No. 45 (209) - 7 November 2007
Capital Market: "NBM's decapitalization: true or false"
The National Bank of
Moldova has announced for the first 9 months of this year losses
amounting to MDL 381 million, determined by the appreciation of the
national currency and significant foreign exchange inflows. The amount
of announced losses discords strongly with the profit made during the
same period of last year, namely MDL 331.6 million, as well as with the
last month’s outcome, when the NBM’s balance sheet showed profit of over
MDL 200 million.
At first sight, it is a
dramatic development. However, in fact, the National Bank has changed
the format of the balance sheet, shifting to the ‘net profit/losses’
category the unrealized losses from the exchange rate movement. Real
losses have been determined by the difference of the exchange rate
applied to the foreign assets of the National Bank that are computed
daily in Moldovan lei, at the official exchange rate. According to the
NBM, the value of the NBM’s assets/liabilities as of September 30, 2007
was 16.8 billion lei (USD 1.46 billion), which is higher than during the
same period of the previous year by almost 2.9 billion lei (USD 252.5
million), i.e. by 20.8 per cent.
Official reserves of the National Bank have
recently reached record-breaking levels, amounting to over USD 1.15
billion as of October 26. Out of these, over USD 356 million are kept in
securities, and USD 794.143 million are in sight and time deposits.
The National Bank is presently facing two
challenges: on one hand there are the increased hard currency inflows
coming from remittances and foreign investments, and this excess of
currency must be taken out of the market to ease the pressure of the
appreciation of the national currency, while on the other hand there is
the need to wipe out of the market the amount of lei which is massively
issued as a result of foreign exchange purchases by the NBM. Taking
national currency out of circulation (i.e. sterilization) is
accomplished by issuing NBM securities, as well as using other tools. If
it had not been done, we would be facing an increased spin of the
inflationary process, which is against the main goal of NBM. However, it
should be kept in mind that inflation is also a tax on the poor, as the
IMF staff have repeatedly mentioned; hence, any price increase hits
foremost the vulnerable categories of population.
Thus, NBM sterilizes the excess liquidity by
auctioning securities (NBM certificates) to the commercial banks with
maturity of 7, 14, and 28 days. For instance, at the auction on November
2 the interest rate set by NBM for its certificates was 15.8 per cent,
i.e. it was rather high. One should also take into account that the
higher is the sterilization rate, the bigger NBM’s losses are; on the
other hand the rate needs to be high enough to make these certificates
attractive for the banks, thus decreasing the volume of lei in
circulation. The experience of most central banks shows that inflation
is, first and foremost, a monetary phenomenon. Currently, one of the
factors causing inflation in Moldova is the excessive growth of
crediting by commercial banks, and this is the reason why measures are
needed to limit such credit expansion – if, of course, reigning in
inflation is desired.
On November 1, the Administrative Board of
the NBM decided to keep the NBM’s base rate for the refinancing of
commercial banks through 2-month REPO purchase operations in the open
market, at the level of 16 per cent a year. It is worth reminding that
NBM has raised significantly the base rate, from 13.5 per cent to 16 per
cent on September 26, also setting the interest rate for overnight
lending at the level of 18 per cent a year, and for the overnight
deposits attracted by NBM – at 2 per cent a year. At the same time, NBM
announced that ‘in conditions of maintained inflationary expectations it
will intervene through monetary tools to not allow a new fast increase
of the CPI, if needed’.
One should not also forget other prudential
measures of the monetary policy undertaken recently by NBM, such as
gradual increase of the requirements on the mandatory reserves for
assets in both national and foreign currency.
Independent experts believe that another
measure meant to decrease the pressure coming from hard currency inflows
would be the capital account liberalization (it should be mentioned here
that now Moldova has full current account convertibility of the national
currency, i.e. for external trade transactions, but not for capital
transfers abroad etc.). If, for instance, restrictions for transferring
foreign exchange from Moldova abroad would be fully lifted, then a part
of the excessive currency in the market could be channeled abroad, hence
easing NBM’s task to manage the increased inflows of foreign exchange,
consequently reducing NBM’s losses.
As for the losses announced by the National
Bank, the risk of its decapitalization is minimal. Last year NBM’s
capital was increased from MDL 200 million to MDL 866.7 million, and the
legislation was amended to ensure a sufficient level of capitalization
of NBM, being the national monetary authority.
Johan Mathisen, the IMF’s Resident
Representative in Chisinau has stated for “Capital Market” that total
capital inflows should amount by the end of this year to about USD 700
million, i.e. 16% per cent of GDP (we are talking about investments
here, not remittances), compared to 7 per cent in 2006, which is a level
comparable with that of the new EU members prior to their accession.
Hence, one can observe a continuous growth of Moldova’s BoP surplus,
this year being a record-breaking one.
The capital inflows have both positive and
negative impact on the national economy.
The negative effects are felt by creating
pressures in the domestic currency market and, as a result, we face a
trend towards the increase of the inflation rate, which can be
eliminated through sterilization of the excess of lei in circulation. In
such context, the National Bank, its main goal being to maintain price
stability, has to choose between the appreciation of national currency
or increasing the interest rates. In the end, we face decapitalization
of the National Bank. And this should not scare us, since it’s a
phenomenon characteristic of all states having massive capital inflows.
No matter if we like it or not, the central bank of a country has to
face the consequences of sterilization. Such consequents are imminent,
and we just need to be aware of this.
The positive effects of capital inflows are,
however, much more significant. In this context, Mr. Mathisen has
prompted that the process of income converging towards EU levels has
started. Now everything will depend on how this process develops and
what kind of investments Moldova is going to attract. The country needs
investments to increase labor productivity and this is the only way to
achieve competitiveness and income growth.