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Kerli Vares, Luminor Bank Manager in Latvia
Looking back over the last years, we all have had to constantly adapt to new circumstances and unforeseen changes; therefore, retaining of stability has been the priority for majority of us in this year. Banking operations are closely linked to the economic processes in the country, so this is a challenging time also for us, and the year 2023 has brought several significant events.
A significant impact on the economy has been made by the increase in Euribor rate, which has slowed down, but not completely stopped the lending market activity this year. In this year, the Euribor rate exceeded 4% for the first time over 15 years; however, the latest forecasts indicate that it may drop below 3% at the end of the next year.
Despite the high inflation and rapidly increasing interest rates, in this year, customers have managed the assumed loan repayment obligations very well and an increase in difficulties with settlement of the assumed obligations is not observed.
However, politicians, assuming that each housing borrower needs support, have come to a decision to impose a special fee on credit institutions, from which compensations will be disbursed to borrowers. Both the sector, and the European Central Bank hold a view that this approach is inefficient; firstly, because the support is aimed at not only those customers who may indeed need such support, but all borrowers; moreover, the wealthiest customers with larger loan balances and larger interest payments will have a greater benefit from such support. Secondly, such a fee will leave an impact on lending and will not benefit the reputation of Latvia in the eyes of investors.
Next year, also other legislative changes are expected that we consider positive – re-crediting of mortgage loans may be made more simple, faster and less expensive, and also the ban on advertising of mortgage loans would be cancelled. Currently, the possibility of re-crediting is used very rare in Latvia – only 2 % of borrowers who may gain financial benefit from re-crediting have changed the bank. These legislative changes would provide customers with an opportunity to find the most favourable offer for them and change the bank in a simplified manner. In addition, the proposed changes to the law may also activate the competition among banks in terms of attraction of customers, thus making a positive impact on the housing market; however, this will not serve as a push for significant increase in lending, as this is affected by many factors, for example, national economic growth, housing offer, customer needs, level of income etc.
This year was challenging for companies in certain sectors, and entrepreneurs are still cautious with their development plans. Most likely, the next year for businesses will be a year to stabilise, instead of achieving considerable growth, and the data of a survey of managers of our small and medium enterprises shows that the most significant reasons for it are high inflation, energy and fuel prices and geopolitical situation. However, many Latvian businesses are relatively optimistic about the next year – one third of entrepreneurs plan to expand their business and another third expect an increase in the sales volumes in the next year.
Economists predict that the GDP dynamics in the next year will be more favourable than in 2023; however, one should not expect rapid growth – most likely, the economy will grow by approximately 1.5%.
During economically difficult times, it is particularly important to make savings, which is one of the most important prerequisites for financial security. Following the situation and demand on the financial market, we have raised the rates of term deposits in this year, which is currently among the highest in Europe reaching already 4%. Consequently, also the interest has increased considerably and according to the data of our bank the amount of private savings has doubled, and we expect that this growth will remain also in future. During particularly high inflation, it is important that people do not keep their savings in their current accounts, where the money loses its value over time due to inflation. Instead, it is better to make term deposits or use savings accounts, which allows savings to earn interest. Great additional instruments are investments in shares and bonds. In general, saving is a habit encouraged by economic stability, promotion of financial knowledge and skills, various economic incentives, for example, tax reliefs.
Improvements are made to the State Funded Pension Law – starting from this year, the new participants of the 2nd pillar pension are transferred to the active pension plans instead of the conservative pension plans, thus increasing the chance of increasing the pension capital considerably. Whereas starting from the middle of the next year, pension managers will be obliged to inform their customers whether the investment plan selected by them is appropriate for their age. As the analysis of SSIA data carried out by Luminor shows, currently, approximately two thirds of participants of the 2nd pillar pension have not selected an investment plan that is appropriate for their age. In a long-term perspective, a wrong pension plan may result in twice or even three times less capital by the moment of retirement; therefore, presumably, the new changes to the law will allow to facilitate increase of the pension savings of residents.
If the year 2022 was complicated on financial markets, the year 2023 already looks better. Fluctuations on financial markets is a normal phenomenon, and declines are followed by hikes. One has to remember that pension investments have to be assessed on a long-term basis – the pension capital is accumulated for several decades.