TIRANA, March 16 – Yields on government securities have embarked on a downward trend in the past couple of months as the country’s commercial banks are using their ample liquidity to invest in risk-free 12-month T-bills and two-year notes. The recent trend in this year’s auctions comes as lending is struggling to recover to positive growth rates and the 16 overwhelmingly foreign-owned banks continue to apply tight lending standards due to non-performing loans at about 20 percent and amid poor demand for new loans by both businesses and households.
The recent trend also comes as the country’s central bank has been holding its key rate at a historic low of 1.25 percent since May 2016 in a bid to boost sluggish lending and consumption and responding to low inflation rates at about 1.7 percent below the Bank of Albania’s 3 percent target.
Yields on government securities embarked on an upward trend in the second half of 2016, reflecting higher government demand for internal borrowing. The same trend is also expected this year.
Yields on 12-month T-bills, the government’s key instrument for internal borrowing, slightly fell to 2.46 percent in the latest March 7 auction, down from 2.89 percent in the previous auction and 3.22 in late December, following a gradual upward trend after hitting a historic low of 1.24 percent in mid-2016.
Meanwhile, yields on two-year notes, the government’s key instrument for long-term debt in the domestic market, dropped to 2.63 percent in this week’s auction, down from 3.35 in last February’s auction and 3.8 percent in January 2017 as banks offered to purchase about double the amount the Albanian government was seeking.
Back in June 2016, yields on two-year notes dropped to a historic low of 1.5 percent as the country’s central bank cut the key rate by another 0.25 percentage points to an all-time low of 1.25 percent.
Despite the slight decline in yields, investments in government securities remain a much more favourable option compared to traditional bank deposits whose average interest rates for the national currency stand below 1 percent and at almost zero for euro-denominated savings.
The lower yields have also had a key impact on reducing debt servicing as public debt dropped by 1.65 percent to 71 percent of the GDP in 2016, ending a 5-year upward trend.
With loan interest rates and security yields at a record low, the Albanian government spent only 36.2 billion lek (€264 mln) in interest rates on both domestic and external debt in 2016. The interest spending marks a record low since 2008 just before the onset of the global financial crisis when public debt stood at affordable levels of 55 percent of the GDP before embarking on an upward trend fuelled by a costly loan to build a highway linking Albania to Kosovo, rising yields and accumulated unpaid bills to the private sector.
The Albanian government targets reducing public debt to 60 percent of the GDP by 2020 but economic and political uncertainties over next June’s general elections. a slower than expected economic recovery and some current and newly proposed public-private partnerships estimated to create new hidden debt make its reduction to 60 percent by 2020 a difficult target to achieve.
Yields on 12-month T-bills have more than halved in the past three years, dropping from 6.6 percent in early 2013 to 3.83 percent in January 2014 and 2 percent in early 2016, considerably reducing the cost of government’s internal borrowing.
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.
