TIRANA, Oct. 18 – The exchange rate effect and the mandatory write-off of non-performing loans have been keeping Albania’s credit at slightly below zero since last April, but real credit growth when adjusted for those effects is at modest positive growth, shows a European Commission report.
The Bank of Albania reports total credit growth to the economy in the national currency every month, making it vulnerable to exchange rate effects and the non-performing loan (NPL) write-off process.
Central bank data shows Albania’s national currency, lek, hit an 8-year high against Europe’s single currency last August when the Euro fell to as low as 132.24 lek affected by large Euro inflows from the peak tourist season and some major energy-related investment increasing the supply of euro in the local market.
With the tourism season over, the national currency has lost some ground against the Euro, which accounts for half of total credit and deposits, trading at 133.5 lek this week, up 2.7 percent compared to the same period last year. Europe’s single currency, has lost about 5 percent compared to the average exchange rate of 140 lek for about five years until mid-2015.
Meanwhile, the ongoing write-off of NPLs also had a negative impact as the 16 overwhelmingly foreign-owned banks continued the mandatory removal of bad debt from their balance sheets, statistically keeping credit at just below zero.
Since 2015, when banks were forced to write off non-performing loans that have spent three years in the ‘loss’ category, bad debt removed from banks balance sheets has increased to 43.3 billion lek (€320 million), of which 4 billion lek (€30 million) was written off in the first half of this year.
The bad debt write off as well as loan restructuring with large borrowers led to non-performing loans dropping to a 6-year-low of 15.6 percent at the end of June 2017, down from a record high of 25 percent in mid-2015.
“Total credit growth to the economy has been negative since April (-0.2 percent year-on-year in August) in domestic currency terms. This, however, is the result of the declining value of foreign exchange loans due to the lek’s appreciation,” says the European Commission in its quarterly report on EU candidate and potential candidate countries.
“When adjusted for the exchange rate effect, credit to the business and household sectors increased by, respectively, 2 percent and 7.5 percent y-o-y in the second quarter. Relatively low credit growth to the business sector partly reflects the settlement of non-performing loans, including write-offs,” adds the report.
With the key interest rate at a historic low of 1.25 percent since more than a year, and sharp fluctuations in Euro-lek exchange rates, Albanian businesses and households have been shifting to borrowing in the national currency in the past few years. Lek-denominated loans accounted for about 49 percent of total credit at the end of last August, up 3.3 percent compared to the same period last year and only about a quarter just before the onset of the global financial crisis in 2008.
The European Commission report describes the Albanian banking system as well-capitalised with a capital adequacy ratio of 16.3 percent at the end of the second quarter of 2017, comfortably above the regulatory minimum of 12 percent.
The Albanian economy is highly euroised with Euro-denominated savings and loans accounting for about half of the total and two-thirds of exports destined for Eurozone countries, making the country vulnerable to sharp fluctuations.
In its latest Spring European Economic Forecast report, the European Commission expects Albania’s GDP growth to slightly recover between 3.7 and 3.9 percent in the next couple of years, when the Albanian economy forecast to be the best performing among regional Western Balkan competitors, but says the balance of risks is tilted to the downside.
“Credit recovery may take longer than expected and the still elevated level of sovereign debt provides little room for countercyclical policies in case of need,” says the EU’s executive arm.
