The EU's Next Member? Moldova's Path to Growth and Housing Finance with Anca Dragu #2

In this episode of Mortgages Covered, the conversation turns to Moldova's economic and financial transformation, as Anca Dragu, Governor of the National Bank of Moldova, shares insights on Moldova’s economic and financial transformation, with a focus on housing finance, capital market development, and the country’s journey towards membership of the EU. 

This Episode of Mortgages Covered explores:

• Moldova’s evolving economic landscape, including mortgage market development, transition away from dependence on Russian resources, and resilience in the face of inflationary shocks. 
• The strengthening of the financial sector through growing capital markets, ample banking liquidity, and strong bank capitalisation.
• The rapid expansion of housing finance.
• Recent capital market developments and key infrastructure reforms for deeper integration with European financial markets.
• A four-step approach for strengthening long-term mortgage growth.  

Transcript

SPEAKER_00 0:00

We were particularly honored at this plenary meeting to be joined by Anka Dragu, the Governor of the National Bank of Moldova, who spoke to us in a keynote speech about the development of capital markets and, in particular, covered bonds in Moldova.

SPEAKER_01 0:22

First of all, it's a great honor for me to be here with you and uh thank you, Luca. Thank you, Sergio, for um organizing uh uh this um this discussion here. That's uh a unique opportunity for many of us to visit other sites of Europe. I mean, I come not from Kishina but from uh Brussels. So, like everybody going uh all the time to Brussels and uh probably I go back to Brussels on my way to Kishina. Um and thank you, Luca, for having such a great introduction. Uh preaching for uh Europe. And yeah, that's that's the mood of uh of probably many people uh nowadays, especially. So let me uh tell you a few words about uh Moldova. Yes, I'm a governor of Central Bank of Moldova, Moldova, not Maldiva, that's the usual joke. Actually, I've never been to Maldiva, but okay, and uh so let me tell you a few words about uh the central bank, the economy, and of course a few words about the mortgage uh that we are developing because we are very serious in catching up uh Europe in uh in uh in in all sectors finally in standard of living. So Moldova is a small country. On the map, it's with uh orange. Yeah, it's not uh the white is Ukraine. So it's a it's a country between Romania and Ukraine. It means that we are at a border uh uh with a war. And uh okay, as of yesterday, uh at a border with a political crisis. Um we have a low unemployment uh rate. It means that yes, we we actually we do have uh labor scarcity, and uh many of our Moldovan citizens are working in uh Europe. Um we have you'll see later on that we have a high level of remittances from our large diaspora. We are a candidate country. As of 2022, when the war started, Moldova submitted the application. We were we had an accession agreement back in 2012, but we accelerated after the beginning of the war in uh Ukraine. And uh now we uh in December we actually started the technical negotiations and we hope to open negotiations uh pretty soon during the current presidency of the council. In terms of GDP per capita, how can we read this graph? It means that we have uh a way to grow. And also we have ambition to accelerate convergence to the EU. And I may tell you that countries like Slovenia, Lithuania, Estonia, Hungary, um 20, 25 years ago were in the same position as Moldova is today in terms of uh GDP per capita, also GDP as share of average EU. So we only have to keep the good track. Okay, on inflation, uh things were a little bit complicated after the beginning of the war as the country was uh almost fully dependent on uh on Russian resources. And uh that's why we had a horrible uh peak on inflation. In October 2022, inflation reached 20 uh 34.6 percent. Uh but uh nowadays inflation went down and uh we are in the corridor still. Uh the our target, inflation target is 5% with a corridor of plus minus 1.5. I think you have uh figures from December. Uh today, as we speak, the situation is a little bit better, but we are sensitive to what's happening uh in uh uh in uh on the oil market. Um so what happened uh after that uh um that peak uh of inflation and in the energy sector, some significant measures have been taken over the last four years, accelerating the interconnectivity with Europe in terms of electricity, increasing gas deposits uh in Romania, and uh also increasing the share of renewables. Renewables grew from 3% of total consumption to almost 20% in only four years. On monetary policy, yes, uh we uh uh we were forced to increase policy rate to 21.5 percent. That's an amazing figure for most economists. Uh but uh it was also we increased reserve requirements uh in order to uh drain the market. Um today we our policy rate is at uh 5%, and also we were able to significantly decrease reserve requirements. Over the last year, we were in a more uh accommodative uh mood of the monetary policy, also considering the fact that we are still uh we still have a negative output gap. Financial markets uh are um uh growing or developing are an initial uh stage like the capital market you'll see later on, and uh still uh the yields for um uh government uh uh debt uh is still uh high. That's also a good opportunity for those who would like to invest. For the banking sector, the first of all I have to say that uh over 90% of banking assets are held by uh EU owners. And uh the banking sector is um uh well capitalized and the liquid. Uh so the liquidity is uh almost three times above the requirements. LCR is almost 300%, uh way above countries in the region. Also uh well capitalized, so capital uh regulatory capital to risk weighted assets uh it's almost double than uh minimum regulatory levels. It means that our banking sector has uh has resources to further continue lending. Uh that's important uh to say that lending uh increased um over um significantly over the last couple of years by six percentage points from GDP, from 23 to almost 30 percent of GDP. That's a significant increase, it's the biggest, the largest in the area. And uh okay, uh we did so without jeopardizing uh the good quality of the banking sector. Actually, uh we noticed that while lending increased, also NPL slightly decreased, and it is uh at um lowest level, 1.5% overall. Profitability is uh is uh is okay uh comparing to the region. We pay significant attention to unnecessary costs. I mean, we do not want that our banks to uh to face unnecessary costs. For small banking sector, you know that compliance costs are very high. But this is why we have a very good uh discussion and cooperation uh daily with banks in order to make sure that we digitalize as much as possible