Consumers’ saving trend, low private investments prevent growth

TIRANA, Sept. 3 – The ongoing saving trend by consumers, lower private investments and credit growth decelerating remain key challenges for the Albanian economy after the slight shrink in the first quarter of the year. The conclusions are made by governor Ardian Fullani after the Bank of Albania Supervisory Council decided to keep the key interest rate unchanged at 4 percent.
“Data on the economic performance of the second quarter of 2012 show a slow recovery of the economic activity. Although some indirect indicators reveal an improvement compared to the first quarter of the year, consumers continue being characterized by behaviour oriented toward saving. The behaviour is reflected in the postponement of important spending, in the deposit increase and investments in government securities as well as consumers’ low demand for loans,” said Fullani. Private investments continue remaining sluggish reflecting the poor performance of the final demand in the economy. The capacity utilization rate remains low while import of machinery and equipment fell by 9.5 percent in the second quarter of 2012 after increasing by 1.5 percent in the first quarter of the year, says the Bank of Albania.
Credit growth suffered a sharp slowdown in the first half of 2012 when it dropped by 5 percent to 8 percent while deposits preserved their 10 percent growth rate mainly thanks to transfer of deposits from migrants in Greece.
The Bank of Albania says it remains careful toward economic and financial developments in Albania and abroad and ready to intervene in the right time and at the right level to meet its obligations.
Since Sept. 2011 the central bank has cut the key interest rate by 1.25 percent to 4 percent on low inflation pressures but the moves have been hardly reflected on lowering interest rates for lek-denominated loans and T-bill yields. Governor Fullani has blamed West European banks present in Albania, which have withdrawn from government securities as the key reason for failure of the monetary policy to have an impact on lowering T-bills yields, which banks use as a reference to determine the interest rates for loans.
Average lek-denominated interest loans in July 2012 remained unchanged at 11.39 percent, the same to the beginning of the year when the key interest rate was higher at 4.5 percent, showing the poor reflection of the central bank monetary policy. Meanwhile, average interest rate for Euro-denominated loans dropped to 6.28 percent in July 2012, down from 7.03 percent in June 2012 and 7.5 percent in March 2012.
Differently from loans, the key interest rate cuts have been accompanied with lower deposit interest rates. In July 2012, 12-month deposits interest rates dropped to 5.33 percent, down from 5.5 percent in June 2012 and up to 5.8 percent in early 2012. Euro-deposit interest rates also dropped to 3.16 percent last July down from 3.24 percent in the previous month and 3.3 percent in early 2012.
In late July 2012, Albania’s central bank cut the key interest rate by another 0.25 percent to 4 percent, the lowest ever historical rate, after previous consecutive cuts failed to either boost lending or lower T-bill yields.
The central bank’s move came after repeated calls by financial experts as a necessity to stimulate the economy following the slight shrink of the economy in the first quarter of 2012 and after the European Central Bank cut its key interest rate by a quarter percentage point to a record low 0.75 percent to try to help ease Europe’s financial crisis and boost its sagging economy. The action, which was widely expected, is meant to make it cheaper for businesses and consumers to borrow and spend money.
High interest rates, tight lending standards and a sharp decrease in demand are the key reasons lending is failing to recover this year.
In the latest Bank of Albania auctions, 12-month T-bill yields dropped to 7.1 percent, down from as high as 7.38 percent in June 2012. Twelve-month T-bill yields have also been on upward trend since Dec. 2011 climbing from 6.95 percent to 7.34 percent in March 2012.
“2012 is a challenge not only for the Albanian economy, but also the global economy, because Albania operates under conditions of a regional market of unresolved problems with trade, business, but also the Greek crisis,” governor Fullani has warned, adding that the 2012 growth will be determined by developments in consumption and private investments.