The Covid-19 crisis and declining demand have not affected housing loans, the central bank’s economist Vilnis Purviņš notes on the economic analysis website “makroekonomika.lv” maintained by the Bank of Latvia.
He also points out that the second wave of the Covid-19 pandemic and the additional restrictions imposed in December in various areas of life have not shaken the banking system. “The financial sector has remained stable. Both individuals and companies have continued to increase savings in their bank accounts. Although the banks’ risk assessment at the end of the moratorium and prudence in investment decisions slowed down the credit recovery, there was no further decline in the loan portfolio,” says Purviņš.
He points out that the tightening of consumption restrictions, as well as the deteriorating mood of entrepreneurs and consumers, stimulated the formation of forced and precautionary savings, increasing the growth rate of deposits. In February, the annual growth rate of domestic deposits reached 16.1%, the highest level since 2007).
Purviņš also points out that the annual growth rate of corporate deposits in February 2021 reached 17.8%, but that of households – 14.9%.
From December 2020 to February of this year, the total balance of deposits increased by 4.3%, including corporate deposits grew by 2.4%, but household deposits – by 5.6%.
“Exactly the limited opportunities to spend money according to one’s wishes at a time when wages continued to rise led to a faster increase in household deposits. Entrepreneurs, in turn, increased savings by refraining from new investments, although the export performance of goods was good,” explains Purviņš.
He also informs that the decline in the domestic loan portfolio in the conditions of pandemic and negative mood can be assessed as moderate: supportive monetary policy and banks’ approach to entrepreneurs in crisis-affected sectors ensured that from December 2020 to February 2021 loans to non-financial corporations and households shrank only by 1.5%, with a slight decrease in enterprises, but only by 0.5% – loans to households.
“The crisis and declining demand did not affect housing loans – they have increased by 0.5% in the last three months,” says Purvins.
He also mentions that the ratio of domestic loans to gross domestic product (GDP) in 2020 remained at the level of the previous year and was 38%.
“The total domestic loan portfolio grew significantly in January this year at the expense of loans to financial institutions due to a one-off factor – the bank’s refinancing of a loan from a financial institution. The annual rate of change in domestic loans turned positive in January and was 3.9% in February. Excluding the impact of changes in the banking sector’s structural and institutional sector changes and one-off factors, the annual rate of change in the loan portfolio was negative for both loans in general (-1.4%) and loans to non-financial corporations (-2.2%) and loans to households. (-0.2%), “says Purviņš.
He also notes that the still low lending activity was reflected in a further decline in new loans in general and in the household sector. In the last three months, from December to February, new loans were issued 4.9% less than in the previous three months, including 14.3% less to households, while non-financial corporations received 4.2% more.
“The negative economic sentiment does not lead to a significant credit recovery in the near future. Credit demand could be dampened by the substitute role of government support measures for Covid-19 crisis-affected sectors, while household deposits increased by a one-off € 500 child benefit and a € 200 pensioner benefit, Representative of the Bank of Latvia.
Data from the Bank of Latvia show that at the end of February 2020, the total domestic loan portfolio of Latvian banks was 11.934 billion euros, while domestic deposits amounted to 15.006 billion euros.
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