This section analyzes the possibility to identify different types of sources of non-payments (characterized by the models) basing on an empirical research. The presence or absence of assumed relationships will permit to describe the process and diagnose the scope of the crisis. In this connection this section focuses on the analysis of the impact of different factors on and their relationships to non-payments, as well as the analysis of previously conducted empirical studies.
From our point of view, the most important aim of this analysis is to find out the criteria allowing to>
Below the author reviews some factors assumed to be related to non-payments originating from different sources.
Amounts of Crediting
While the theory broadly substantiates the important role played by the factor of crediting in the problem of payment arrears, a certain vacuum is felt in the area of empirical testing of this hypothesis. It may be asserted that no empirical data (at least as concerns the data collected in Russia) presents direct evidence of the existence of such relationship. This hypothesis was mainly advanced as an alternative to the hypothesis that non-payments originate from loss-making. For instance, Alfandari and Schaffer (1996), Calvo and Coricelli (1994) conducted the testing at Russian and Romanian enterprises respectively. The results of the testing and the methodology of research will be reviewed below.
At the same time, it seems that the easiest way to test the hypothesis that shortage of crediting is the source of payment arrears is to find out if there is a relationship between the amounts of crediting and non-payments. However, this task may be complicated by a number of factors, the most important among them being the insufficient observation interval. Due to well known reasons it is impossible to compare the data on the amounts of crediting granted in the pre-reform period with the amounts of credits granted over the transition period. The major changes in the availability of financial resources for enterprises occurred at the start of the reforms. The effects of the shock experienced at the beginning of the transition period by the real sector persisted for a long time. Therefore, later changes in the crediting taking place in the new economic environment might prove to be incommensurably small as compared with the initial shock. It may result in statistically insignificant or no relationship between the dynamics of non-payments and the amounts of granted credits. However, it does not mean that this factor plays no role in the generation of payment arrears, since the available data array does not permit to detect its impact.
Yet another problem hindering to evaluate this relationship in statistical terms is the poor performance of banks related to the accumulation and redistribution of resources, and their “bad debts.” The banking system in Russia alongside with other participants of the economic system experienced difficulties in adapting to the transition to the market. Banks also accumulated “bad debts” (non-payments), however, according to the statistics, at a level considerably below those registered at enterprises. A factor behind this development was that banks reregistered bad debts on credits as formally new credits in order to conceal their real financial standing. At the same time, liquidity indicators are more crucial for banks than for enterprises. A slightest sign of instability may scare their clients away and render the bank bankrupt over a very short time. Therefore, the registered indicators of amounts of credits granted to the real sector may turn out to be overstated. At the same time, the available CBR statistics include inter-bank loans, which have only indirect (if any) impact on enterprise payment arrears.
However, this relationship was tested in the framework of our earlier research8. As expected, the obtained results reveal a rather weak negative relationship between non-payments (increment) and the amounts of crediting.
Apparently, enterprises with longest production cycles experienced the most urgent need of credit resources. Therefore, the solvency of such enterprises was more dependent on the availability of credit resources. Accordingly, the presence of a relationship between non-payments and the duration of production cycles may indicate that there exists the problem related to the financing of current assets (Model 2, valid only for profitable enterprises).
As an alternative of the direct relationship between non-payments and granted credits, the hypothesis may be tested basing on indicators indirectly reflecting the amounts of crediting and / or availability of credits.
Indicators of Monetary Policy
Indicators of monetary policy (nominal and real interest rates, and money supply) may be used to characterize the availability of credits.
The interrelation of non-payments, interest rates, and money supply was studied in the framework of our earlier research (see: Entov et al., 1998). The three-month GKO (Government short term bonds) rate was used as the indicator of the market rate. Over the period under observation (1994 through 1997) the market of internal public debt dynamically developed and began to dominate the Russian financial market due to the active efforts on the part of the Finance Ministry and Central Bank. In this connection, although GKO interest rate was not identical to the interest rate on enterprise borrowings, it better reflects the level of liquidity9 in the economy, and therefore indirectly indicates the availability of crediting.
In 1994 through 1998 the real rates on the market of government bonds were at a very high level, presumably over the average profitability in the real sector of the economy. In this situation, the crediting of the real sector entailing high risks of default was less acceptable than investment in the public debt market.
At the same time, enterprises might prefer to invest their internal or borrowed resources on the GKO-OFZ market seeking additional gains, what resulted in the outflow of money from the real sector and default on its payment obligations.
Thus, in the order of identification, there are two possible channels transmitting the impact of increasing interest rates on non-payments. The first channel is related to the limited availability of bank credits (Model 2) aggravated by difficulties encountered in transfers of payments (increase in interest rates also limited the availability of inter-bank loans thus negatively affecting the payment function of the banking sector). The second channel is related to incentives for premeditated default on obligations (Model 1). The increment of interest rates increased potential gains related to payment arrears. In the latter case both nominal and real interest rates are of importance.
The dynamics of nominal and real interest rates reflects changes in inflationary expectations. Entrepreneurs may delay the repayment of their obligations in order to repay them with depreciated money. At the same time, high interest rates, especially in the situation of institutionalized non-payments is a clear stimulus for defaulters to obtain certain gains. As it was noted above, the problem of deliberate default on obligations may acquire the global scope under weak market institutes.
