PRESS RELEASE
Questions and answers at the Governor's press conference on 06.08.2015

Question: You mentioned the reduction of non-performing loans. I would like to know more about them. What happened? Is there any write-off balance sheets? And the second question: You have cut the key rate continuously and that is mostly reflected in the lowering of interest rates on deposits than on loans. It is established a larger spread between them, while banks report high profits. How do you explain this fact and have you taken any other additional measure?

Answer: On your first question, about non-performing loans, your conclusion is true. Commercial banks have written off the non-performing loans of their balance sheets, attributable to the measures plan undertaken by the Bank of Albania. One of the points we have requested to banks is to clean the loans considered as lost and have more than three years that are not paid of their balance sheets. There is no sense that banks continue to have these loans in their balance sheets. Their shift out of the balance sheet will relief the economic and financial situation of banks and will increase their optimism and positive decision making in terms of further lending.

Nevertheless, the fact they are written off does not mean they are forgiven; they continue to be sub-mention loans. They are not reflected in the balance sheets, so far; nevertheless they continue to be reflected in banks' financial statements. I want to be clear on this fact, in order to give the right message. These loans are equally addressed as all other delayed loans.

The amount of written-off loans is around ALL 8 billion, driving to a fall of non-performing loans at 20.8%. This figure is quite positive and shows a positive trend of the improved non-performing loans situation.

Meanwhile, in addition to the balance sheets clearing, there are two other factors providing positive impact. First, the increase of outstanding loan at 2.4% in annual terms, impacts the non-performing loans ratio, as we refer to a ratio expressed in per cent. Lending increased both, for households and businesses, but higher for the households.

Second, the performance of loan portfolios was positive in all segments of business, as there is a payment and improvement of some loans, also their restructuring by banks.

Taking account of all these factors, non-performing loans are down. We aim at maintaining this trend in the periods ahead. I would like to emphasise, taking advantage of this moment and case, that there is a comprehensive measures plan, where are committed Bank of Albania, all public agencies and actors engaged in this process. This plan of measures is developed together with the Albanian Government. We have concluded a serious commitment of the Government regarding all the steps for the implementation of this plan of measures. Bank of Albania has started the implementation of some measures at the year start, while the plan was finalised around two weeks ago, between the Government and the Bank of Albania. In the context of this plan of measures, as I mentioned in the statement, we expect further fall of non-performing loans, which will drive to the growth of lending to economy.

The second question, interest rates on deposits and their impact, I would say that this phenomenon is not only an Albanian one. Bank of Albania has implemented the reduction on interest rates for the purpose of an accommodative monetary policy to foster lending, investments and economic growth.

Absolutely, any action has its positive and negative sides. Our aim is to enhance optimism in markets, and on the other hand, this policy leads to lowering of interest rates and savings. The cut of interest rates on savings would encourage a more optimistic approach of households and businesses regarding consumption and investments.

We are aware, like all the central banks in western and eastern countries, that interest rate on savings fells, but that is converted in higher investments, economic breathing, and a new financial incentive to support a better economic outlook. The economic recovery, in a second moment, once the measures implemented in the framework of the accommodative monetary policy provide their effects in economy, will drive to an increase of interest rates. To speak more concretely, our forecasts impose us to be positioned in the current territory, at least until the half of 2016.

This way is traced by all European and non-European central banks. Bank of Albania pursues the same line in terms of its monetary policy. It is a fact that lending in lek is increased by 7.5% on annual basis. This growth is directly related to the accommodative monetary policy implemented by the Beak of Albania: keeping the key rate at the lowest historical level.

Question: What has changed in the institutional relationship between the Bank of Albanian and the Government throughout one year? Is there any legal initiative between the Bank of Albania and the Government? Second question: How do you explain the fact that although the disbursement of around Euro 500 million by the Government to pay the arrears to businesses, bad loans continue to be a problem. Do you have any evidence where all these many has finished and what part of them have been transferred abroad?

Answer: On first question, regarding the legal relationship between Bank of Albania and the Government, if I understood it properly, nothing has changed. The relationships between the Bank of Albania and the Government are determined by the Law. Bank of Albania has been correct and strict in implementing these relationships pursuant to the Law. That is, the entire relationship is legally correct by the Bank of Albania and the Government.

Second question, I have addressed the issue on the payment of arrears in the previous occasions as well. It is true, that the payment of arrears by the Government to the businesses, as a rather positive step in supporting the economic and financial situation of businesses, has not impacted at the accepted level the payment of liabilities to banks and the accepted reduction of non-performing loans.

We deem that this was due to the fact that businesses have had a lot of liabilities and a lot of needs for liquidity. Their needs for liquidity were at higher levels, and they have preferred to pay the most acute needs, notwithstanding banks were at the list of creditors. Businesses have not determined a list of settlement priorities related to the payment of arrears.

