Filenews 19 December 2023
There are three business sectors (construction, hotels – restaurants and mines – quarries) that are likely to face particular difficulties in repaying their lending obligations in the current environment of increased interest rates, as they have the highest debt levels as a percentage of the gross value added of the respective sector.
The Financial Stability Report 2022, released yesterday by the Central Bank, clarifies, however, that both the contribution of the mining and quarrying sector to GDP and the exposure of the banking system to this sector is very small (0.2% and 0.4%, respectively). By contrast, the other two sectors mentioned above are larger contributors to GDP and the exposure of the banking system to these sectors is also higher (overall 12.9% and 32.9% respectively).
Inflationary pressures, rising interest rates and the impending tightening of borrowing standards are expected to affect mainly low-income households and low-profitability non-financial corporations, which may have high debt on the one hand and represent a low share of total debt on the other.
In particular, energy-intensive sectors of the economy, such as manufacturing, as well as sectors expected to be affected by the Russia-Ukraine war, recorded a positive growth rate in value added and generally seem to have adequately coped with the new challenges, but small increases in the NPL ratio of these sectors highlight potential problems at company level.
While private non-financial sector deposits appear to strengthen the sector's resilience to the current environment, if deposits are concentrated in high-income and/or debt-free households and non-financial corporations, then the ability of households and non-financial corporations with lower incomes and/or more debts to cover Their short-term deposit needs may be reduced.
Therefore, inflationary pressures, rising interest rates and the impending tightening of lending standards are expected to affect mainly low-income households and low-profitability non-financial corporations, which may both have high debt and represent a low share of total private non-financial sector debt.
Exposure to households
The loan portfolio of credit institutions is mainly characterised by long-term lending to the private sector. At the end of 2022, lending to households and non-financial corporations accounted for 44% and 50% of the loan portfolio to the private sector, respectively.
The report states that most of this portfolio (83% of the total loan portfolio) has been allocated at variable rates, with 50% of the loan portfolio linked to the key ECB interest rates and the Euribor rate. This share of the portfolio is directly affected by changes in borrowing costs, also due to recent increases in key ECB interest rates in the second half of 2022 and the first quarter of 2023. 33% of the total loan book is linked to credit institutions' key interest rates and does not appear to have been particularly affected by increases in ECB interest rates.
Higher borrowing costs, primarily related to loans linked to the Euribor or to the key ECB interest rate, together with inflationary pressures on domestic households and firms, may, as mentioned above, limit borrowers' ability to repay, especially those with increased vulnerabilities.
