Asset management firm African Alliance says that it is highly likely that commercial banks funding will remain structurally tighter and that household disposable incomes will remain under pressure due to increased retrenchments in the economy.
The management of African Alliance told this BusinessPost in response to an enquiry, that: “Because of the continued tight liquidity in the market and increased arrears from both households and corporates as well as the already high loan to deposit ratios; the local banks do not have much flexibility to push up their loan growth to the historic mid twenty levels and therefore loan growth is expected to be in the lower teens or even single digits for some banks.”
“As most banks have already indicated, this might not be a once off phenomenon but the new normal for the domestic banking industry,” the firm added.
African Alliance noted that domestic credit extension dropped significantly in 2014 to average of around 14 percent from a 20 percent average in 2013 as banks became increasingly selective in extending credit facilities, particularly to households. “This was partly due to the tight liquidity situation and increasing arrears on loans from both households and corporates; a sign of credit weakness.”
The liquidity crisis, which has hit the banks’ ability to lend out funds, has also left other sectors such as the property development sector, feeling the heat of increased interest rates for borrowing.
The central bank reduced the Reserve Requirements from 10 percent to 5 percent from 1st April, releasing P2,3 billion pula in cash, into the banking system.
African Alliance said that the reduction would support credit extension but it would not go to the all time highs experienced before 2014.
“In the short term credit extension will likely be supported by the Primary Reserve Requirement reduction, although we do not anticipate it to return to the 20 percent levels seen in the period pre-2014 for several reasons. Firstly, commercial banks funding will likely remain structurally tighter and secondly household disposable incomes will remain under pressure due to increased retrenchments in the economy,” said African Alliance.
Recently, Bank of Botswana Governor, Linah Mohohlo confirmed that over the past five years liquidity in the banking industry, as represented by outstanding Bank of Botswana Certificates (BoBCs), has declined from P17.7 billion as at end-2010 to P4.6 billion in February 2015.
Explaining the cause of the reduced liquidity, however noting that banks are still profitable, Mohohlo said is the result of a combination of factors and events including, the Bank of Botswana’s phased reduction of the excess money that is continuously mopped by way of auctioning of BoBCs. This she said, resulted in the rapid credit growth of the commercial banks coupled with lowered deposit taking at the same banks.
“This ratio increased from 53.1 percent at the end of 2010 to 87.6 percent in a period of four years to the end of 2014. In essence, funds previously held in BoBCs have been diverted to loans by banks and more than doubled –growing by 104.3 percent, from P22.1 billion in December 2010 to P45.2 billion in January 2015, said Mohohlo at the press briefing to announce the central bank’s measures to mitigate the crisis.
“Deposits increased at a slower pace of 31.7 percent from P40.4 billion to P53.2 billion in the same four-year period,” said the Governor. Mohohlo cited several possible reasons for the reduced deposits, such as, sluggish growth in incomes, lack of financial inclusion and Government’s more streamlined methods of financing parastatals as well as low interest paid by banks on deposits. She encouraged Banks to find ways of increasing deposits.
This century is always looking at improving new super high speed technology to make life easier. On the other hand, beckoning as an emerging fierce reversal force to equally match or dominate this life enhancing super new tech, comes swift human adversaries which seem to have come to make living on earth even more difficult.
The recent discovery of a pandemic, Covid-19, which moves at a pace of unimaginable and unpredictable proportions; locking people inside homes and barring human interactions with its dreaded death threat, is currently being felt.
Member of Parliament for Kanye North, Thapelo Letsholo has cautioned Government against excessive borrowing and poorly managed debt levels.
He was speaking in Parliament on Tuesday delivering Parliament’s Finance Committee report after assessing a motion that sought to raise Government Bond program ceiling to P30 billion, a big jump from the initial P15 Billion.
Government Investment Account (GIA) which forms part of the Pula fund has been significantly drawn down to finance Botswana’s budget deficits since 2008/09 Global financial crises.
