"Banks are putting aside money to take into account the increase in non-performing loans. All in all, banks are likely to remain profitable, but such profitability may be partially eroded, depending on the business mix. For example, the retail part, including mortgages, may be more affected than corporate business," Matteo Rivellini, EIB Global Head of Division for Enlargement Countries, told SeeNews in a recent interview.
The economic slowdown may be detrimental for lending volumes, meaning that the mix of higher interest rate margins and lower volumes will likely have an adverse effect in the longer term, while higher inflation will put pressure on costs, including employee salaries, Rivellini said.
A recent EIB survey on lending in Central, Eastern and South-Eastern Europe (CESEE) showed that although credit demand from bank clients has remained strong during the last months, its composition has changed, with working capital now the main driver, while fixed investments and retail segments are expected to slow down. According to Rivellini, this is also a possible sign that companies will invest less and households will postpone private consumption.
"The real problem is not the demand for credit, but the supply side (how much banks are willing to extend credit). Indeed, credit supply has been deteriorating and is expected to weaken further across all business segments, mortgages in particular," he said.
However, banking groups are not signaling a contraction of their exposure to SEE, as they see the long-term potential of the region and believe their market positioning is favourable since the profitability has constantly been higher for regional subsidiaries than for overall groups, Rivellini noted.
The lack of access to finance continues to constrain small and medium business growth in the region, as the financing of young innovative firms and startups is hindered by the lack of credit history and reliance on intangible assets that are hard to collateralise. Moreover, in possible credit supply tightening periods, some groups might suffer more, and a targeted policy focus should be designed accordingly, Rivellini said.
Across the small and medium business segment, those with weakened balance sheets due to the previous crisis - along with some specific sectors - might be more exposed to financing shortages. The risk of non-performing loans (NPLs) and corporate defaults should be carefully monitored, he noted.
"Moreover, amid tighter financing conditions, sources still need to be secured for investments in specific areas, like those addressing the current energy crises and transition to the green and digital economy. Innovative firms play a special role in this process, and they might be threatened by lack of financing even further due to tightening financing conditions," Rivellini said.
The Western Balkans economies have been strongly hit by the fallout of the pandemic and recent macro imbalances have surfaced through a rapid increase in inflation and increasing financing costs. According to the October edition of the World Economic Outlook survey of the International Monetary Fund, inflation is expected to peak at 10.6% in 2022, ranging from 6.2% in Albania to 12.8% in Montenegro. The recent increase in inflation rates across the region was mainly due to the rise in energy and food prices, in line with global trends, and is currently expected to get back to normal levels starting in 2024, when it is expected at 3.6%.
ENHANCED SUPPORT FOR SMEs, ENERGY SECTOR
The EIB has set up a dedicated branch, EIB Global, to extend support outside the European Union with a structure designed to deploy innovative financial instruments and advisory support to boost green, digital and just transition among small and medium businesses. Support through the new Western Balkans Guarantee facility is expected to mobilise investments of up to 20 billion euro in the next decade, according to Rivellini.
"An example of an innovative type of financing is an impact incentive loan we have launched, for Serbia with UniCredit Bank, and for Bosnia and Herzegovina with Intesa Sanpaolo Banka. This credit line aims to support the employment, professional training and long-term retention of people from vulnerable social groups. In addition to funding, Serbian and Bosnian companies will receive a performance-based financial reward if they meet specific targets to foster leadership, employment and professional development opportunities for women, young people and groups that often face barriers to accessing job opportunities," he added.
In cooperation with the European Commission, EIB Global will continue to support small businesses in the Western Balkans by working together closely with partner commercial banks that on-lend our funds to these businesses under favourable conditions.
The European Investment Fund (EIF) has launched the Western Balkans Enterprise Development and Innovation Facility guarantee for small business resilience with guarantee coverage of 60 million euro, which aims to increase access to finance for some 4,000 small businesses during the ongoing crisis and is expected to unlock about five times the guarantee value in investment, Rivellini said.
"Going forward, we see our role in creating investment opportunities to help attract private financing for ventures and philanthropic activities that contribute to sustainable development goals, through an innovative approach to financing and new partnerships under Team Europe. The establishment of the bank’s branch for activities outside the EU - EIB Global - comes at the right time to help communities across the world prosper and address their existing energy, food, and climate change challenges," he stated.
To date, the EIB Group, comprising the EIB and EIF, has unlocked close to 5.6 billion euro for the private sector in the region, supporting the growth, recovery and transformation of small and medium businesses, while safeguarding some 800,000 jobs.
For the Western Balkans, EIB Global intends to intensify its work in the energy sector focusing on renewable energy, energy efficiency, electricity networks, and storage infrastructure.
"We are fully aligned with European Union's 1 billion euro Energy Support Package for the Western Balkans dedicated to addressing an urgent short-term need stemming from Russia's war in Ukraine, as well as to building resilience in the longer term," Rivellini said. With the funding the EU Commission aims to help the region decrease dependence on Russian fossil fuels, accelerate decarbonisation and improve energy security.
"To this end, we plan to deploy the new financial instruments and guarantees recently approved by the European Union under the EFSD+ and WBIF," Rivellini said.