Another indicator of monetary policy is the money supply in the economy. Therefore, the problems with liquidity and scarce bank credits are often related to the “tight money supply” and the “low GDP monetization.” For a time, a number of authors adhered to this point of view (see, for instance, Lisitsian, (1997), Shmelev (1997), Gavrilenkov (1996), etc.). The supporters of this hypothesis assert that high inflation rates depreciating the money on enterprises’ accounts, and a sharp contraction of crediting of the economy are the factors responsible for the shortage of current capital. Accordingly, enterprises experiencing so called scarcity of current capital could not settle with their creditors.
Indeed, the growth in money supply outpacing inflation rates may characterize the growth in liquidity in a short time perspective. However, it is apparent that in case the increase in money supply is not supported by growing demand for money these developments facilitate the future rise in prices. Accelerating growth in the nominal money supply most often intensifies inflation processes, facilitates increases in interest rates, and as a result decreases demand for real money balances.
Since the beginning of market reforms Russia has experienced considerable fluctuations of money supply and demand, as well as priorities of monetary and budgetary policies, while non-payments steadily grew until the crisis of 1998. It was observed that indebtedness increased at higher rates when the amount of real money in the economy was maximal (in 1997 through 1998); and decreased in the periods when the real money supply was at rather low levels (1999, see Annex 1, Fig. 7). Therefore, it may not be asserted that there exists a significant interrelation between non-payments and the money supply, at least without considering other factors of equal importance.
The issue of the impact of interest rates and money supply on non-payments was analyzed in Entov et al. (1998) by applying the econometric simultaneous equations model:
The model was evaluated using monthly time series, the interval from 2/1994 to 9/1997. According to the results of the evaluation (standard errors of coefficient evaluations are given in brackets) increments in overdue creditor indebtedness are influenced:
negatively – by previous recovery of business ;
positively – by high real yields on government bonds registered over the preceding period ;
negatively – by the excess of actual budgetary expenditures over the targets (i.e. expenditures below targets - negative difference – result in an increase in non-payments) ); the evaluation of this coefficient is given for the model with excluded variable of debtor indebtedness;
positively – by the increase in the debtor indebtedness over the preceding month (in real prices ); the evaluation of this coefficient is given for the model with excluded budgetary variable ;
positively – by the increase in the nominal (three month) GKO interest rates.
The dynamics of nominal GKO rates are affected:
negatively – by high real yields on bonds registered in the preceding period; what may also be interpreted as an inflation rate prediction error under adaptive expectations10 ;
negatively – by accelerating growth in the nominal money supply over the current period ;
positively – by the preceding acceleration of growth in the nominal money supply due to the rise in prices ;
positively – by unexpectedly high auction premium on the GKO market interpreted as the intensity of the Finance Ministry demand for financial resources necessary to finance the budgetary deficit.
Besides, logical variables were introduced to the model for the periods characterized as periods of increased instability (elections, crises). The model was designed as a simultaneous equations structure was aimed to separate the possible inter-influence of non-payments and interest rates, since it was not excluded that non-payments may influence interest rates. The nature of this relationship may be ambiguous. First, it is not excluded that enterprises experiencing liquidity problems may to withdraw funds from other assets, bonds including, thus facilitating an increase in interest rates. Second, the growth of non-payments in the real sector may also mean that budgetary tax revenues are decreasing, what would result in the increasing demand for borrowings on the part of the Finance Ministry with respective impact on interest rates. Third, the growth in non-payments may cause the contraction of bank crediting of the real sector, what, due to the related increase in demand of banks for alternative assets, would decrease interest rates.
The results of the evaluation of the impact non-payments have on interest rates are ambiguous. Opposite trends were registered at different intervals, while no significant influence was detected over the whole evaluated interval. The length of the observation interval shall be taken into account (44 observations from 2/1994 to 9/1997). Taking into account the number of observations the twofold reduction of the sample substantially deteriorates confidence in the conclusions on the significance and trends of the relationship between non-payments and interest rates and requires a further research.
In contradistinction to this relationship, the influence of interest rates on non-payments is statistically significant over the total observation interval and stable, what is supported (not rejected) by the results of the Chow breakpoint test and Chow forecast test. The high statistical significance (influence on non-payments) was detected both for the previous dynamics of real interest rates and the current growth rate in nominal interest rates. In other words, in this case the hypothesis about the significant impact of the liquidity levels in the economy on non-payments seems to be most relevant.
However, the statistical significance of the impact of interest rates on non-payments alone does not suffice to conclude that constrained bank crediting generates non-payments. The impact of interest rates on non-payments may be caused by the functioning of different mechanisms. For instance, the following circumstances may be considered: in the situation where non-payments do not result in bankruptcy procedures the rising interest rates create additional incentives to default on current payments and invest liquid assets in the financial market. Moreover, in this situation even banks carrying out payment operations of their clients may, as experience show (see: Mikhailov, Sycheva, Timofeev, 1998) delay payments in order to utilize most liquid resources for investment to the market of the shortest-term loans.
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