Vladimir Munteanu
Financial stress – at historically low levels
The document analyzes the dynamics of the financial sector in terms of the current situation in the economy, financial results and “well-being” of professional participants, confidence of the population and business in it.
The aggregate financial stress index, according to the assessment, is at a historically low level, and the systemic vulnerability of the banking system remains low. The assessment of systemic risks revealed, however, the persistence of vulnerabilities in the non-banking sector, which is most exposed to credit risks, as well as potential risks associated with the real estate sector, climate change and digitalization.
At the same time, exposure to external shocks, including geopolitical, energy and trade shocks, remains a significant challenge to the country’s financial system, although not as pronounced, the NBM report said. Speaking about the probability of occurrence, the experts put the geopolitical risk in the first place, which is characterized by “high potential impact and a very complex management task”. Macroeconomic risk is second in importance. Sovereign risk ranks third in the hierarchy of risks of “medium severity” for the financial system. Credit and cyber risks are not neglected, and regulatory and reputational risks remain likely.
The opinion of professional participants themselves about their stress tolerance is closer to reality. Most respondents consider the real economy (91%) and external events (91%) as potential sources of systemic risk, followed by the political sphere (73%). At the same time, respondents mentioned other potential sources of systemic risk: the social sphere (55%), the financial and banking sphere (36%) and the real estate market (27%). One respondent even pointed to a new potential systemic risk – energy risk. It was rated as having “medium probability, low potential damage and relatively easy to manage”.
From the point of view of Vladimir Munteanu, former vice-governor of the NBM, the conclusions on financial stability are generally consistent with reality – “banks are well capitalized and have sufficient liquidity”. But “there are credit risks, especially in the mortgage lending sector, which can have a pro-inflationary impact”.
At the end of last year, average annual inflation amounted to 4.7%, initially remaining within the target corridor, but exceeding it in the second half of the year under the pressure of food prices and energy tariffs. Stabilization of inflationary pressure occurred throughout this year, and the National Bank forecasts a return to the target range only in 2026. This year will be marked by annual inflation of 7.5%, the NBM forecasts.
But the regulator looks at the difficulties with inflation targeting optimistically: “Despite these events, the banking sector continued to function effectively, supporting financial intermediation and transmission of monetary policy. However, the monetary policy easing had little effect on the rates of lending to households and the volume of borrowing to finance budget expenditures.
“Lost illusions”, or how to regain confidence
Perhaps, the main concern of the financial system on the background of the achieved successes will be the return of confidence in itself. According to the surveys conducted, the savings rate among the population is very low: 74.7% of respondents stated that they have not managed to save money during the last 6 months.
Most respondents who do manage to save keep their savings in cash (57.1%) or in a current bank account (46.1%). Other ways to save include: deposits/term deposits (9.1%), life insurance (3.1%), real estate investments (4.7%) and securities (2.0%).
Only 31.1% of respondents consider keeping savings in Moldovan banks partially safe, 29.0% – safe or very safe, and 25.4% – unsafe or very unsafe. Trust in non-bank credit organizations has decreased. If earlier one third of respondents trusted them, now only 9.5% declare their interest in NBCOs. In the lending process, the most important aspects are considered to be favorable loan terms (51.6%), speed of decision-making (39.3%), and low fees and commissions (36.6%).
The burden of servicing the public debt is putting more and more pressure on the budget. The maximum amount of repayments is due in 2025. The government’s objective is to borrow over 10 billion lei to cover next year’s state budget deficit. Whether it will be possible to place the entire proposed issue directly depends on the financial market’s demand for investment instruments, which has recently fallen significantly, despite good yields. And – on the banks’ “enthusiasm”.
“In recent years, the banking sector has made unprecedented profits despite a series of serious crises. In principle, there are enough resources in the system both for consumer lending and for financing the state. The only question is how to allocate these funds correctly and in a balanced way, how to strengthen market confidence in the mechanism of domestic debt management. As well as the confidence in the macroeconomic policy of the state,” says Vladimir Munteanu. – The cost of debt servicing directly depends on it. A professional monetary policy, as well as skillful coordination of liquidity management by the NBM and the Ministry of Finance are also extremely important”.
We will not guess whether the recent decisions of the NBM to provide additional liquidity to banks (reduction of mandatory reserve requirements) are related to the plans to refinance domestic debt and cover the budget deficit. But, as the regulator itself recognizes, domestic debt is more exposed to refinancing risk than external debt.
According to the Ministry of Finance, the short-term segment of domestic public debt, which is annually refinanced through new issues of government bonds, poses a significant risk to the state budget due to the possible growth of interest rates in the domestic market.
In 2025, according to the NBM forecast, economic activity is expected to moderately accelerate (GDP: +2.0%). Although this growth will not compensate for the downturn in 2022 (GDP in 2025 will be 98.1% of the 2021 level), consumption and private investment will remain the main drivers of economic growth. The task of banks is not to miss them….