One thing is sure, the non-performing loans and the situation of businesses in liabilities would have been several times worsened, in the event these arrears were not paid. The financial situation of businesses and corporates has considerably improved after the payment of arrears by the Government and is reflected in the relationship these businesses have with banks.

We are conducting a study to better understand the reasons, but in general, I just explained above the main reason.

Our expectations for the future are positive, in terms of the overall environment and the economic climate. Depending on the overall business' climate, we expect a growth of businesses' demand for credit and, and a fall in the specific share of bad loans.
 
Question: At the beginning of the statement, you stated that the economic and financial indicators, are trending down, particularly referring to fiscal indicators, but this will be a transitional situation. Where are You and the Supervisory Council based, when you say that is a transitional situation?

Answer: As we emphasised in the Monetary Policy Statement of the Bank of Albania, we expected a higher economic growth in 2016 and 2017. As I already mentioned, the financial standards will improve. The effects of the accommodative monetary policy will be felt, as we have felt the increase of lek lending. The support in lending will simulate the economic growth.

Meanwhile, attributable to the expected improved business climate in euro area in line with the European Central Bank's expectations, and the recently concluded agreement between Greece and creditors, the situation in the region and in partner countries, including Italy and other countries we have an active trading balance, is expected to improve. Also, we expect an increase in the level of foreign and domestic investments in Albania.

These are the main elements where we base our opinion that the situation in the second half of 2015 will be a transitional one. In 2015, the economic growth of 3%, may be revised down, as a result of developments in Greek economy. Potentially, we deem that the impact will be stronger in the second half of year, mainly concerning trade activity and remittances flow. Nevertheless, I would emphasise that exports to Greece increased at 5.5%, instead of falling, in the last months.

There are no accurate forecasts, but time has shown that real figures have been close to our forecasts. That means, during the second half of 2015, we expect a better economic growth than in the previous year, but it may be lower than 3%. The economic growth will continue to be up based on the above stated factors (increase of foreign and domestic investments, and the improved business climate in the region and in Albania in the years to come).

Question: One day ago the Government revised the budged, by cutting spending. What will be the impact on economy and do you deem it as appropriate in this moment?

Answer: The Government revised the budget for 2015. The revision consisted in the correction of spending in compliance with the revenue realisation. Although fiscal incomes are 5.5% higher compared to the same period in the previous year, they have recorded a non-realisation as a ratio to the income plan for 2015. In collaboration with the International Monetary Fund, the Government will revise the budget, both spending and revenues, as the low income level compared to the plan, should be compensated by a reduction of spending.

Absolutely that is the right decision, as the most important and crucial thing for which the Bank of Albania is interest as the basic element is the maintenance of the budget deficit. As it is noted from the changes in the budget, the budget deficit, which we follow attentively, is maintained unchangeable. These measures taken by the Government will be discussed once again with the next IMF mission in October, and as usually, we will have again a press conference to provide a more detailed explanation of this measures plan.

Question: In the Bank of Albania's report, at least for the second quarter, it was stated that lending standards to businesses are eased/improved, while business has no interest for loans. In fact, business is concerned and claims that commercial banks in Albania have rather tight lending standards; even more they are selective in granting loans, making business to apply for loans in neighbouring countries, where interest rates are lower and procedures less bureaucratic.

Answer: I am not sure how much business has applied for lending to banks in neighbour countries. There are some legal and administrative restrictions to Albanian businesses, which firstly relate to collateral and to some other elements.

Nevertheless, I will answer directly to your question regarding the banks' position to lending to businesses and which are the reasons.

Lending capacity of banks in Albania is influenced by two elements. First, the situation of non-performing loans. Notwithstanding the progress recorded in the last month, the still high situation decreased the optimism of banks in the decision making for a successful lending. The second element is related to the policies and strategies of parent banks in regional level, in line with the development objectives for certain countries where they conduct their activity and the risk criteria they implement.

In accordance with the classical principles of banking system, to receive a loan you should meet the respective criteria. In case you have unpaid debts or liabilities, a non-prospering financial situation and businesses, obviously the bank shall not grant any credit. Given the difficult economic climate, many businesses have problematic balance sheets and are classified as "not adequate" to receive a loan. That is related to overall business climate, not only in Albania, but also a regional a phenomenon and even broader.

We are working with both, banks and business, in order to resolve gradually this cramp, providing breath to businesses. But, we may not ask banks to ease the risk-related criteria, as banks work with households' deposits and the accommodation of risk criteria would make banks to undertake a risk bearing versus some businesses having problems. That means, we should be prudent, in encouraging banks towards lending to economy.

Our target, as a central bank, is than in one side to have sound banks, rather serious, correct, prudent as they operate with the savings of people, and on the other hand to have an economic growth. It is not an easy mission, it is a challenge, but we are moving ahead and figures, notwithstanding being gradual, show that we have made positive steps ahead. Future will show that we will have further progress, albeit gradual one. Our assessment stated in the statement is that we expect a moderate increase of lending during 2015 to businesses and a more optimistic growth of lending in the two years to come.