1. Credit market developments: dynamics and stability of the system
Selami Xhepa

2. Motivation: high volatility of credit behavior and risks involved
Quality of loan’s portfolio
Threatening recession/economic growth

3. Monetary policy responses:
A series of policy rate cuts
Other policy measures related to:
Execution of Collateral

4. What drives credit growth?
Surges in capital inflows (usually associated with capital account liberalization, exchange rate regimes, etc);
Total factor productivity gains;
Financial reforms
Periods of strong economic growth are associated with credit booms
Mendoza and Terrones – 2008; Dell’Ariccia

5. What drives credit growth/behavior?
financial deepening (shown to support growth, Levine, 2005),
normal cyclical upswings (the demand and availability of credit tends to increase during recoveries),
excessive cyclical fluctuations (“credit booms”). Excessive credit growth (credit boom) often end leading to a financial crisis, as it was the case of Asian crisis in 1997 (Selim Elekdag and Yiqun Wu, 2011).

6. Credit behavior:
within the “normal” trends – part of financial deepening
deviates from such pattern – financial accelerator theory;
Qualifications for developing/transition economies: stronger credit growth does not indicate or qualify as “excessive” growth

7. Good and bad credit – and the ugly
Bezmer , 2014

8. ‘Healthy and unhealthy’ loans in Albania

9. Main hypothesis of the paper:
Credit supports growth, but when credit dynamics are excessive, they pose risks to growth.
Has credit in Albania been “excessive” too much/too little credit supplied if compared to the credit supported by macro fundamentals
Gauge into the dynamics of credit to private/public, trying to understand if:
economic growth and recovery of Albania can claim support from the financial sector or we have to go for creditless recovery scenario?

10. Methodology Not an easy job
At some degree, excessive credit relates to transition adjustment path of the financial sector
Two steps are followed:
Identify the deviation of the credit to GDP from its long term trend (Hedrick Prescott filtered)
Estimate the deviation of Credit to GDP from the its level defined by macroeconomic variables (VECM estimation of credit equation)

11. Private and Public Credit Deviation from long term trend

12. Episodes of credit dynamics being excessive are found (2004/2005; 2007-2009)
Credit to public entities “excessive”, two episode of positive excessive in a short time frame.
From “over” heated credit, over reaction of crediting, with prolonged excessive negative credit growth are observed

13. Is this excessiveness
a transition feature of the credit (the hypothesis of financial deepening)
or;
a system failure and lack of mechanisms to ensure smooth transition of credit cycles
What is the effect of this volatile credit for the sustainability of growth?

14. Credit as defined by Macro fundamentals
Estimated the following credit equation using VEC
A specification randomly found in similar literature, especially in studies dealing with transition economies.
Most of the variables were found non-stationary and VEC gives the best results when dealing with non stationary variable.
The model was then used to forecast credit and evaluate the deviation of credit from the credit as per macro fundamentals

15. Data and variables – Descriptive and expected impact
Hypothesis
 Mean
 Std. Dev.
No. 
Data frequency, source
Deposits to GDP
Supply side factors
(+)    
 198
BoA, monthly
Equity to GDP    
Public Credit to GDP
Crowding Out effect (-)    
BoA, Author calculations
Real GDP per Capita
Demand Side factor    
INSTAT, extrapolated to monthly
GDP per Capita (in Logs)    
Annual Inflation +    
INSTAT, monthly
Base Interest Rate
Measure cost of credit
(-) demand side
(+) supply side    
Spread (lending -depositing rate)    
Private Credit to GDP
Dependend variables    
Total Credit to GDP    

16. VEC identification procedures
All variables were tested for Unit root test – 4 variables have unit root
Number of lags to be included in the model were defined – 1 lag
Performing Cointegration test – Rank 1 (one cointegration equation)

17. Long term cointegration equation
Credit to GDP
Total Credit to GDP
GDP per Capita (in log, -1)
[ ]
***
[ ]
Deposits to GDP (-1)
[ ] **
[ ]
Base Interest Rate (-1)
[ ]
[ ] C
Error Correction Term
[ ]
[ ]
Δ[Credit to GDP (-1)]
[ ]
[ ]
Δ[GDP per Capita (-1)]
[ ]
[ ]
Δ[Deposits to GDP (-1)]
[ ]
[ ]
Δ[Interest Rate (-1)]
[ ]
[ ]
[ ]
[ ]
Equity to GDP
[ ]
[ ]
Spread
[ ]
[ ]
Public Credit to GDP
[ ]
[ ]
Inflation Rate (annual)
( )
( )
[ ]
[ ]
R-squared
Adj. R-squared
F-statistic
Log likelihood
Observations
196

18. Main findings
Long term credit is strongly influenced by economic performance and deposits
Interest rate, plays more on the demand side, hurting credit growth
Positive and significant error correction term, more financial deepening will be needed for Albania to move toward its long term macro founded equilibrium

19. Main findings
Short term adjustment/fluctuations of credit to GDP, weak and sometime “going wrong direction”
Banking sector equity, not significantly related to credit dynamics, may be because of deposit driven credit supply
Crowding out negative effect on private credit observed
Spreads, along side base interest rate were posing negative influence on credit short term dynamics.

20. Comparing credit with forecasted

21. Some concluding remarks
Reverse dynamics of private and public credit
Credit to private has to take ground, as it is currently under its long path equilibrium
Credit to private entities excessive episodes are more related to financial deepening
Smooth transition of credit cycles are needed in order not to hurt growth
2008 made private entities react and adjust (over adjustment and contract)
It seems now is the government turn to take care of public credit.