Deposits heading toward decline as interest rates drop below average inflation

The deposit interest rates are lower even compared to the average inflation rate during the first three quarters of 2014 which stood at 1.75 percent, remaining below the central bank’s mid-term target of 3 percent, and hinting sluggish demand and consumption.
TIRANA, Nov. 3 -With the key interest rate standing at a historic low of 2.5 percent and interest rates having dropped to below the average inflation rate, deposits are hardly managing to remain at positive growth rates during the second half of this year. The situation is not a result of panic deposit withdrawals in late 2008 and early 2009 in the face of spillovers from instability of global financial markets which were compounded by concerns about the health of the Greek banking system in the fall of 2008, but interest rates at a historic low making investments in deposits one of the least attractive opportunities. Back in late 2008, ample liquidity buffers were utilized to meet deposit withdrawals. To boost confidence, deposit insurance limits were raised fivefold to 2.5 million lek (Euro 17,630), and deposits started to recover from the second half of 2009.
Bank of Albania data shows interest rates on 12-month lek-denominated deposits hit a historic low of 1.59 percent in September 2014 down from 1.93 percent last August and 3.41 percent in September 2013. The interest rates are lower even compared to the average inflation rate during the first three quarters of 2014 which stood at 1.75 percent, remaining below the central bank’s mid-term target of 3 percent, and hinting sluggish demand and consumption. Albania’s annual inflation rate dropped to 1.5 percent in September 2014, remaining below the central bank’s lower limit of the target range of 2 to 4 percent for the sixth month in a row, according to INSTAT.
Since the outbreak of the global financial crisis in 2009, interest rates on 12-month lek-denominated have been on a continuous downward trend dropping from an average of 6.8 percent in 2009 to 6 percent at the end of 2010, 5.8 percent at the end of 2011, 5.2 percent in 2012 and 2.45 percent at the end of 2013. The situation is also a result of the drastic ease of the monetary policy since late 2008 when the key interest rate stood at 6.25 percent compared to 2.5 percent currently.
Interest rates on 12-month Euro-denominated deposits also hit a historic low of 1.59 percent in September 2014 down from 1.93 percent last August and 3.41 percent in September 2013 as the European Central Bank cut its key rate to a record low of 0.05 percent last September.
Deposits were up by only 0.35 percent in September 2014 but were down by 2.93 billion lek (around Euro 20 million) compared to August 2014.
Deposits slowed down to 2.1 percent in 2013 after growing by 6.3 percent in 2012, 11.4 percent in 2011, 18 percent in 2010 and 6.8 percent in 2009, unveiling a drop in households’ savings at a time when both consumption and investments remain sluggish.
The slowdown in deposits is also a result of sharp cuts in interest rates and more favourable interest rates in the emerging investments funds.
“While these funds have helped diversify the ownership of government securities, they are inadequately supervised and regulated, invest mostly in longer-dated securities and their clients appear to consider these funds as substitutes for bank accounts,” warns the IMF in its latest report.
Data published by the country’s Financial Supervisory Authority show the two investment funds run by the Albanian subsidiary of Raiffeisen Bank, the country’s biggest commercial bank, increased their net asset value by around 30 percent to a total of 65 billion lek (Euro 458 million) in the first half of this year compared to the end of 2013.
Lending up by only 1.6%
After overcoming a 12-month moderate decline only last July, lending to the economy slowed down to 1.6 percent in September 2014 despite interest rates on both lek and euro denominated loans standing at historic low.
Tight lending standards as a result of bad loans standing at a record of 25 percent and low demand by both households and businesses have kept lending at a moderate growth in the past five crisis year.
After growing by 30 to 50 percent annually in the pre-crisis years, lending grew by an average of 10 percent from 2009 to 2011 but sharply decelerated to 2.36 percent in 2012 and shrank by 1.25 percent in 2013 as bad loans hit a record of 24 percent.
Differently from loans, 63 percent of which are issued in foreign currency, mainly in Euro, the situation with deposits appears more balanced with lek deposits accounting for 52 percent of total deposits.
Average interest rates on lek-denominated loans dropped to 8.46 percent in Sept. 2014 down from 10.14 percent in September 2013 but were slightly up compared to August 2014 when they stood at 8.43 percent. Meanwhile, average interest rates on euro-denominated loans stood at 6.46 percent in September 2014, down from 6.51 percent last August and 7.09 percent in September 2013.
Lending standing at moderate negative growth rates of around 2 percent since one year was also a result of banks writing off bad debt from their balance sheets which under new legal changes are being recognized as deductible expenses, says the IMF.
Since September 2011, the country’s central bank has cut the key interest rate in eleven consecutive moves by 0.25 percent each time to a historic low of 2.5 percent, but the moves have mostly been reflected on lower interest rates for lek-denominated deposits and T-bill yields, which have almost halved during the past year, while interest rates on lek-denominated loans have registered only a slight decline.
Tight lending standards and high interest rates in the banking sector are forcing more and more Albanian households in need to address informal borrowing, a survey conducted by the country’s central bank has found. The survey with around 2,000 Albanian households nationwide found that the number of Albanian debtor households who addressed informal borrowing rose to 60 percent in the first half of 2014, up from 55 percent in the second half of 2013. The survey shows that three out of five households in need address friends and relatives as well as local groceries where they buy on credit usually in interest-free informal borrowing.
Businesses have also been turning to informal channels after being classified by banks as unreliable borrowers as band loans stand at around 24 percent. Local media report construction companies, to which government still owes hundreds of millions of Euros for finished public works, are the most engaged in informal borrowing whose interest rates range up to 5 percent compared to an annual 10 to 12 percent in banks.
T-bill yields
Yields on 12-month T-bills, the key instrument of government’s internal borrowing, have registered a slight increase in the past few auctions despite the key interest rate continuing remaining at historic low of 2.5 percent. Yields on 12-month T-bills in the latest auction in late October 2014 slightly rose to 3.25 percent, up from 3.24 percent in the previous auction and a historic low of 3.18 percent in early September 2014.
Yields on 12-month T-bills have more than halved during the past one and a half years, dropping from 6.6 percent in early 2013 to 3.83 percent in January 2014 and 3.24 percent in the latest auction.
Experts explain the declining trend in T-bill yields with more active participation by commercial banks which have turned to investments in government securities due to poor demand for new loans as non-performing loans have reached a record 24 percent and lending stands at negative growth rates of 2 percent.
The Bank of Albania organizes 3-month and 6-month T-bill auctions every month and 12-Month T-Bill auctions every two weeks. T-bills are issued and guaranteed by the Ministry of Finance on behalf of the Albanian government.