Abolishing the current restrictions on foreign exchange lending in Moldova is an issue that has been risen several years ago. At that time NBM asked for the opinion of IMF officials and they were against it. Now, we asked Johan Mathisen, the new IMF Resident Representative in Moldova, to discuss this issue.

“In Moldova this issue should be given a lot of consideration. A decision on it should be done for the right reasons”, says Mr. Mathisen. “In my opinion, it would be useful to discuss possible developments from the viewpoint of eventual strengths and shortcomings. It is necessary to weigh benefits from proposed liberalization of foreign exchange lending against potential risks that might be caused by such actions”.

IMF Resident Representative in Moldova proposed to look at the potential outcomes at three levels. At the consumer – borrower – level, at the lending bank level, and at the aggregated national level.

Let us start our analysis from the bank level. For commercial banks foreign exchange lending may seem profitable as it may lead to a significant increase of the lending portfolio.

However, foreign exchange lending, in Mr. Mathisen’s opinion, would increase the banks’ credit risk. “As the exchange risk undertaken by lenders increases their risk of insolvency. The foreign exchange lending risk is higher than the national currency lending risk”.

These statements are partly true, we think. First, the exchange risk – when the exchange rate can change in both directions – is a potential risk for national currency loans as well. Hence, if the MDL position strengthens – and we have witnessed this repeatedly lately – the risk of the decrease of profit from export proceeds leads to problems in repaying MDL loans.

Secondly, it seems to us incorrect to approach the Moldovan commercial banks from the position “we know what threats await you”. We would like to believe that during 10-15 years of activity many of them have learnt by now how to evaluate risks and weigh them against real benefits of some action or another. If risks are higher in the case of foreign exchange lending then this should be reflected in normative acts. However, it cannot serve by itself as reason to forbid operations that are usual in the international banking practice.

As for the profit increase, some banks are concerned that their real profit will decrease if foreign exchange lending is liberalized, since interest rates for foreign exchange loans are currently lower than for MDL loans. If all other conditions are equal it is more profitable to lend strong MDL at an interest rate of even 20% a year rather than in foreign currency at an interest rate under 15%. It seems that this is the reason why not all banks are in favor of expanding foreign exchange lending.

Still, many banks want to get wider foreign exchange lending rights to get more freedom for development, bearing in mind real needs and possibilities of the local market.

Let us refer to the consumer level now. At the moment, importers can get foreign exchange loans without restrictions. There is also another source of foreign exchange borrowing – credit lines of international financial organizations re-financed through local banks. However, this source is available for a limited number of banks that have received the right to use such credit lines, which is in itself a certain ‘discrimination’ in banking activity, in the opinion of those who have no access to them. Foreign exchange lending may be interesting for three categories of borrowers, namely enterprises that can be both importers and exporters, as well as individuals or households. Needs and risks in foreign exchange lending are specific for different categories of borrowers, and should be examined separately, to a certain extent, considers Johan Mathisen.

Importers usually are short in foreign currency and long in national currency. For exporters, on the opposite, is characteristic to be short in MDL and long in foreign currency (to explain the expert’s opinion let us say that being long in one currency is related to potential risks that appear in time).
When it comes to export, the problem is that appropriate mechanisms should be put in place – both at the banks’ level and at the NBM level – to identify for certain if the borrower would generate enough income in foreign currency so that it could pay back easily the foreign exchange loan when its maturity expires.

“However, a more effective alternate method to cover such risks might be the development of the derivatives market where exporters could insure themselves directly against unfavorable exchange rate differences”, adds Johan Mathisen.

Such method – in the opinion of local experts as well – is the preferable one. However, there is no real mechanism in place that would allow insurance against unfavorable conjuncture in the internal foreign currency market. Even futures or forwards (agreements that sets forth the prices, terms and volumes) that are similar to futures, to be used to buy foreign currency, are extremely rare at the moment. The reason is, as local experts explain, that commercial banks are ready to undertake the customers’ exchange risks only for a price that seems to customers too high.

However, if the exchange rate of MDL against foreign currencies will stay stable, then, possibly with time such service would get cheaper and there will be more demand for it. Regarding this issue, some say that progress would be quicker if NBM used more such tool as forwards. It allows commercial banks to conclude with NBM (and with each other) contracts for purchasing foreign currency which term, amount and price would be agreed preliminary, thus sharing potential exchange risk. Still, so far the longest term for NBM forwards for purchasing foreign currency is 30 days. Certainly, such term is far from sufficient to cover exchange risk in lending operations.

On the other hand, one should take into account that NBM is not, by definition, an enterprise seeking profit. If income is not the ultimate goal, why to risk then? “Forwards with commercial banks are used by NBM to maintain the stability of the national currency and the liquidity of the banking system. NBM does not consider them a tool to encourage the increase of foreign currency credit reserves by commercial banks”, explained the Chief of the Foreign Exchange Operations Division of NBM, Sergiu Bucur.

Besides, according to Mr. Mathisen – foreign exchange lending leads to an increase in imports and other types of payment balance worsening. (Here we talk about the national level already). Liberalization of foreign exchange lending, as the experience of other countries shows, can lead to the decrease of the national foreign exchange reserves and to the increase of exchange liabilities of local borrowers. Such situation conditions the worsening of the macroeconomic stance of the country because of so-called exchange differences”, states the IMF expert.

This risk can arise, for instance, in the form of a specific attack on the currency as a result of increased interest for foreign currencies rather than for national currency, when most foreign exchange assets will turn into foreign exchange loans to residents, i.e. local enterprises and individuals. If, under such conditions, a decrease of the volume of foreign exchange deposits  begins - it could lead to liquidity problems in the banking system.

When we talk about foreign exchange lending liberalization in Moldova, we should keep in mind two things. The first is the redistribution of the large foreign exchange lending resources of the banks. At the moment foreign exchange loans are given to importers for acquisition of goods abroad. But why cannot exporters be allowed to get loans linked to USD or Euro? Since now depositors are inclined to give their savings to banks in foreign exchange, even at a lower interest rate. If offer from depositors changes - interest rates will change as well. It is a normal market mechanism for pricing financial resources. And it is a sufficient counterbalance for the exchange risk, on condition that NBM makes efforts to maintain the dynamic stability of MDL.

Finally, let us refer to foreign exchange lending for individuals. Now one notices an increased demand for mortgage loans. People would like to get them for extended periods of time, at low interest rates. However, banks have limited MDL resources for lending under such conditions. At the same time, bankers say that they could gather from individuals more USD and Euros for long terms, at rates lower than for deposits with fixed terms in MDL. Why should not they use such possibility? Again, answers the IMF expert, there is an exchange risk for borrowers.

Of course, we can't agree more with the IMF official’s opinion here, namely that if MDL weakens the borrower will have to pay more for the foreign exchange loan reported to MDL. However, at this moment, when MDL is strong, the MDL loans are more expensive, especially if we bear in mind that during the last years the inflation rate growth in the consumer market has noticeably exceeded the rate of MDL devaluation against USD.

Thus, we consider the topic of foreign exchange lending liberalization an open and actual one.

Alexander TAKII

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