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The profit of the National Bank, Government’s Securities and the Lei Rate

The profit of the National Bank, Government’s Securities and the Lei Rate

InfoMarket Comment

When there is not enough money, it’s always in demand. It so happened that Moldovan politicians most often are looking for money at the National Bank.

President Igor Dodon announced in early February 2020 that it would be possible to reduce the amount of debt on money from the stolen billion by 5-6 billion lei if the National Bank provides the funds. Politicians and some businessmen "peered" at the National Bank’s currency reserves prior to the statement... but it’s more difficult than profit: the NBM only manages currency reserves, places it on highly liquid world markets and ensures the financial stability of the state, guarantees the country's import and the reliability of the Moldovan currency. The International Monetary Fund will not be silent if something happens with currency reserves that is not stipulated by strict rules, contracts or memorandums.

There is only one question about foreign exchange reserves: the IMF recommends that the reserves cover 3-4-month imports into the country. Today, the amount of the reserves $3.05 billion which covers the import of more than 6 months ($5.3 bn. for 11 months of 2019). How appropriate are such excessively high foreign exchange reserves?

The profit of the National Bank is likely to be changed in the near future.

In general, the NBM is not a commercial organization and does not aim to make a profit. Its main goal is to maintain inflation rate and its range was 5% per annum ± 1.5 percentage points in the last decade, that is, from 3.5% to 6.5% per annum. If the Leu rate changes dramatically in any direction this will certainly affect inflation rate.

50% of the National Bank’s profit should be sent to the authorized reserve fund of the NBM in accordance with the law of 2015, another 50% of the profit to the accounts of the Ministry of Finance as dividends of the state organization. The losses of the NBM were covered by the previously established reserve fund, if it was not enough, the NBM had to apply to the Ministry of Finance for additional funds but so far it has not reached the latter.

The Law on the National Bank have been amended in July of 2015, according to the Law all profits of the NBM sent in its reserves up to the moment when they reach 10% of all cash Liabilities of controller. When the NBM registered the highest profit in its history at the end of 2015, it was sent to the reserves. As a result, the size of the authorized capital amounted to 8.8% of liabilities. It was the highest and the closest indicator to the target of 10% for all the years the National Bank has existed.

The losses of 2016-2017 years had reduced the reserves but the profit in 2018 has compensated these losses by two-thirds. According to InfoMarket news agency, the regulator’s revenues amounted to 1.7 billion lei last year, operating expenses - 0.34 billion lei, expenses on the implementation of monetary policy - 0.92 billion lei. This is preliminary data, which must be verified and approved by an external auditor.

The financial result of the NBM activities in 2011-2019.

Year

2011

2012

2013

2014

2015

2016

2017

2018

2019 *

Profit in million Lei

57.88

70.92

250.08

1778.73

1960.89

-262.15

-95.31

249.13

-

 

* Profit data for 2019 is not published yet.

The NBM's monetary liabilities amounted to 52.4 billion lei at the end of 2019 (the main part is in Moldovan lei). Reserves should be 10% or 5.2 billion lei but this border do not reach yet, with an indicator of 5.8% (3.1 billion lei), which means that the profit should remain in the NBM’s reserve fund until it reaches 10% of the liabilities, according to the law.

Currently, it has already been announced, amendments are being prepared to the law on the National Bank, so that distribute profits by the formula 50 to 50, half of the profits goes to the bank's reserve, half to Ministry of Finance as dividends, but with one caveat: if the reserves of the NBM are reduced below 4% of liabilities, the payment of dividends to the Ministry of Finance is suspended. Meaning, it is proposed to introduce a minimum of necessary reserves which will ensure the financial stability of the regulator in fulfilling its main task. The amendments are still being discussed, we will see final version of the law after the parliamentary vote, possibly in the coming weeks. Then, the profit of 2019 will most likely be distributed according to the new law.

In general, the question of profits’ distributions is solved differently in different countries. There are no international standards, except for the guarantee of the regulator’s financial independence.

The repeal of the so-called "Billion Law" has been discussed diligently in recent months. After the "theft of the century", a "hole" in the Moldovan budget was found, money was found in the National Bank (as mentioned at the very beginning). As a result, the Ministry of Finance issued in August 2016 special-purpose government securities worth 13.58 billion lei for a period of 25 years at 1.4% per annum (the first 9 years) and 5.3% per annum (the remaining 16 years) .

Mathematically, the government will pay from the state budget not only 13.6 billion lei of issued securities over 25 years , but also 11.5 billion lei in the form of interest. In total, Moldovan taxpayers will pay 25.1 billion lei for government decisions taken bypassing the parliament.

Let’s recall the redemption of special purpose government securities is planned.