The 2009 global economic recession triggered the collapse of financial markets in the United States, sending waves of shock across world economies, eroding business sentiment, and causing financiers of trade to excise heightened caution and hold onto their cash.
The ripple effects of this economic catastrophe were mostly felt by low to middle income resource based economies, amplifying their vulnerability to external shocks. The diamond industry which forms the gist of Botswana’s economic make up collapsed to zero trade levels across the entire value chain.
The Upstream, where Botswana gathers much of its diamond revenue was adversely impacted by muted demand in the Midstream. The situation was exacerbated by zero appetite of polished goods by jewelry manufacturers and retail outlets due to lowered tail end consumer demand.
This resulted in sharp decline of Government revenue, ballooned budget deficits and suspension of some developmental projects. To finance the deficit and some prioritized national development projects, government had to dip into cash balances, foreign reserves and borrow both externally and locally.
Much of drawing was from Government Investment Account as opposed to drawing from foreign reserve component of the Pula Fund; the latter was spared as a fiscal buffer for the worst rainy days.
Consequently this resulted in significant decline in funds held in the Government Investment Account (GIA). The account serves as Government’s main savings depository and fund for national policy objectives.
However as the world emerged from the 2009 recession government revenue graph picked up to pre recession levels before going down again around 2016/17 owing to challenges in the diamond industry.
Due to a number of budget surpluses from 2012/13 financial year the Government Investment Account started expanding back to P30 billion levels before a series of budget deficits in the National Development Plan 11 pushed it back to decline a decline wave.
When the National Development Plan 11 commenced three (3) financial years ago, government announced that the first half of the NDP would run at budget deficits.
This as explained by Minister of Finance in 2017 would be occasioned by decline in diamond revenue mainly due to government forfeiting some of its dividend from Debswana to fund mine expansion projects.
Cumulatively since 2017/18 to 2019/20 financial year the budget deficit totaled to over P16 billion, of which was financed by both external and domestic borrowing and drawing down from government cash balances. Drawing down from government cash balances meant significant withdrawals from the Government Investment Account.
The Government Investment Account (GIA) was established in accordance with Section 35 of the Bank of Botswana Act Cap. 55:01. The Account represents Government’s share of the Botswana‘s foreign exchange reserves, its investment and management strategies are aligned to the Bank of Botswana’s foreign exchange reserves management and investment guidelines.
Government Investment Account, comprises of Pula denominated deposits at the Bank of Botswana and held in the Pula Fund, which is the long-term investment tranche of the foreign exchange reserves.
In June 2017 while answering a question from Bogolo Kenewendo, the then Minister of Finance & Economic Development Kenneth Mathambo told parliament that as of June 30, 2017, the total assets in the Pula Fund was P56.818 billion, of which the balance in the GIA was P30.832 billion.
Kenewendo was still a back bench specially elected Member of Parliament before ascending to cabinet post in 2018. Last week Minister of Finance & Economic Development, Dr Thapelo Matsheka, when presenting a motion to raise government local borrowing ceiling from P15 billion to P30 Billion told parliament that as of December 2019 Government Investment Account amounted to P18.3 billion.
Dr Matsheka further told parliament that prior to financial crisis of 2008/9 the account amounted to P30.5 billion (41 % of GDP) in December of 2008 while as at December 2019 it stood at P18.3 billion (only 9 % of GDP) mirroring a total decline by P11 billion in the entire 11 years.
Back in 2017 Parliament was also told that the Government Investment Account may be drawn-down or added to, in line with actuations in the Government’s expenditure and revenue outturns. “This is intended to provide the Government with appropriate funds to execute its functions and responsibilities effectively and efficiently” said Mathambo, then Minister of Finance.
Acknowledging the need to draw down from GIA no more, current Minister of Finance Dr Matsheka said “It is under this background that it would be advisable to avoid excessive draw down from this account to preserve it as a financial buffer”
He further cautioned “The danger with substantially reduced financial buffers is that when an economic shock occurs or a disaster descends upon us and adversely affects our economy it becomes very difficult for the country to manage such a shock”