Moldova, like other developing countries, faces a relatively short maturity of financial instruments. The average weighted maturity of state securities in circulation is only 6.5 months. The average weighted maturity of the portfolio of new loans granted throughout the banking sector in 2016 made up 29 months, while the average duration of loans granted to legal entities in developed countries is 58 months. Meanwhile, about 92% of the total new deposits attracted by local banks in 2016 have a term of up to 1 year. Thus, economy of the country is constrained by the lack of long-term credit instruments that would otherwise enable efficient long-term investments: real estate projects, infrastructure projects, etc.
The problem of maturity of financial instruments has two aspects: lack of the supply of instruments with long-term maturity and low demand from the population for such instruments. A basic precondition without which it is impossible to extend the maturity of financing is to ensure stable macroeconomic conditions.
In addition to ensuring macroeconomic stability of the country, the state can adopt a number of targeted policies to extend maturity of financial instruments, such as:
- Increasing the share of Government Securities (GSs) with a maturity of 3 years, with subsequent issuance of GSs with a maturity between 5 and 10 years, depending on the demand on the market.
- Extending the list of primary dealers who have access to primary auctions of GSs and creation of a secondary free market with direct access of buyers and private sellers, including individual ones, who would convince GS holders that these instruments are liquid and can be sold at any time.
- Implementation of tax policies favourable toward capital market development, at least equivalent to the treatment applied to interests related to bank deposits.
- Creation of framework for appearance of new intermediates of long-term resources by supporting private pension funds (Pillar III) and progressive implementation of mandatory pension funds (Pillar II).
The prerequisite before implementing the policies described in this note is related to ensuring macroeconomic stability of the country. Any isolated attempt of authorities to address any particular problem such as short-term maturity of government bonds, lack of private pension funds, or maturity mismatch between loans and bank deposits, without a clear multidirectional set of actions, will lead to failure.
The publication was funded by the British Embassy in Chisinau through the Good Governance Fund. The content of this publication is the responsibility of the author and do not necessarily reflect the position of the British Government.