Beating the credit growth path to door
Brian Benza | Friday August 19, 2016 15:48
The central bank last Friday slashed the benchmark interest rate by another 50 basis points further pulling down lending rates that were already sitting at record low levels. The sole and well-intended aim of the rate cut is to try and make lending cheaper, particularly to those who want to use the funds for productive purposes. With inflation similarly sitting at record low levels, the BoB could afford to loosen its monetary policy without fears of demand push factors kicking in again from the extra cash that would have been pumped into the economy.
Additionally, the low wage and employment growth rates could be causing weak household consumption and thus resulting in lower demand-pull inflation pressures through to 2017.
Analysts are agreed that this could be because of lower growth in employment and wages, which translates to weaker household purchasing power and ultimately weaker demand for goods and services.
The prevailing weaker credit extension level also implies consumption induced by borrowing is limited there being less activity from the demand side. Last Friday’s rate cut was the first for 2016, but fourth in the past two years taking the cumulative drop in interest rates to 2.5 percentage points since January 2015.
But the results of these policy-easing actions on the credit growth numbers have been far below the expectations of both fiscal and monetary policy authorities.
Latest figures show that despite the record low interest rate figures, credit growth still remains at historical levels, albeit a slight improvement has been registered in recent months. Credit growth, which hovered between 15% and 25% in the years 2010-2014, rose marginally to 9.5% in the year to April 2016 from 7.1% in December attributable to faster growth in lending to both households and firms.
“Given other structural limitations, we expect credit growth to remain soft due to normalisation of property market; eroded purchasing power of households; weak demand and limited investment opportunities for businesses as well as cautious credit approach.
“We thus reiterate the eroded signalling effect of the bank rate – which requires the policy decisions to be supported by structural reforms that will bolster credit and investment growth,” Moatlhodi Sebabole, research manager at First National Bank of Botswana (FNBB) said. Despite the rather lukewarm expectations from the bank rate cut, analysts believe that given that inflation remains stable but credit growth and confidence surveys low, the BoB will continue to focus on supporting economic growth.
According to Sebabole’s forecasts, credit growth is likely to print at 10% in 2016 compared to 7.8% in 2015.
“Weak demand prospects, pressures on household purchasing power and weak cyclical growth imply investment and credit growth will remain under pressure in the short- to medium-term.
“Risks to outflows on money market will deter any strong dovish reactions to falling inflation trends. “We thus expect the bond yields to be under pressure to fall further in the September government auction,” he said.
Going forward, analysts believe with the US Fed hike pushing out thus further limiting the dollar rally while South African Reserve Bank might start cutting rates in the near future, the BoB might have more room to further ease interest rates.
However, other factors of financial stability might make it less likely for the central bank to further cut rates. “This is primarily because rates in other markets like South Africa, Namibia, Mozambique, Zambia and even the US have been going up and are expected to increase further in the near term.
“This poses a risk of flight if investors prefer to chase higher rates as further rate cuts will result in lower money market rates and thus even pose a risk to capital flight in the fixed income market. Thus any rate change ought to balance the financial and price stability effects,” said the economist.