Implying the withdrawal of Raiffeisen, the country’s biggest bank, from Albania’s public debt in 2012, Fullani said liquidity imbalances were created causing a rise in government security yields and limiting the transmission of the monetary policy
TIRANA, July 16 – The quick and considerable withdrawal of some foreign-owned banking groups present in Albania has created difficulty in financing the public debt, consumption and investments, says central bank governor Ardian Fullani. Speaking at the 20th anniversary of the Joint Vienna Institute, a regional capacity-building and training center, the governor warned the negative impacts could further damage financial stability which already suffers from a record high 20 percent non-performing loans.
Implying the withdrawal of Raiffeisen, the country’s biggest bank, from Albania’s public debt in 2012, Fullani said liquidity imbalances were created causing a rise in government security yields and limiting the transmission of the monetary policy.
Although having lowered the key interest rate by 1 percentage point to a historical record low of 4.25 percent since Sept 2011, the Bank of Albania interventions in the monetary policy have been poorly reflected in lowering interest rates for loans in the domestic currency lek, and T-bill yields.
“In fact, as a result of the interpretation of the European Banking Authority, one of the foreign banks operating in Albania lowered its exposure to the Albanian government debt by 3 percentage points of the GDP within a three-month period. These actions caused liquidity imbalances in the interbanking market, which could not be solved quickly because of structural problems,” said Fullani of Raiffeisen’s withdrawal.
Latest Finance Ministry data show Raiffeisen’s share of the domestic debt dropped to 31.19 percent at the end of the first quarter of 2012, down from 33.7 percent at the end of 2011. However, the Austria-based bank continues remaining the biggest single internal debt holder followed by other commercial banks with 37.8 percent and the central bank with 13.61 percent. Both individuals and non-banking institutions slightly increased their domestic debt shares to 13.3 percent and 4.07 percent respectively at the end of the first quarter of 2012.
Some 16 banks operate in the Albanian banking system, which is overwhelmingly foreign-owned. Raiffeisen Bank and Turkish-owned BKT are the leading banks in Albania with a market share of 28 percent and 13 percent respectively.
“Last year and the first half of this year showed that the crisis which broke out in the 2008 has reached its most acute stage, characterized by a mutual relation of sovereign debt and the crisis in the banking system,” said Fullani, adding that the situation in neighbouring Greece and Italy, Albania’s top trade partners made matters worse.
Banks’ profits in 2011 registered their lowest rate during the past 12 years as bad loans reached a historical high record of around 19 percent, according to the Bank of Albania. Data show banks’ net profits at the end of 2011 were only 706 million lek (Euro 4.95 million), the worst level since the 1997-1998 pyramid investment schemes when banks registered negative balance sheets.
Government has recently launched an awareness campaign targeting migrants announcing that it will sell Euro bonds worth Euro 30 million in two auctions in July and August 2012. Investing in T-bills proves more profitable than investing in deposits. 12-month T-bill currently stand at 7.35 percent while interest rate for 12 month lek-denominated deposits are at an average of 5.7 percent.
Public debt threat
Public debt at around the legal ceiling of 60 percent of the GDP, and bad loans at 20 percent are the key threats to the Albanian economy which since 2009 has stuck into moderate 3 percent annual growth rates, international financial institutions have warned.
Estimated at over 800 billion Lek currently, the public debt costs the Albanian government 3 percent of the GDP or 50 billion lek in interest payment annually. In addition, reliance on consequent mid-term budget adjustments to contain the deficit has resulted in unpaid bills to private contractors for undertaking publicly financed works, worth around 100 million dollars.
The World Bank suggests a moderate program of fiscal consolidation of reducing the level of debt by about 5 percent of GDP over 5 years is both absolutely essential and pro-growth.
“Staying too close to 60 percent carries a significant risk of crossing it over if a major shock to the budget occurs, as for example, nearly happened during the last winter due to unforeseen electricity imports. Crossing the 60 percent mark, in turn, carries a high risk that markets will take it as a sign of macro-economic instability and react badly, making furthermore difficult to support both growth and fiscal policy objectives,” says Kseniya Lvovsky, World Bank Country Manager.
Albania’s Finance Ministry says public debt fell to 56.89 percent of the GDP in the first quarter of 2012 despite the total debt stock climbing by 2 percent to 788 billion lek. At the end of the final quarter of 2011, public debt stock stood at 772.5 billion lek, accounting for 58.76 percent of the GDP, only 1.24 percent below the legal ceiling of 60 percent of the GDP. The central government holds the overwhelming majority of 99.67 percent of total debt stock with the local government debt reported at only 260 million lek or 0.33 percent. Domestic debt represented 56.7 percent of the total debt stock while external debt accounted for 43.3 percent in the first quarter of 2012 compared to only 39 percent in 2009 before Albania made its Eurobond debut.
