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Energy-intensive firms borrow less as energy prices rise
When the price of energy rises, energy-intensive firms will draw less on their lines of credit. This is one of the conclusions of a new Working Paper by Danmarks Nationalbank economists Johannes Pöschl Ketelsen and Niels Framroze Møller. They have analysed how credit institutions' lending to the manufacturing sector was affected by the increase in energy prices in the wake of Russia's invasion of Ukraine.
Rising energy prices may cause energy-intensive firms to draw less on their credit cards and overdrafts
Geopolitical developments and increasing dependence on renewable energy sources may lead to episodes of sharp and prolonged increases in energy prices in the future. According to the results of the analysis, such episodes may lead to a significant decline in credit institutions' lending to energy-intensive industries.
The analysis covers the period 2019-2023 and combines quarterly data on the energy consumption of Danish manufacturing firms with data on the firms' loans from Danish credit institutions. The analysis shows that growth in lending to energy-intensive firms fell by 8.75 percentage points compared to comparable non-intensive firms as energy prices rose sharply following Russia's invasion of Ukraine. The results suggest that the decrease was largely due to lower credit utilisation by these firms. This was especially true for firms classified by the banks as less risky.
Rising energy prices may cause credit institutions to raise interest rates on new loans to energy-intensive firms that they consider risky
The analysis shows that the decline in lending growth came from existing loans, whereas energy price increases had no significant impact on new lending. At the same time, banks raised interest rates on new loans to energy-intensive firms that they classify as relatively risky. The lack of response in new lending is therefore interpreted as a result of a tightening of the supply of new loans that was offset by an increase in the demand for new loans.
The effects may be greater and more significant in several other European countries
Other European countries trade energy in the same markets as Denmark and can therefore expect the same future developments in energy prices. At the same time, the analysis suggests that, the higher the energy intensity, the greater the effect on lending. For a number of European countries where manufacturing industries are more energy-intensive and constitute a larger share of the economy (chart), it is therefore expected that the effects on the lending market will be both greater and economically more significant than for Denmark.
In many European countries, the manufacturing sector is more energy-intensive and constitutes a larger share of the economy than in Denmark
Note:
“Manufacturing sector” excludes certain subsectors due to missing energy intensity data. Energy intensity is calculated as energy consumption measured in MJ relative to gross value added, GVA, measured in purchasing power adjusted USD. Figures are from 2019 (latest year with sufficient data coverage). The weight of the manufacturing sector in the economy is calculated as the sector's average GVA per year for the period 2010-2020 compared to the average total GVA per year across all sectors (2020 is the latest year with sufficient data coverage). The size of the bubbles indicates each country's GVA in the manufacturing sector relative to the sum of all countries' GVA from this sector.
Source:
IEA, Energy and Emissions per Value Added Database, IEA, Paris (link), Eurostat and own calculations.