banking risk, currency risk, sovereign debt risk

1. 1
Macro 2013 conference, Chisinau
Short-term financial
risks in Moldova Ukraine: 5 Year USD Credit Default Swap Par Mid Rate (bps)
Russia: 5 Year USD Credit Default Swap Par Mid Rate (bps)
Brazil: 5 Year USD Credit Default Swap Par Mid Rate (bps)
JUN
13
MAYAPRMARFEBJANDECNOVOCTSEPAUGJULJUN
12
Sources: CMA Datavision /Haver Analytics
975
900
825
750
675
600
525
280
240
200
160
120
80
June 18th 2013
David Dalton
© Economist Intelligence Unit

2. 2
Some conclusions first
• Moldova’s banking system has been relatively isolated from direct
financial turbulence externally and from impact on parent banks.
• After 2008-09, economic weakness left Moldova with low debt
burden, in contrast to, say, the Baltics.
• Regulation and supervision looks like main short-term risk to
banking stability, which has potential for knock-on effects on public
finance and the currency.
• Leu float reduces currency risk, but chronic external imbalance
could be more of a risk with remittances likely to fall following
Russian weakening. Too fast currency depreciation could boost
inflation, complicating monetary policy.

3. 3
What is financial risk?
How believable is commitment to
exchange assets as agreed?
If “not very”:
Relative asset prices can change unpredictably.
Incentive to switch to increase wealth/ avoid wealth loss.
This is a financial crisis: this is what we’re
looking out for when we try to assess a
country’s financial risk.
Analyst asks: Will investors get their money back?
Country (Moldova) asks: Will this hit economic growth?

4. 4
Big picture: Moldova rates a “B”
How is Moldova assessed?
• Moldova’s financial risk is rated "B", in the middle.
• Can meet its financial obligations and wants to, but is
vulnerable to economic shocks.
• Same overall risk rating as Romania, Macedonia, Croatia;
above Ukraine, below Russia.
• At the top is AAA (“of course, help yourself!”) and at the
bottom is D (“are you crazy?”)

5. 5
Risk categories
• Five risk categories
• I’ll focus on three:
Banking: Risk that banks won’t pay back savings.
Moldova’s most risky category currently.
Currency: Risk that central bank won’t convert
domestic into foreign currency at the expected rate.
Not too bad for Moldova, but: a large external deficit.
Sovereign debt: Risk that the government won't pay
its debt in full and on time.
Not too bad for Moldova: low and multilateral.

6. 6
Bank risk I: pros and cons
Romania: Deposit Takers: Nonperforming Loans as % of Total Gross Loans
Ukraine: Deposit Takers: Nonperforming Loans as % of Total Gross Loans
Russia: Deposit Takers: Nonperforming Loans as % of Total Gross Loans (EOP,%)
12111009
Sources: International Monetary Fund /Haver Analytics
18
16
14
12
10
8
6
18
16
14
12
10
8
6
Positive recent indicators: April
• Non-performing loans
(NPLs) fell to 12.6% of all
loans.
• Banking assets rose by
3.8% year on year (yoy)
• Tier 1 capital increased by
5.2% yoy
• Capital adequacy at 24.9%
vs 16% minimum
But
• NPLs set to climb in wake of recession
• Net foreign banking assets still negative: Lei1.7bn in April 2013

7. 7
Bank risk II: making the rules stick
Banca de Economii (BEM)
• In 2012 regulatory capital fell below
set limits
• NPLs climbed to 55% of all loans
from 32% in 2011
• Misdeeds or just poor lending?
Moldova Agroindbank (MAIB)
• 30% of shares bought by foreign-
registered firms, all less than 5%, so
no need for NBM permission.
• Spontaneous upsurge of foreign
investor interest in Moldovan banks
or attempt to get round the law?
Possible impact
• BEM raises prospect of increased strain
on public finances.
• MAIB highlights risks of design and
enforcement of banking rules
• Both are big enough enough to
undermine confidence in banking sector:
hit saving and lending when external
conditions look grim.
• Currency and debt crises often originate
from problems in banking system.
• Recent cases raise concerns on bank regulation and supervision
• Even more important that in assessing bank risk than bad loans

8. 8
Currency risk I: weakening outlook?
Moldova: RealEffectiveExchRate: Consumer Pricebasis
2005=100
Moldova: ExchangeRate: Marketor Par
Average, Lei/US$
1211100908
Sources: InternationalMonetaryFund/HaverAnalytics
157.5
150.0
142.5
135.0
127.5
120.0
13
12
11
10
9
Leu: dynamics and outlook
• US dollar has strengthened
• Exports up in Q1 2013
• Remittances slowed at end-Q1
• Investment: won’t recover
much in EU
• NBM base rate down to 3.5%
in April
 Leu fell from Lei12:US$1 to
Lei12:5US$1 from February to
June
 Could produce faster leu
depreciation

9. 9
Currency risk II: mixed picture
Exchange rate regime
• Managed float
• Less risky than fixed: less distortion, less imbalance
Current account
• Deficit came down in 2012 in the recession
• But persistently large external deficit is a key risk to currency stability
• 8.5% of GDP over 4 years, 5.4% for “B”s, 1.6% for EMs
• Chronic trade deficit, linked energy and remittances.
• These can only be addressed over the long term.
Foreign-exchange (FX) reserves
• US$2.46bn in May: up 2% over 6 months
• FX to short-term debt is lower than for EMs and “B”s, but it >100%
• Import cover about the same: 4.5 months

10. 10