The economy grows, lending from banks to citizens falls and uncertainty about the future is great

The increase in uncertainties and concerns over the possible weakening of economic activity with the prolongation of the conflict in Ukraine, have dictated the tightening of lending standards by banks for businesses, as well as the increase in the cost of credit in certain segments”, it is emphasized in the review of the Central Bank [1].

According to representatives of the banking sector, the deterioration of the ability of individuals to pay loans is expected to continue, as it did at the end of 2022 and during 2023. This several-month trend is already affected by high inflation, shrinking the purchasing power of consumers, and giving negative effects such as businesses and citizens.

Credit expansion in 2022 was observed in the medium and large business segment, while financing for small businesses decreased and slowed down for micro businesses. Both segments are also the categories most exposed to uncertainty and increased risk in the conditions of the new macroeconomic reality.

Likewise, according to the Bank of Albania’s publication of the Review of Lending Activity, of the IV Quarter [1]

“Banks lent to individuals within a cautious framework, tightening lending standards and approving a lower number of loan applications. On the other hand, individual initiatives of banks to increase the loan portfolio in the segment of individuals were finalized under conditions and easier credit terms, driven by increased competition in the banking system. Demand for credit was reported high across all business size links, used to cover increased needs in financing working capital inventories. “Individuals showed a lower demand for loans, both for consumption and for the purchase of housing. The decrease in the demand for loans from individuals, in the judgment of commercial banks, in addition to uncertainties related to the macroeconomic environment, also reflected the increase in interest rates.”

Although the year 2021 was the year that made the difference in the positive financial performance for the Albanian banking sector, it does not seem that the trend continued with the same growth for the year 2022 [2].

The decline in the profit of the banking sector in 2022 is conditioned by the increase in interest rates and the decrease in lending from November 2022.

Meanwhile, in December 2022, the Bank of Albania in its monthly publication summarizing the measurements on the survey of business confidence and consumer confidence shows us that although there is a slight increase in [3], however, it continues to remain below the long-term average. Although businesses expect an increase in their activity, they express low and declining expectations for the labor force and the prices of raw and semi-finished materials.

But what does the entire panorama of the banking sector and business and individuals’ confidence mean for the expectations of 2023?

Businesses expect input price inflation to increase in the next 12 months, although current forecasts speak of it softening. But anyway, the economy and businesses feel the uncertainty beyond the forecasts of the Bank of Albania and international monitoring institutions. This reflects ongoing supply chain disruptions and sharp increases in energy and raw material prices for all manufacturing sectors, including food. Similarly, citizens will also be more restrained in the demand for credit, due to the high interest rates, which means higher costs in the conditions of less income.

To support their margins, businesses have been raising prices to outpace costs since last year. Higher selling prices, along with increased sales, mean profits continue to rise after declines for much of last year.

The movement of employees and staff of diverse levels within businesses and the availability of non-managerial skills are the most cited growing challenges, each affecting two in five businesses. Staff turnover and limited skills availability, combined with high inflation, have prompted many businesses to raise wages in recent months.

Sales growth has been healthy, following contractions during the pandemic, but businesses are aware that this could be disrupted by economic threats posed by the cost-of-living crisis, rising inflation and global volatility.

While none of these problems have been directly influenced by the government, it is nonetheless its duty to address the high cost of living with targeted and strategic financial measures to prevent catastrophic consequences for people’s living standards and the amount of spending in the economy, which can result in real pressure on businesses.

[1] https://www.bankofalbania.org/Botime/Vrojtime/Vrojtimi_i_bizneseve_dhe_i_konsumatoreve/
https://www.bankofalbania.org/Botime/Botimet_sipas_viteve/Vrojtimi_per_aktivitetin_kreditues_T4-2022.html
[2] According to data from the Bank of Albania, the net profit of the banking sector for the 11th month of 2022 compared to the same period of 2021 results in a decrease of 13.4%.
[3] The economic sentiment indicator (ESI) recorded an increase of 2.7 points in December.
The industry confidence index (ICI) increased by about 2.9 percentage points compared to last month, influenced by the improvement of all its component indicators. Among them, the increase in the balance for current production and that of ordering contracts are highlighted. Also, businesses expect increased production in the future, against downward expectations for employment and for the prices of their products.
The construction confidence indicator (CCI) increased by 5.5 percentage points in December, registering a significant improvement in the indicator for the second month in a row. This development was influenced by the improvement of the balances for construction activity and for ordering contracts. Meanwhile, expectations for future employment and prices declined.
The service confidence indicator (SCI) recorded a slight increase of about 0.7 percentage points in the month of December, influenced by the better performance of the business progress indicator. Businesses in the service activity estimate that there is an increase in current employment, while expectations for the future are decreasing. The performance of service prices is expected to be in a downward direction.
The trade confidence indicator (TCI) continued the upward trend, up about 1.8 percentage points this month. The indicator was influenced by more positive assessments of current business performance and future employment. Expectations for future prices were downgraded.
The consumer confidence indicator (CPI) improved by about 1.8 percentage points in December but continued to remain below the long-term average. The indicator reflected the more positive assessment of consumers regarding purchases in enormous amounts, both in the current period and in the future. Consumers rate the current price trend downward, a situation which is expected to continue in the future