On 22 October 2012 the
International Monetary Fund released three documents regarding Moldova.
1. Country
Report No. 12/288: Republic of Moldova: Staff Report for the 2012 Article IV
Consultation, Fifth Reviews Under the Extended Arrangement and Under the Three-Year
Arrangement Under the Extended Credit Facility, and Requests for Waivers for
Non-Observance and Modification of Performance Criteria (“The staff report, prepared by a staff team
of the IMF, following discussions that ended on May 17, 2012 with the officials
of the Republic of Moldova on economic developments and policies. Based on
information available at the time of these discussions, the staff report was
completed on September 17, 2012. The views expressed in the staff report are
those of the staff team and do not necessarily reflect the views of the
Executive Board of the IMF.”)
Some excerpts regarding the banking sector and the
National Bank of Moldova (NBM) (emphasis as per original):
“... and the structural benchmark on the long-overdue
parliamentary passage of legal amendments to facilitate debt restructuring and
speed up execution of collateral on bank loans was not met. Staff and the
authorities agreed on corrective measures to overcome these policy slippages.”
“B. Stabilizing Inflation and Developing the
Inflation Targeting Framework
13. The NBM’s aggressive easing of monetary policy
was appropriate in view of rapidly falling inflation and moderating activity.
After some tightening in mid-2011, the NBM reversed course and ratcheted down
the base rate by 550 basis points between November 2011 and February 2012. The
authorities’ sharp reaction was motivated by the plummeting inflation outlook
(some 350 bps between August 2011 and February 2012) and the weak response of
commercial bank lending rates (chart below). ...”
“The authorities ... concurred that the enacted policy
easing is still making its way through the financial system—lending rates had
inched down only slightly so far, banks held large amounts of liquidity in
reserve, while credit extension was holding steady (Table 4). It was therefore
agreed to refrain from further monetary policy action unless the downside risks
to the economic outlook materialize or demand-driven inflation pressures
re-emerge.”
“C. Preserving Financial Stability
16. The banking sector is broadly sound, but
developments at the majority state-owned Banca de Economii (BEM) are a concern.
Banks are generally liquid, well-capitalized, and profitable (Table 5). By
September 2011, the effects of the 2009 recession on nonperforming loans (NPLs)
had largely dissipated. The increase since then (to 15.3 percent at end-June
2012) is mainly due to (i) a methodological change (the addition of fully
provisioned off-balance sheet items), which added 2 percentage points; and (ii)
the deterioration of the BEM’s asset portfolio, which accounted for 3
percentage points. In February 2012, the NBM put the small Universalbank (less
than 1 percent of banking system assets) in liquidation following liquidity and
capital deficiencies, with little impact on the overall stability of the
banking system. With the exception of BEM and Universalbank, the overall sound
conditions in the banking sector are shared by individual banks.”
“17. Financial deepening has resumed, but action is
needed to remove legal impediments.
Since mid-2010, healthy credit growth has resumed and
the credit to GDP ratio has been slowly rising (Table 4). While remaining
mindful of credit’s effects on inflation and the current account deficit, the
authorities and staff concurred that credit growth can exceed nominal GDP
growth by a few percentage points to facilitate steady convergence toward
credit’s estimated equilibrium level of 80-85 percent of GDP from 38 percent at
end-2011.However, financial deepening is impeded by significant legal
constraints on the banks’ ability to restructure their NPLs out of court and
execute the associated collateral. The authorities have painstakingly prepared,
with Fund TA, a comprehensive package of legal amendments to address these
problems. Staff welcomed the authorities’ plan to swiftly implement this
long-overdue reform (SMEFP ¶15).”
“18. The serious situation at BEM needs to be
promptly addressed. Risky lending practices and poor governance have
significantly weakened BEM’s asset portfolio and necessitated a large increase
in provisions, bringing its capital adequacy ratio below the statutory minimum.
Conflicts between shareholders, lack of coordination between regulatory
institutions, and controversial judicial decisions have permitted the problem
to fester. The bank, which accounts for about 13 percent of total assets in the
banking sector and holds the largest number of individual deposits, requires
urgent measures to repair its balance sheet and improve risk management.
