Foreign currencies in crisis/ Businesses and individuals are returning loans from Euro to Lek

2023-11-17 07:34:00, Ekonomi CNA

Foreign currencies in crisis/ Businesses and individuals are returning loans

The strengthening of the Lek and the lower interest rates for loans in the local currency this year have caused many borrowers to convert their loans from Euro to Lek.

The Bank of Albania points out that during the third quarter of the year many businesses and individuals who had loans in foreign currency and mainly in euros have chosen to return these loans to the local currency.

The main factors that have supported this shift have been the appreciation of the local currency, the lower interest rates of the mortgage loan in Lek compared to that in Euro, as well as the regulatory facilities for changing the currency of the loan without penalty.

At the end of September, loans in lek for businesses recorded an annual expansion of 7.6%, significantly higher than the average growth of 1% in the first half of the year. The above developments have resulted in the increase of the share of loans in Lek to the total to 46%, at the highest historical levels.

Similar to the trends observed among businesses, foreign currency credit to individuals has slowed down to 13.9% in the third quarter, from an average of 21% in the first half. At the same time, loans in lek for individuals have shown improved growth rates, which reached 12.6% in the third quarter from 8% a quarter earlier.

This apparent shift of lending towards the lek does not only reflect a greater orientation of new loans towards the local currency, but also the conversion of existing loans.

For the first time this year, interest rates on loans in Lek were lower compared to loans in euros. The Bank of Albania significantly restrained the normalization of interest rates this year and until the beginning of November the basic interest rate was at the level of 3%. This caused the yields of government bonds to fall significantly and was also reflected in lower loan interest rates.

On the contrary, the European Central Bank this year has followed a rather aggressive approach, with successive increases in the base interest rate up to the highest historical level of 4.5%. This has been followed in the increase of Euribor and consequently of the rates of loans with variable interest in Euro.

The average interest rate for new business loans in Lek in the third quarter was 6.4% from 6.9% in the first half of the year. While the interest rate for business loans in euro was 6.4% in the third quarter of the year from 5.8% in the first part of the year and 5.4% a year ago.

A similar tendency has been observed for individuals. The average loan interest in lek for individuals was 6.7% in the third quarter from 7.0% and 7.6% in the previous two quarters. The average interest of the new loan in euro for individuals marked a slight increase, reaching 5.5% in the third quarter, from 5.3% and 4.1%, which were the values ??of the two previous quarters.

Meanwhile, this year the Lek marked an unprecedented strengthening in the exchange rate with the Euro. The Euro-Lek exchange rate went down to close to the 100 Lek limit in July, while the annual drop of the rate reached more than 14%. Under these conditions, many individuals and businesses found a double advantage to convert their loans from Euro to Lek.

The trend of returning loans in Lek is estimated to have also affected the performance of the exchange rate. The conversion of loans into the local currency means an increase in the demand for Lek and an increase in the supply of Euros in the foreign exchange market. In this way, this would explain, among other things, the strengthening of the Lek in the exchange rate with the Euro.

Although theory suggests that keeping interest rates lower is likely to devalue the currency, this has not happened with the Lek this year, in fact, the local currency has strengthened more than ever against the Euro.

This proves that the exchange rate in Albania is mostly determined by net inflows of foreign currency, but perhaps also the fact that the difference in interest rates has affected loans more than public savings and investments./ Monitor Magazine