2024-07-27 08:31:29
And the head of the ECB was very careful and did not promise anything. Nevertheless, markets are optimistic about two more key interest rate cuts in the euro zone: in September (with an 80% probability) and in December (with a 76% probability). What determines this? First, the head of the ECB emphasized that the economic growth of the euro zone in the second half of 2024. in the second quarter will be slower than in the first quarter due to the weakening of the industry.
A very important indicator, especially for Lithuania, which is an exporting country and whose industrial expectations are consistently decreasing due to the weakening of the entire EU industry that has been going on for several months. Second, while the ECB has acknowledged the risk of wage growth pushing up services inflation, the bank says this is temporary, with wage growth expected to slow significantly in 2025 and 2026.
Gediminas Šimkus, Chairman of the Board of the Bank of Lithuania (LB), also tends to predict the further reduction of interest rates in September and December of this year. Moreover, market participants predict that the base interest rates will be reduced in both March and June 2025.
However, Lithuanian business still needs to survive until 2025. And not only to survive, but also to transform, to create jobs with higher added value and higher productivity, which means investing. But it is an obvious truth that investment requires money. And here are two pieces of bad news.
The first is that we will definitely not get a zero-rate reinvestment for profit in the near future. The current rulers have not done it yet, and it is difficult to guess who will take over the helm of Lithuania after the October elections. However, there are no firm promises in this direction. If, as the ratings promise, it will be the social democrats, then the zero reinvested profit rate will be only in one basket with a much higher profit tax. It could have been calmly accepted in previous years, but with our current geopolitical risks, I don’t know how we will encourage investment here under such conditions.
The second is our ability to borrow from banks. The common EU capital market is so far only a mirage, which is not spared good words, but it does not acquire any real forms. And some countries openly say that this mirage does not seem attractive to them.
On the other hand, commercial banks operating in Lithuania have been justifiably happy with their financial indicators for several years and are really smartly using the rules of bank sustainability that were tightened throughout the European Union after 2009. Unfortunately, they do not help the Lithuanian economy, which is currently particularly lacking in investment.
While the President of Lithuania, the Government and businesses are looking for opportunities to borrow for economic recovery, innovation, digital and green transformation, commercial banks operating in Lithuania are unfortunately consistently reducing lending to the country’s private sector.
What are the facts? According to the World Bank, loans to the country’s private sector in 2010 still reached 58.6 percent. GDP. Guess how much it was last year?.. Just 35.2 percent. GDP, ie 24.3 percent. point less. And this is almost twice less than in OECD countries (73.0 percent of GDP).
And, for example, in Sweden, since 2010, lending to the private sector has even exceeded 100%. GDP (in 2010 it reached 122.5 percent, in 2023 – 126.5 percent). In fact, credit to private businesses has been growing around the world. Just not with us. Why?
Is the Lithuanian private sector “uncreditable”? In recent years, the indicators of risky loans in Lithuania have been low (about 1%), the requirements to pledge assets (for business enterprises) are among the highest, and the interest rates are among the highest. The country’s economy, despite the marathon of crises in recent years, is still basically on the path of stable and faster growth than the average economy of the entire European Union. So, apparently, the answers to such non-crediting policy should be sought elsewhere.
What do the statistics say? Only 4 out of 10 euros collected in deposits are lent on the market (where the average ratio in the euro area is 10 out of 10). Other money “rests” in the accounts of credit institutions. Or in other words, there is money to lend in the country, but these institutions, armed with their financial sustainability indicators, lend it with great difficulty. And not only geopolitics is the main problem in the lending market.
World Bank data clearly shows that the problem is much deeper. It seems that the aforementioned credit institutions have simply lost the motivation to lend and manage risks.
And the need to borrow for Lithuanian business enterprises is great. According to the data of the European Commission’s regular survey of companies in the European Union, about 46 percent of all companies say that they have their own funds for investments, but in Lithuania there are only about 6 percent of them (according to the European Commission’s research data).
About half of all companies operating in Lithuania are forced to look for alternative sources of borrowing, as even 27 percent the applications of those who applied to banks were rejected (while in the European Union there were only 7% of such applications on average), and 13% companies in the country refused the offer of bank credit offered to them, because the set interest rates were too high (in the European Union, the average interest rates were only 3%).
As long as the issue of the unified capital market in the European Union is not resolved, I think it is very important to make maximum use of the instruments available in Lithuania that meet the legitimate expectations of the country’s economy, that is, deposit funds collected in Lithuania would be maximally invested within the country and would ensure adequate crediting needs of the private sector at an affordable price for this sector.
Because otherwise, even the changing policy of the ECB can be like a bandage for some of our companies. We’ll just be late.
2024-07-27 08:31:29