Drawing from MCM TA work, staff recommended decisive strengthening of the
bank’s management, including risk management capacity to ensure sound lending
practices and continuing close oversight by the NBM (SMEFP ¶13). Subsequently,
the newly elected Board of Directors has replaced the bank’s management and is
preparing further measures, including sales of foreclosed collateral, loan restructuring,
and––after all other avenues are explored––possible recapitalization, to
rehabilitate the bank. Staff encouraged the authorities to seek minimization of
the cost to the public purse.
19. The events at BEM and previous legally dubious
takeover attempts of Moldovan banks call for improving the judicial system and
achieving greater transparency of bank ownership. The authorities agreed
that a speedy passage of the prepared (with assistance from LEG) legal amendments
to facilitate disclosure of bank owners, to introduce fit and proper criteria
for financial institutions’ directors and senior management and a more
effective sanctioning regime, together with swift judicial reform, are
essential to mitigate similar problems in the future. (SMEFP ¶14).”
“STAFF APPRAISAL
30. Moldova enjoyed vigorous economic growth in
2010–11, supported by appropriate macroeconomic policies and structural
reforms. Implementation of the ECF/EFF-supported program over that period
has been strong.
31. The economy is slowing down in 2012 due to
weakening external conditions, with serious downside risks. GDP is expected
to grow by 3 percent in 2012, and inflation should settle close to the NBM
target of 5 percent. Economic deterioration in the EU could significantly depress
growth. However, with a lower structural fiscal deficit, improved monetary
policy framework, and an overall sound banking sector, Moldova is in a much
better position to withstand shocks than in 2009. ...”
“Table 5. Moldova: Financial Sector Indicators,
2008–12 (End-of-period; percent, unless otherwise indicated)
[I give below the data only for Q2 2012]
Number of banks: 14
Total assets of the banking system (billions of
Moldovan lei): 53.6
Total loans of the banking system (percent of GDP):
35.5
Total assets of the banking system (percent of GDP):
59.4
Capital adequacy ratio (Total regulatory capital over
total risk-weighted assets): 25.6
[…]
Return on equity: 13.4
Return on assets: 2.7
Interest rates:
Domestic currency average lending rate: 13.7
Domestic currency average deposit rate: 7.6
Interest rate spread, domestic currency: 6.1
Foreign currency average lending rate: 7.9
Foreign currency average deposit rate: 3.8
Interest rate spread, foreign currency: 4.1
[...]
Source: National Bank of Moldova.”
“5. The financial sector remains strong although
recent decline in asset quality in the majority state-owned Banca de Economii
(BEM) is troubling. Even though the nonperforming loans (NPL) ratio has
increased to 15.3 percent in June 2012—mostly reflecting methodological changes
and the rise in the BEM’s NPLs—the sector remains well capitalized and liquid,
and credit growth net of write-offs stayed healthy at 16 percent. Meanwhile,
liquidation of the Universalbank has proceeded well with most household
deposits already paid out. ...”
2. Country
Report No. 12/289: Republic of Moldova: Selected Issues
An excerpt regarding the banking sector (emphasis as
per original):
“D. Conclusion
[...]
23. Moldova’s small banking sector is relatively
insulated from external developments. The potential losses from cuts in
foreign assets values or foreign funding for the banking sector as a whole are
small relative to total assets and reserves in liquidity, capital, and foreign
exchange. A few individual banks, particularly some foreign subsidiaries, are
more exposed, reflecting more sizable foreign assets and funding, albeit the risk
is only moderate. The foreign currency position is almost balanced across banks.
However the size of domestic lending in foreign currency suggests that currency
mismatches may be significant in the non-banking sector. Thus a large
depreciation of the leu could still have significant repercussions on the
banking sector if it provokes an increase in NPLs.”
3. Country's
Policy Intentions Documents -- Moldova, Republic of: Letter of Intent, and
Supplementary Memorandum of Economic and Financial Policies, August 31, 2012
Eastern Europe Banking &
Deposits Consultant
