009 issue, compared to 109 th place out of 142 in the 2011-2012 issue.