Repayment period
(years)

The volume of
emissions
(thousand lei)

Interest
rate

Interest on
each
emission
for the entire period of
its circulation
(thousand lei)

Interest on
each
emission
on annual
payments
(thousand lei)

Interest
repayment amount by years (thousand lei)
 
 
 

Total
repayment amount
(repurchase
and interest) by years (thousand lei) 
 
 

1

50,000

1.4

700

700

631 017

681 017

2

210,000

1.4

5,880

2 940

630 317

840 317

3

230,000

1.4

9 660

3 220

627 377

857 377

4

240,000

1.4

13,440

3 360

624 157

864 157

5

260,000

1.4

18,200

3,640

620 797

880 797

6

290,000

1.4

24 360

4,060

617 157

907 157

7

310,000

1.4

30 380

4,340

613 097

923 097

8

330,000

1.4

36 960

4 620

608 757

938,757

9

360,000

1.4

45 360

5,040

604 137

964 137

10

390,000

5.3

206,700

20 670

599 097

989 097

11

420,000

5.3

244,860

22,260

578 427

998 427

12

450,000

5.3

286,200

23 850

556 167

1 006 167

13

490,000

5.3

337 610

25 970

532 317

1,022,317

14

530,000

5.3

393,260

28,090

506 347

1,036,347

15

570,000

5.3

453,150

30 210

478 257

1,048,257

16

620,000

5.3

525,760

32,860

448,047

1,068,047

17

660,000

5.3

594 660

34 980

415 187

1,075,187

18

720,000

5.3

686,880

38 160

380 207

1 100 207

19

780,000

5.3

785 460

41,340

342,047

1 122 047

20

840,000

5.3

890,400

44,520

300,707

1,140,707

21

900,000

5.3

1 001 700

47,700

256,187

1,156,187

22

980,000

5.3

1,142,680

51 940

208 487

1,188,487

23

950,000

5.3

1,158,050

50 350

156 547

1 106 547

24

950,000

5.3

1 208 400

50 350

106 197

1 056 197

25

1,053,717

5.3

1,396,175

55 847

55 847

1 109 564

TOTAL

13 583 717

 

11 496 885

 

11 496 885

25 080 602

 

* Calculations of interest and payments were made by InfoMarket agency and may differ from the data of the Ministry of Finance and the NBM.

These funds have been repaid mainly due to the return of money from the sale of property of the defendants involved in the "theft of the billion" case, including the sale of assets of three banks (Banca de Economii, Banca Sociala, Unibank) and the sale of shares (Moldindconbank, Moldova Agroindbank, Moldasig).

Speaking about the conditions on special-purpose government securities were placed (13.6 billion lei for 25 years), there is no escaping the fact that the rate of return on the securities, which the Ministry of Finance will need to pay after the 9th year of issue, that is, starting from 2025. The issue on these papers discussed in the parliament in January 2016, the average interest rate on government treasury bonds (T-bills) amounted to 25.29% per annum at the time of enactment (July 2016th) it was 12.54% per annum. The proposed rate on government securities for special purposes at 5.3% per annum since 2025 looked very attractive to the state, it was significantly lower than the market one. The rate on T-bills decreased sharply in recent years by 4.99% per annum, according to the results of 2018 and 6.22% per annum 2019. The yield on securities of 5.3% was estimated as normal in 2016 (which is 3-5 times lower than the market’s value). Today, the situation has changed significantly, the yield of 5.3% is very attractive for investors. By the way, the NBM can sell 40% of the volume of issued securities in the secondary market according to the law. Certainly, there will be investors who want to purchase them. The fact that the rate of 5.3% should be revised is also evidenced by the dynamics of the inflation rate in recent years.

 

2015

2016

2017

2018

2019

2020 *

2021 *

Inflation rate in % per annum

13.6

2,4

7.3

0.9

7.5

5.1

3.6

 

* Forecast of the National Bank.

Apparently, this is also one of the reasons that (especially recently) politicians raise the question periodically of repealing the "Billion Law", that is, adopt another law so that the Ministry of Finance will no longer serve these government securities (pay interest) or even repay them completely. The Ministry of Finance paid 2.5 billion lei interest fee to the National Bank over the past 4 years since the issue of these securities, taking into account 2020, it will amount to 3.1 billion. The total interest for 25 years is 11.5 billion lei. The cancellation of interest payments is estimated at more than 8 billion lei according to politicians (some calculations between 7 and 8 billion lei ).

First of all, the IMF will not approve this scenario. The adopted scheme to cover the "theft of a billion" was a very difficult compromise between the IMF and the country's authorities. There is no chance to any good relations with the IMF if something changes (the same with international institutional investors and partners). But, let's pretend this happens. What could it mean for the National Bank or the country's economy?

The calculation is based on time value (Time Value of Money). “The meaning of this theory is that the present value of money (Present Value - PV) is greater than the future value (Future Value - FV). There are at least three reasons why this statement is true: firstly, you can invest money and earn income, that is, you will get more money in a period of time; secondly, the purchasing power of money may fall over time due to inflation; thirdly, one cannot be completely sure of receiving money in the future” (quote from nexus.ua). 

In other words, the Moldovan Leu will depreciate due to lack of the credibility. According to an estimate, if there is money in circulation worth 22.95 billion lei (indicator M0), the current rate against the US dollar is 17.7 lei. We add to the money supply the "under-received" 8 billion (which is 34%) and we get depreciation of the Leu in the same proportion up to 23.7 lei for $1. We emphasize once again: this is based on the rough economic estimates, considering the factor of a sharp decline of credibility in the Moldovan Leu and its institutional issuer. This factor, based on panic and speculations which is impossible to predict. Therefore, a sharp increase of inflation is inevitable (because of a 100% increase in prices of imported energy) and the impoverishment of the population.

Politicians come and go, but the National Bank remains as an independent regulator. The NBM often receives IMF support in macroeconomic terms, so the country loses international investment credibility without a financial program. But, laws are approved by parliament (politicians) and they are mandatory for the NBM. Unfortunately, common sense, state thinking and stand of power structure do not always prevail in parliament’s decisions. Moreover, it’s going to be the elections year in Moldova. // 13.03.2020 - InfoMarket.