The Problem of Interest Rates in the Republic of Moldova

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The Problem of Interest Rates in
the Republic of Moldova
Analytical Country Report
Adrian Lupusor
Head of Monetary Sector Department
“Expert-Grup” economic think-tank
email: [email protected]
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
Source: World Bank
5
10
15
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
MNE
BGR
SVK
EST
CZE
AZE
POL
GEO
LVA
ROM
HRV
RUS
HUN
SVN
MDA
LTU
ALB
BIH
UKR
0
20
40
Source: World Economic Forum
60
80
100
120
140
Though much lower than pre-crisis levels the
difference between nominal and real lending interest
rates denotes a strong inflationary environment
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
45
40.2
40
35
27.5 29.1
30
25
29.5
32.0
39.8
41.6
34.5
31.5
38.0
33.9
25.2
20
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
Main reasons of this discrepancy
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, %
MDA
ALB
GEO
HUN
SVN
AZE
CZE
LTU
BIH
EST
HRV
MNE
ROM
BGR
LVA
BLR
-5
-3
Source: World Bank
-1
1
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
AZE
GEO
RUS
HUN
BGR
POL
BLR
SVN
EST
LVA
UKR
LTU
0
0.05
0.1
Source: World Bank
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)
Factor no. 3: High Risk Premiums
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
Source: World Bank
4
6
8
10
Central Bank’s Action to Reduce the
Lending Interest Rates
Three important notes
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.
Main instruments used:
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: 102nd
place out of 134 according to the 2008-2009
issue, compared to 109th place out of 142 in
the 2011-2012 issue.
Thank you!
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