TIRANA, May 2 – The rapid growth of investment and private pension funds in the past few years has more than doubled the share of Albania’s non-bank financial institutions in the country’s domestic debt stock. Households have also increased their share benefiting from more favorable rates compared to investments in traditional deposits whose interest rates currently stand close to zero.
By contrast, the country’s central bank and commercial banks have lowered their exposure to the country’s domestic debt, fuelled by consecutive cuts to the key interest rate, currently standing at 1.25 percent of the GDP.
Albania’s non-bank financial sector accounts for about 10 percent of the GDP and consists of savings and loan association, micro-credit organizations, insurance companies, investment and pension funds and leasing companies supervised by the Bank of Albania and the Financial Supervisory Authority.
Non-bank financial institutions invest about 40 percent of their assets in government securities with the share of investment funds and private pension funds at about 90 percent.
Central bank data shows the non-bank financial sector dominated by investment funds slightly increased their share in the country’s domestic debt to 15.5 percent at the end of the first quarter of 2017, up 0.1 percent compared to the end of 2016, but down from a record 17 percent at the end of 2015. The increase has been triggered by the sharp growth in the emerging investment funds which suffered their first contraction in 2016 after rapid growth in their first four years of operation.
Net assets in the three investment funds slightly dropped to 65.4 billion lek (€483 mln) in 2016, accounting for 4.4 percent of the GDP, as membership dropped by about 9 percent to 29,276 investors, according to a report by the country’s Financial Supervisory Authority.
Meanwhile, the smaller emerging private pension market registered a sharp 42 percent increase with its net asset value climbing to about €9.75 million. With a membership of more than 17,000 investors, the voluntary private pension market holds less than 0.1 percent of financial system assets and aims at supplementing pensions offered under the government’s obligatory scheme.
Both investment funds and private pension funds were established in 2012 and have been rapidly growing in the past few years.
Back in 2008, just before the onset of the global financial crisis domestic debt was largely held by commercial banks and the country’s central bank while non-bank financial institutions and households held a total of about 10 percent.
Domestic debt stock at the end of the first quarter of 2017 slightly rose to 572 billion lek (€4.1 billion) accounting for about 36 percent of the GDP, according to the finance ministry.
External debt, whose share has almost trebled since the onset of the global financial crisis in 2008, accounted for 32.5 percent of the GDP at the end of the first quarter of 2017.
Albania’s public debt continued declining in the first quarter of this year after overcoming a 5-year upward trend that saw it hit a record high of 72.6 percent of the GDP in 2015. Finance ministry data shows public debt dropped to 68.37 percent of the GDP at the end of March 2017, down from 71 percent of the GDP at the end of 2016 thanks to a tight spending policy the government has been following in a bid to bring public debt to more affordable levels of 60 percent by 2020.
Yields embark on downward trend
Yields on government securities have embarked on a downward trend in the past few 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.
Yields on 12-month T-bills, the government’s key instrument for internal borrowing, dropped to 1.8 percent in the latest April auctions, down from 3.22 percent 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 2.25 percent last April, down from 3.8 percent in January 2017 amid higher auction interest and tougher competition.
Despite the slight decline in yields, investments in government securities remain a much more favorable 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.