processes that are cumbersome for banks and uh incur costs, like compliance uh AML, CFT costs, for example. A few words about uh mortgage, uh basically our main topic. Mortgage uh uh grew significantly over the last uh six, eight years. Uh it's six, seven times more uh in 2026 compared to 2018. Um the sharp acceleration we noticed uh uh in after 2023. In 2023 and four, interest rates started to decrease. I I showed you the the the big uh push of inflation in 2022. So once uh the market conditions started to normalize, we saw an increase of um um of mortgage. It also came together with political stability, and of course, this is an important uh um condition for uh financial market and for mortgage to grow. Uh but we do need longer-term funding because uh the the funding for the banks is basically short-term, and you'll see that the mortgage uh is basically it's it's financed also uh through remittances, but remittances have a natural tendency to lower over time, and we have already seen a decrease of remittances uh in Moldova. So um we have uh the mortgage financed so far through the banking sector, and mortgages almost one-third of total loans in the banking sector. Uh we have uh a program uh with uh government support, uh first house, prima casa, which means that uh the government provides some uh guarantees uh to the banks. But also there are better conditions like a very small down payment of up to 5%, and uh it basically targets uh younger people. So uh remittances, as I said, there they are, and it's a normal phenomenon of remittances to slow down, to decrease, as people who are working in other economies are basically developing and integrating in the new countries. Uh and uh so they they they they decrease uh remittances towards uh towards Moldova. Uh where these remittances are coming from, and that's a very nice graph. I I like it a lot. It shows the evolution of remittances and basically economic ties of the country uh from 2014 until 2025. And you see that in 2014 uh remittances and in general activity uh was uh mainly with former uh Soviet uh uh republics, uh 65%, 67%, while today this share is uh around uh 5%. Uh and uh if we look at remittances uh from different countries uh uh so outside uh uh Russia it's 0.1%, we have uh high numbers from Israel, uh almost 17%, US uh 11%, uh, UK 5.6 percent, Turkey about 1%. And then the bulk comes from the EU. Uh and uh of course out of the EU you have uh Germany, Italy, France, Romania, Ireland, Belgium, Spain as uh as bigger contributors. From the capital market, um yes, uh capital market uh perspective uh it's again uh how can I put in in uh in optimistic words, it's encouraging that's uh uh room here to improve uh the situation. Um we have a new uh a new strategy. That's actually that's another institution that is uh uh regulating the capital market. Central bank is regulating the banking sector, non-bank financial institutions, insurance sector, and also we own the depository uh of the capital market. And uh this is why we invested uh uh time and knowledge in post-trade infrastructure reform, a unified CSD. Uh we have um uh implemented advanced payment infrastructure. Uh and uh that's a new stock exchange to be operational probably this fall. That's uh um uh a joint venture with Romanian with Bucharest Stock Exchange, a market that now is has increased uh a lot and has provides good liquidity. And we hope to see dual listings from Moldova in Bucharest and uh also to have the Cushinao um stock exchange growing. Well, but the time the the picture is that the stock market capitalization currently is 0.16 percent of GDP, so just keep this in mind that we have uh room to increase. Central banks approach to uh mortgage uh growth. Uh we have um we have uh several uh uh areas to to grow, several pillars. We have the covered bonds framework, and uh we are working on this uh draft regulatory uh framework. We hope to have it um approved by the end of this year, and discussions uh with you uh helped us a lot to mobilize the resources in this direction. Actually, this uh covered bonds framework is also included in our national uh accession, EU accession uh program. Then we need to have the capital account liberalization. The capital account is not liberalized yet, and we are working on steps to gradually liberalize, so to make it possible a natural uh liberalization before the accession uh in the EU. Also, uh we implement EU market integration, uh, and I'm talking here about um implementing omnibus accounts and links with EU central securities uh depositories. And uh last but not least, we have developed uh uh the green housing uh uh using the taxonomy to develop green mortgage, especially uh when we are looking at uh energy efficiency housing and uh renovation loans and green bonds. For um uh covered bonds, we are looking into uh several directions. So we are working uh to transpose uh the relevant uh uh legislation directive uh 2162 of the EU. Also, we are looking at instruments to provide investor protection, to provide market discipline, uh full coverage and the 180-day liquidity buffer, and uh to um uh to monitor and uh to uh um facilitate the market impact, to have a long-term bank funding and mortgage lending and investor-based uh funding. Um about the second pillar I uh mentioned uh the liberalization of the capital account. We are now uh uh finalizing actually at the level of the government uh the legislation and to be adopted. And we have several steps uh at the beginning of the next year and 2028. We are going to gradually increase the um thresholds for transactions uh in and out uh Moldova. You know, that there are a number of um notifications and authorizations we have to provide the central bank. Uh and this is going to disappear fully at the accession, but in the meantime, we are gradually increasing this um these uh limits. Um integration uh with the uh capital market, uh the EU capital market. Uh as I said, uh the um uh depositories uh owned by the central bank was established in 2018, and it was uh uh a modern system uh and now uh we already implemented omnibus account and uh we create uh uh interconnections with depositories in uh Europe. The green housing, the last uh the last pillar of our um mortgage strategy. It was approved uh by uh by the poll by by the government and uh we implemented uh the EU principles uh for uh uh for um uh green taxonomy. Okay, and um so my first uh remark uh here would be that uh in a few years' time I hope to see you again in such a format and to tell you about the progress, about the covered bonds, how they are working actually in Moldova, how the capital market is already uh functioning, and the and uh the financing of mortgage is well diversified. And financing is not um you know a constraint for the mortgage market, but uh we we we have solutions for it. So thank you for your attention.