TIRANA, March 3 – Lending to the economy suffered another setback in 2014 as bad loans stood at around a quarter and the payment of accumulated unpaid bills to the business community had a minor impact on reinvigorating demand for new loans.
Latest Bank of Albania data shows credit slightly accelerated to 2.2 percent in 2014, up from a 1.25 percent decline in 2013 as the 16 overwhelmingly foreign-owned commercial banks operating in Albania continued applying tight lending standards and the consecutive cuts to the key interest rate had a small impact on reducing loan interest rates.
Lending to the economy registered a turning point in July 2014 when it overcame a 12-month moderate decline of around 2 percent as the economy struggled with its poorest growth rate in more than a decade and bad loans stood at around a quarter.
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.
The easing of the monetary policy since late 2011 has had a small impact on reducing interest rates for loans denominated in the national currency due to the high stock of non-performing loans and poor demand for new loans by both businesses and households as the economy has been suffering crisis impacts with GDP growth in the 2012-2014 period estimated at 1 to 2 percent.
With the key rate cut to a new historic low of 2 percent in late January 2015, average interest rates on lek-denominated loans dropped to 8.1 percent in January 2015, down from 9.19 percent a year ago but up from a record low of 7.66 percent in October 2014.
Back in August 2011 when the key rate was at 5.25 percent and just before the country’s central bank would undertake consecutive cuts to its key rate in an effort to boost sluggish lending and consumption, average interest rates on lek-denominated loans stood at 11.11 percent.
Interest rates on euro-denominated loans, which account for around 60 percent of the total lending, have also registered a slight decline as the European Central Bank has kept its key rate at a historic low of 0.05 percent since September 2014.
Average interest rates on Euro-denominated loans dropped to 6.33 percent in January 2015, down from 7.25 percent a year ago and a record low of 6.12 percent last December, says the Bank of Albania. Local interest rates on Euro-denominated loans have dropped from an average of 7.6 percent at the onset of the global crisis in 2009 to 6.3 percent currently.
Interest rates on US dollar-denominated loans continue remaining at their historical average of 6.4 percent despite the Albanian-currency having lost around 20 percent in the past year.
In its latest country report on Albania, the International Monetary Fund which is assisting the Albanian government with a recovery programme supported by a Euro 334 loan says low inflation pressures can allow the country’s central bank to continue its easing of the monetary policy but its impacts could be limited due to the high level of euroization.
“With inflation falling below the inner band of the BoA’s inflation target, monetary easing is expected to continue in the near term, provided exchange rate pressures remain muted. The impact of further easing on credit may be limited, however, because of high risk aversion of banks, weak private sector balance sheets, and extensive euroization,” says the IMF.
With interest rates on loans denominated in the national currency having considerably fallen in the past couple of years, both businesses and households have shifted into borrowing in the national currency although lending in foreign currency continues dominating.
Lending in the national currency lek has gained around 10 percentage points in the past four years and now accounts for more than one third of the total credit portfolio compared to only a quarter just before the onset of the global financial crisis in 2008. Lending in the national currency climbed to 37 percent in 2013, up from 35.5 percent at the end of 2012, and only 27.4 percent at the end of 2008.
Latest data published by the country’s central bank show lending in lek for businesses increased its share to 38 percent in November 2014, up from around 35.6 percent in Nov. 2013 and only 34 percent in the same month in 2012. Credit in euro continues dominating lending to businesses with 52 percent of the total, followed by lending in U.S dollar with around 10 percent.
Tight lending standards and high interest rates in the banking sector are forcing more and more Albanian households and businesses in need to address informal borrowing, a survey conducted by the country’s central bank has found.
Deposits
With average interest rates hitting a historic low and standing below inflation rate, deposits are hardly managing to stand at positive growth rates and the newly established investment funds are emerging as a more competitive alternative in investing savings due to due to higher interest rates compared to traditional bank deposits.
Bank of Albania data shows deposits were up by 2.9 percent in 2014 but decelerated to 2.4 percent in January 2015 as interest rates dropped to a new historic low.
In April 2014, deposits slowed down to a record low of 0.5 percent, registering the lowest growth rate since late 2008 and early 2009 when banks in Albania witnessed panic deposit withdrawals 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.
Central bank data show the deposit growth slowed down to 2.1 percent in 2013, down from 6.3 percent in 2012, and 11.7 percent in 2011, unveiling the downward trend in consumers’ saving trend.
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.
Interest rates on 12-month lek-denominated deposits dropped to a new historic low of 1.42 percent in January 2015, down from 2.39 percent a year ago and 6 percent in early 2011 when the country’s central bank started easing its monetary policy by cutting the key rate from 5.25 percent to a record low of 2 percent currently.
Interest rates on 12-month euro-denominated deposits also dropped to a historic low of 0.49 percent, down from 1.46 percent a year ago and 4.7 percent in early 2009 at the onset of the global financial crisis.
