December events can bring financial system of Moldova on verge of collapse

Summarizing results in the financial-banking sector with Dumitru Pîntea, economic researcher of the Independent Think Tank “Expert-Grup”, within IPN’s series “2020 in Review: Good and Bad Aspects”.

Dumitru Pîntea noted that on the first day of 2020, particular reforms done last year, which were positive reforms for the citizens, will take effect. These include the augmentation of the deposit guarantee limit from 20,000 lei to 50,000 lei. This brings more protection to depositors. Starting with next year, the deposits of legal entities will also be guaranteed. Also, at the start of 2020, as a follow-up to efforts started in 2019, the National Bank of Moldova (NBM) launched a financial education program given that the population’s interaction with the financial system has grown. The population takes out more consumer loans, home loans. By this campaign, the National Bank wanted to present the main concepts and financial products existing in the financial system to the population in plain words. As a result, the NBM’s website provides a financial education module where all those who interact with the financial system can find out more information.

These efforts were somehow thwarted by the COVID-19 pandemic that in Moldova started in March. The National Bank and the National Commission for Financial Markets, as regulators, came up with measures to support the population and firms by recommending the banks and nonbank lending companies to defer payments on loans released to private individuals or legal entities that were effectively affected by COVID-19. The repayment of about 4 billion lei in interest on loans was put off. This is about 20% of the loans released by banks. At the same time, the regulators recommended the financial institutions not to pay dividends this year so that the financial institutions remain solid during the crisis period expected after the pandemic. Most of the financial institutions complied with these requirements and coped with the economic situation until now. The financial system in general, despite the pandemic, remained rather stable this year, rather capitalized, with a yet low volume of nonperforming loans, of under 12%. Confidence of investors was maintained and these continue to remain in the Republic of Moldova.

This year, the terms in office of two vice governors expired, while the third vice governor tendered his resignation at the start of summer. Respectively, the Executive Board of the National Bank remained with only two persons. The governor of the National Bank proposed three candidates for the vacancies. Parliament approved only one of these candidates - Alexandru Sava. The other two candidates were rejected for the reason that they do not met the legal conditions stipulated for such a post, namely experience in the financial system. It was a political decision and the rejection of the candidates without these being put to the vote is a rather bad signal as the appointment of all the members of the Executive Board is a condition imposed by the International Monetary Fund (IMF) and other partners.

Another reform done as a result of the new agreement with the IMF was the transfer of the duties to supervise and regulate the insurance sector, nonbanking lending sector and savings and loan associations from the National Commission for Financial Markets to the National Bank as from 2023. The given law was adopted in September. The National Commission for Financial Markets will further manage the capital market. All these reforms were done amid the negotiations on a new agreement with the IMF, which were completed.

But winter came and the politicians or particular interest groups adopted laws that lead to the destabilization of the financial-banking system and generate imminent risks to the financial system. One of them is the revocation of the “billion law”. This causes problems from two perspectives: the National Bank will be de-capitalized and will be unable to fulfill its main duties stipulated by law – to maintain price stability and to target inflation - and other monetary policy functions. On the other hand, international practice shows a national bank cannot remain with negative capital and the Government is to capitalize back the NBM. It will have to find money and to give it to the National Bank so that it becomes solid. As the Government does not have money, it will have to issue state securities, to borrow money and to capitalize the bank, again on public funds. Moldova enters a black hole at world level. There is a risk that inflation will rise in the immediate period and this will lead to the depreciation of the national currency. The economy would collapse and the people’s savings would devaluate. Another adopted amendment provides that the money earned as interest from bank deposits as of 2021 will be taxed 3%. The Ministry of Finance aims to obtain the increasing of this percentage to 12% the next few years. The state securities will also be taxed, but his is done nowhere in the world.

Before the December events, the banking system, institutions were rather strong. The NBM’s reserves rose even during the pandemic, exceeding US$3.5 billion. The NBM has enough reserves to intervene in conditions of shock, but not in conditions of an extreme shock caused by the repealing of the “billion law”. Inflation reached historical lows, of under 1%. This leads to much lower interest rates. Six years after the commission of the banking fraud, particular investigation prospects appeared in 2015-2019. Later, after the political changes that took place, the investigation was resumed, but funds of those stolen from banks weren’t recovered. Money was recovered only from the liquidation of the banks. December changed radically the situation and ‘erased’ not only the results achieved in 2019, but also what had been done since 2014 and the national financial system can be brought to the verge of collapse if Moldova loses trust at foreign level and does not get money from the IMF and the European Commission, but this money is to be used to finance the budget deficit next year.

IPN

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