Since taking office as governor of the National Bank of Moldova in 2009, Dorin Drăguţanu has implemented the country’s first inflation-targeting policy, has seen interest rates on loans and deposits decline and has welcomed amendments to the law on financial institutions. He speaks to The Banker about challenges surrounding transparency in the banking sector and economic implications of the Russia-Ukraine crisis.

Q: You inherited a country deeply in recession, with high inflation and high interest rates, when you became governor of the National Bank of Moldova [NBM] in November 2009. You started implementing an inflation-targeting regime in 2010. How would you characterise the economy now?

A: Our medium- to long-term target is 5% inflation with a potential deviation of 1.5% – before 2009 we permanently had double-digit inflation. Since the start of our inflation-targeting regime we managed to lower our inflation rate to single digits for the first time in 23 years, and we have kept it at this level for four consecutive years. More than that, in the past two years, at the end of each month, we were within the targeted band. This is a pretty good result for a young national bank, but a prudent fiscal policy implemented by the government also helped.

Interest rates on loans and deposits are also going down and have been doing so over the past four years. The rates are still pretty high compared with the EU but the improvement of the overall environment in the banking sector is obvious. The average interest rate on loans in local currency in 2009 was 20.3%, and in April 2014 it was 11.5%. On deposits, interest was 14.7%, which has dropped to 4.9% in April this year.

Q: In 2013, two large Moldovan banks, Victoriabank and Moldova Agroindbank, saw significant changes in their shareholdings and it is not clear who these new owners are. How are you trying to tackle the problem?

A: The Moldovan legal framework looks fine. The big issue is the effective implementation of the law. There were instances, where the NBM had collected a lot of evidence [against non-transparent actions] and taken the decision to block the voting rights and other rights of those shareholders, but we were then faced with questionable court rulings, which suspended our decisions. In a case like this, the judicial process takes two or three years, but meanwhile, those non-transparent shareholders remain at the bank.

To make it more difficult to obtain a suspension of an NBM decision, we obtained additional amendments to the law on financial institutions and to the administrative code, which means that if a shareholder wants to challenge a decision by the NBM they are now obliged to initially come to the Council of Administration of the NBM in order to avert surprises. And any claim can now only be challenged in the court in [capital city] Chisinau, where NBM’s legal address is.

The process is a bit more bureaucratic but we significantly squeezed the room for manoeuvre for judges, who now also have strict rules of how to examine a request for a suspension of an NBM decision.

All these amendments, especially the latest one, were approved by parliament in December 2013 and we are already testing in real life how these new provisions of the law work in reality with the case of Victoriabank (see article on transparency in Moldova’s banking sector, page 46).

Q: Is the profitability of Moldova's banking sector suffering?

A: The banking sector is inherently profitable; the overall capitalisation of the banks is comfortable, which makes the general picture pretty stable. Our banks mainly use the local deposit base to finance their activities. At the end of 2013, the loan-to-deposit ratio was 95% and at the end of April 97%, which means that total loans are lower than total deposits in the market.

The non-performing loan ratio at the end of April is about 12.4%. This looks pretty high if you compare it to a developed country or more mature banking sector but the number is still below that of some of our neighbouring countries.

Return on equity is usually between 8% and 9% and return on assets is about 1%. These pretty high figures reflect the high interest rate margins [of 6.5% in April 2014] but also the overall risks in the countries in our region.

Q: The Moldovan economy is strongly linked to Russia and has experienced shocks when Russia defaulted in 1998 and when wine exports to Russia stalled in 2006. What impact do the tensions between Russia and the Ukraine have on Moldova?

A: We aren’t seeing major movements in the markets or a shock in prices. People are still bringing deposits to the banks and companies are still asking for loans – maybe at a slower pace than previously, but loans are still growing.

If the situation was to deteriorate, we could face a shock if trade conditions in the region were suddenly toughened, and given that about 25% of our exports go to Russia, a change in trade conditions would affect us. In the first quarter of 2014, exports to Russia decreased by almost 40%, but the situation is still manageable. We need to see what will happen in the third quarter, because we record the bulk of exports in the third and fourth quarters.

Another big risk is a sudden tightening in migration conditions, as fewer people would be able to work in Eastern countries and could send money back to their families. This of course would cause some temporary shocks because last year our total cash remittances amounted to $1.6bn, which is about 24% of gross domestic product, and about 60% of our remittances are coming from the East. Any bad news from migration will hit our current account, which would mean that we would then need to accommodate for this or take decisions, which will help avoid a significant deficit in our current account.

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