In an optimal case of the existence of the stock market and securities markets, the banks’ reaction toward interest rates on loans would be almost immediate on the market because of direct intersectoral competition between banks and non-bank financial institutions, experts say
TIRANA, March 12 – While the Bank of Albania’s consecutive cuts to the key interest rate have resulted almost inefficient to boost lending, domestic consumption and private investments, economy experts suggest structural reforms, a functional stock exchange and government orientation on productive investments.
“The cut to the key rate could have a positive impact on government debt, but in the Albanian economic reality it has not managed to produce an impact on the real economy,” says Arben Malaj, a former Finance Minister, who suggests structural reforms in improving the business climate and the quick payment of government arrears to give a boost to lending which since the second half of 2013 has been in moderate growth rates.
Selami Xhepa, another economist, says the interest rates are heading toward zero in real terms considering the inflation rate, casting doubts on the real impact of the central bank’s monetary policy. “On the one hand, it considerably discourages savings by households while the fact whether it promotes the economy remains doubtful,” says Xhepa about the cuts to the key rate which in the past year have almost halved deposit interest rates but remained almost unchanged on lek-denominated loans.
“Under these circumstances, there are other factors which must be solved especially relations between businesses and banks but even a clarification on the long-term monetary policy,” he adds.
Speaking of the need for a long-term vision of the key rate, Xhepa says “this would be a facilitating measure compared to frequent changes which instead of bringing a message of encouragement, convey messages of doubt and skepticism on the markets.”
Elvin Meka, another economy expert, expects interest rates on loans denominated in the national currency to be reflected in the next six to nine months considering the current mechanism of the transmission of the monetary policy and the lack of a an efficient stock market.
“In an optimal case of the existence of the stock market and securities markets, the banks’ reaction toward interest rates on loans would be almost immediate on the market because of direct intersectoral competition between banks and non-bank financial institutions,” says Meka.
Enea Janko, another expert, says government should orient SMEs to invest through market research and business plans to convince banks in providing loans to them.
Albania’s central bank expects the country’s economy to register a moderate recovery in 2014 when both international financial institutions and government expect growth to slightly accelerate to 2 percent, up from an expected 0.7 percent in 2013, the poorest growth rate in the past 16 years.
The base scenario of the Bank of Albania foresees Albania’s growth will be supported by higher exports and domestic consumption and the payment of government arrears which are expected to boost demand by businesses for new loans at a time when lending has plunged into negative growth rates.
Lending at negative growth rates
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.
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. The moves have failed to increase lending or investments as the Albanian economy suffers 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.
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.
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.
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.
Meanwhile, yields on 12-month T-bills, which are the key instrument of domestic public debt, dropped to 3.62 percent in December 2013, almost half of the record 6.6 percent in January, positively influencing on the reduction of the domestic debt cost.
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.
Tirana Stock Exchange
Almost a decade after its establishment, the Tirana stock exchange remains inactive due to the small number of listed companies currently counted on the fingers of one hand and lack of interest because of the high informality of Albanian businesses. However, at a time when the banking system has almost frozen lending, experts consider the activation of the Tirana stock exchange another opportunity to increase efficient investments. Business representatives say the activation of the capital market is the best way to fight corruption in privatization processes and attracting necessary financing for projects and public companies affecting the state budget.
“The increasing need of the Albanian businesses to find new financing ways, different from the costly bank loans, naturally leads to the activation of the capital market, which is necessary also to ensure financing on public companies and projects. The listing of public or private companies in the stock exchange would also serve to increase the confidence of these enterprises and would be the best way of marketing for potential investors in Albania and abroad,” Gjergj Buxhuku, the administrator of the Konfindustria business association has earlier said.
Experts say the activation of the capital market would not only break the financial monopoly commercial banks have established but would also give households the opportunity to invest their savings in shares of public projects or strategic enterprises.
The Tirana Stock Exchange, TSE, established in 2002 in the form of joint stock company is the only organized securities market in Albania.
Despite continuous efforts, this institution has not been able to be attractive enough for the national business. Currently, there are only four listed companies in the Tirana Stock Exchange, three of which are local commercial banks.
