Business lending stabilizing yet overall money supply stagnating

The improvement of competitiveness of Latvian businesses and the positive export dynamics activated the cooperation between banks and businesses – the balance of loans granted to non-financial enterprises grew for a fourth consecutive month in October, with the increase concentrated in the short-term lats loan segment. Even though the total loan balance still shrank, the annual rate of the shrinkage of the banks' loan portfolio was the lowest in the last 13 months (-7.7%). The tense situation in the euro area, as well as the contours of next year's budget, still unclear in October, kept depositors from increasing their savings and the stock of deposits attracted by banks as well as that of the total money supply decreased.

The stock of loans granted in euro continued to contract, mainly due to housing loan repayments exceeding new issuance, whereas loans granted in lats grew 3.2% and the proportion of lats loans in total loans reached 10%. Lending in lats was on the rise not only to businesses but also to the household sector where the balance of loans granted in lats increased.

Money indicator M3, which is used to measure the amount of cash and noncash currency in the economy dropped 1.0% in October, with the annual growth of M3 at 3.4%. The balance of domestic deposits attracted by banks decreased by 1.2% in October, with the lion's share of the decrease on account of a payout of a deposit by a financial intermediary: i.e. a wider trend of decline in deposits has not been observed. While the household deposits with banks decreased slightly, non-financial enterprise deposits increased.

A more optimistic view to the future is overshadowed by economic slowdown risks next year. If these risks materialize, income from exports will decline and economic recovery will slow down potentially resulting in a reduction in money supply, including in the amount of total deposits. Deposits are expected to remain stable over the next few months, however, as the desire to increase savings in view of global economic uncertainty and the approaching winter on the one hand and the necessity to pay the increasing bills and ensure payments for imports on the other cancel each other out. The more competitive branches of the economy can expect an ever more substantial inflows of loan resources, as the liquidity of the banking sector remains high and credit institutions find themselves increasingly in need to place their resources in profit-generating projects. An essential precondition for that, however, is reinforcement of macroeconomic stability, successfully wrapping up the drafting of 2012 budget and completing the international loan programme.