Bank of Albania data show average interest rate for lek-denominated loans rose to 9.19 percent in January 2014, up from 8.85 percent in December 2013 and 9.88 percent in January 2013
TIRANA, March 3 – Lending continued remaining at moderate negative growth rates in early 2014, while deposits strived to remain at positive growth rates, unveiling the difficult situation both businesses and households are facing as the economy faces its worst situation in the past five global crisis years.
Meanwhile, interest rates on lek-denominated loans suffered another slight increase in January 2014 despite the key interest rate standing at a historic low of 3 percent until late last February, unveiling the failure of the central bank’s easier monetary policy as bad loans stand at a record 24 percent and lending standards remain tight with banks preferring investments in low risk government securities.
Bank of Albania data show lending to the economy shrank by 1.25 percent in 2013, registering the first decline in the past five global crisis years. 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 as bad loans hit more than 22 percent.
Meanwhile, deposits slowed down to 2.1 percent 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 at negative growth rates.
With the key interest rate on lek and the euro at historic lows, investing in deposits is becoming less and less profitable as both interest rates on lek and euro denominated loans stand at a record low.
Since September 2011, the Bank of Albania has cut the key interest rate by 2.5 percent to 2.75 percent in several consecutive interventions, but the moves have only been reflected on lower T-bill yields and interest rates for lek-denominated deposits. However, the moves have failed to increase lending or investments as the Albanian economy suffered spillover impacts from top trade partners Italy and Greece and problems at home with public debt at around 70 percent of the GDP including government arrears of around 5 percent and non-performing loans at 25 percent.
In December 2013, Standard & Poor’s, one of the top three international credit rating agencies, lowered Albania’s long-term sovereign credit ratings to ‘B’ from ‘B+ with a negative outlook. The new rating means Albania is more vulnerable to adverse business, financial and economic conditions but currently has the capacity to meet financial commitments, according to S&P’s definition.
Despite remaining in negative growth rates for several consecutive months and the key interest rate standing at a record low, interest rates on lek-denominated loans have only slightly dropped affected by tight lending standards and high risk premia compared to low risk investments in government securities as bad loans in the banking sector stand at around 25 percent.
Bank of Albania data show average interest rate for lek-denominated loans rose to 9.19 percent in January 2014, up from 8.85 percent in December 2013 and 9.88 percent in January 2013.
Average interest rate on euro denominated loans also rose to 7.25 percent, up from 7.02 percent in December 2013 and 6.13 percent in January 2013.
Interest rate on 12-month lek-denominated deposits dropped to 2.39 percent in January 2014, down from 2.45 percent in December 2013 and 5.07 percent in January 2013.
Interest rate on 12-month Euro-denominated deposits dropped to 1.46 percent in January 2014 down from 2.74 percent in January 2013.
In late February 2013 Albania’s central bank cut the key rate by another 0.25 percent to 2.75 percent while the European central bank has kept the key rate unchanged at 0.25 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.
The latest survey carried out by the country’s central bank shows both households and businesses are facing rising difficulty in paying off loans they took at better times and do not plan to borrow in the short term either to finance home purchase or increase investments. The results reconfirm the difficult situation both households and businesses are facing as crisis impacts in Albania escalate with domestic consumption failing to recover because of consumers’ falling purchasing power and their rising saving trend as they expect harsher times ahead.
