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Macroeconomic situation, bank lending and SME finance in Moldova
2. German-Moldovan Forum on SME Finance
Dr Ricardo Giucci
German Economic Team Moldova / Berlin Economics
Chişinău, 25 October 2011
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German Economic Team Moldova 2
1. Macroeconomic situation: Selected issues
2. Bank lending
2.1 Monetary policy and bank lending
2.2 Structural issues concerning bank lending
3. Implications for SME Finance
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1. Macroeconomic situation: Selected issues
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German Economic Team Moldova
Economic growth
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GDP growth, y-o-y, %
Source: NBS
• 2010: Strong and quick recovery after crisis
• 2011: Strong growth continues
• 2012: Slow-down forecast; need for structural reforms
Source: NBS
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German Economic Team Moldova
Inflation
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CPI, average, y-o-y, %
Source: NBS
• Until 2008: Relatively high inflation (two-digit)
• 2009: Very low inflation due to crisis
• Since 2010: Stabilisation of inflation rates in single digit realm, despite higher energy/food prices
Reason:• Change in monetary &
exchange rate policy• Inflation targeting instead
of exchange rate targeting
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German Economic Team Moldova
Exchange rate
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Exchange rate MDL/USD, 2005-2012f
Source: NBS
Since adoption of inflation targeting:•Lower interventions of NBM on foreign exchange market•Higher fluctuation of nominal exchange rate (MDL/USD)•But: Interventions from time to time to restrain volatility
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German Economic Team Moldova
Macroeconomic situation and SME lendingEconomic growth•Good for SME and SME lending•But: Lack of structural reforms a problem for long-term growth perspective
Inflation•Relatively low and stable inflation good for SME lending
Exchange rate policy•Flexibility crucial to avoid an exchange rate misalignment•Fixed systems: Risk of overvaluation/deterioration of int. competitiveness → Risk for SME & SME lending
Thus: Macroeconomic situation/policy matters for SME lending
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2.1 Monetary policy and bank lending
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German Economic Team Moldova
Transition economies in Eastern Europe: •Strong fluctuations of lending activity in recent years•Very high lending growth before the crisis•Abrupt decline during crisis•Very low lending after crisis
→ “Boom and bust cycle”
Implication for SME finance:•Bust period/credit crunch: Very difficult to obtain a loan•Boom period: Inappropriate checking of creditworthiness of borrower; many companies struggle later to pay back debt
→ Both periods of cycle not really good for SME
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German Economic Team Moldova
What is to be done?
Goal: Reduction in lending volatility
Instrument for monitoring situation:•Comparison between current and “equilibrium” lending•If ratio too high/upper threshold surpassed: Credit boom•If ratio too low/lower threshold not reached: Credit crunch
Main monetary policy instruments to reduce fluctuations:•Central banks’ interest rates•Reserve requirements
But also: Fiscal policy important → Policy coordination
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German Economic Team Moldova
NBM policy in this respect•Analysis of boom and bust cycle in the past•Research conducted on request of NBM by GET Moldova; see policy paper PP/03/2011•Result: Two events of credit booms since independence•Thus: Important initial steps already conducted
Further steps:•Establishment of forward-looking monitoring system•Training of NBM experts for using the monitoring system•Implementation of policy measures if danger arises•Here: Need for technical cooperation
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Credit booms in Moldova: Empirical Evidence
Source: GET Moldova Policy Paper PP/03/2011: "Credit Growth in Moldova: Empirical Analysis and Policy Recommendations"
Boom I
Boom II
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2.2 Structural issues concerning bank lending
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German Economic Team Moldova
High interest rates constrain access to finance
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Real interest rates, average 2005-2010, %
Source: World Bank
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German Economic Team Moldova
Policy measures (overview):
i. Improvement of creditor’s rights → Lower interest rates
ii. Better working of credit bureaus → Lower interest rates
iii. Better working of guarantee fund → Better access
iv. Increase competition and attraction of FDI in banking sector- More competition- New technologies beyond the traditional collateral based lending- Better funding
→ Lower interest rates and better access
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German Economic Team Moldova
i. Improvement of creditor‘s rights
Necessary:•Improvement of legislation on corporate insolvency & bankruptcy•Shorter court procedures related to problem loans•Improvement for execution of collateral
Situation:•Strong cooperation within IMF program on this field•Work in progress
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German Economic Team Moldova
International experience
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Bank interest rate spread and judicial efficiency
Source: Laeven and Majnoni (2004)
Conclusion: Clear correlation between judicial efficiencyand interest rates spreads
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German Economic Team Moldova
• As of today: Two credit bureaus– IMC Infocredit (founded in 2004) – ”Biroul de Credit” founded by the Bank’s Association of
Moldova• But: Databases of credit bureaus are still very limited;
much room for improvement• Reasons:
– The mechanisms for data collection are not working properly
– The banks and other financial institutions are reluctant to share the information about their borrowers
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ii. Establishment of effective credit bureaus
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iii. Guarantee fund for SME loans
• Idea: Lack of collateral should be mitigated by credit guarantees from a Guarantee Fund
• As of today: Guarantee Fund formally in place, but extremely limited resources and institutional problems
• In particular: 100% state-owned institution• On top: No participation of commercial banks in the
management of the Fund• Necessary: Reform and substantial recapitalisation of
existing Guarantee Fund or establishment of new institution
• Possible: Participation of foreign donors with both technical and financial assistance
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iv. Moderate competition/high concentration
Share of assets of 5 largest banks in total assets, %
Source: NBM
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Concentration – International Comparison
Market share of top five banks in % of assets as of end 2009Source: Local central banks, Raiffeisen RESEARCH
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Source: EBRD
iv. Low level of FDI attractionShare of foreign owned banks' assets in total banking assets, % (2010)
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4. Implications for SME Finance
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German Economic Team Moldova
• SME lending depends on macroeconomic policy and on structural issues regarding bank lending
• Moldova:– Adequate monetary and fiscal policy– But low speed of reform problematic in the long-term– Appropriate monitoring of bank lending by NBM– However: Structural deficiencies in banking sector
continue to limit access to finance for SME; high interest rates are still a problem
• In short:– Current macroeconomic/monetary/banking policy good– Lack of structural reforms in the economy and the
banking sector remains the main problem
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German Economic Team Moldova
Contact
Dr Ricardo [email protected]
German Economic Team Moldovac/o BE Berlin Economics GmbHSchillerstr. 59, D-10627 BerlinTel: +49 30 / 20 61 34 64 0 Fax: +49 30 / 20 61 34 64 9 E-mail: [email protected] www.get-moldova.de
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