Credit growth in Moldova

Abstract

"Bank credit growth to the private sector has risen rapidly in many Central and Eastern European countries (CEECs) including Moldova over the previous decades, an issue that ranks high on economic policy agendas. This can be explained by severe macroeconomic and financial sector stability risks that excessive credit creation ('credit booms') carries. However, strong credit growth can also be interpreted as an equilibrium phenomenon, signalling financial deepening that helps to accelerate real income convergence and economic development in general. In order to distinguish 'good' from 'bad' credit creation, one needs to examine in more detail the empirical credit dynamics in the country in question. In order to conduct an analysis of credit growth in Moldova during 1995-2010, we use a number of complementary approaches. Specifically, we apply both statistical and fundamental econometric methods that have been widely used in the literature to Moldova for the first time. The results verify that Moldova displayed two distinguished periods of credit booms in its recent past. The first credit boom developed around 1998, just before the Russian crisis. The second boom developed during 2007/08 after some years of very strong economic growth, and just before the global crisis hit the country. These results confirm that the authorities need to be vigilant, monitoring the pace of credit creation very closely. The approaches discussed in this paper contribute to such efforts. Furthermore, in case the models signal that credit growth turns excessive, the authorities need to deliver a comprehensive policy response in order to keep credit growth in line with the development of economic fundamentals. We discuss a wide range of possible policy options, ranging from macroeconomic policies to prudential and supervisory tools." (Author's abstract, IAB-Doku) ((en))

Cite article

Weber, E. & Kirchner, R. (2011): Credit growth in Moldova. Empirical analysis and policy recommendations. (German Economic Team Moldova. Policy paper series 03/2011), Berlin, 12 p.