Flagging economy needs robust credit growth
Brian Benza | Tuesday April 14, 2015 13:54
Last week, Statistics Botswana announced that Gross Domestic Product (GDP) grew by 4.4 percent in 2014, the lowest growth rate recorded in the post 2009-recession period.
Government had estimated an economic growth rate of 5.2 percent in 2014, while the International Monetary Fund (IMF) had forecast a GDP growth rate of 4.9 percent in the year.
In a market commentary, researchers at RMB Global Markets say that even though inflation is expected to rise slightly, there is still room for the central bank to further cut rates and reverse the current muted local economic prospects.
“The central bank last week noted that credit growth is supportive of economic growth and household debt poses no immediate threat to financial stability.
“We expect the BoB to maintain an expansionary stance in 2015. Although the real rate differential has very nearly bottomed, owing to the recent 100 basis points cut, there is still a small but nonetheless reasonable room for the central bank to cut rates further as demand prospects stay muted,” the researchers opined.
Last week, the BoB left the Bank Rate unchanged at a 25 year low of 6.5 percent based on the inflation outlook, which it says, remains consistent with the medium term objective of 3 – 6 percent. In a statement released after a meeting of the Monetary Policy Committee (MPC) last Thursday, the central bank noted that credit growth is supportive of economic growth and household debt poses no immediate threat to financial stability.
According to the RMB researchers, an expansionary monetary policy will not only work to boost GDP, but also consumption as consumers are under pressure to reduce indebtedness.
“With the high levels of household credit, the BoB will be slow to upwardly revise rates given that inflation prospects will remain within manageable levels over the next two years,” said RMB.
Credit growth rose at a slower rate of 13.5 percent in 2014 compared to the previous year’s growth rate of 15.1 percent. The slowdown was mostly due to the decrease in household borrowing which fell sharply from 24.2 percent to 9.4 percent in 2014.
In contrast to household borrowing, credit to business raised markedly, from 4.6 percent in 2013 to 19.1 percent last year, a development that helped moderate the extent of the slack in non-mining GDP growth.
While there is need for an expansionary monetary policy, a high rate of credit extension without a corresponding increase in deposit has been blamed for the tight liquidity conditions prevailing in the market.
Some analysts have also pointed that a loose monetary policy would not be as effective if the tight liquidity environment persist in the market. However the RMB researchers believe that the tight conditions will eventually ease, as banks find new sources of offshore financing or the BoB acts to inject liquidity.
The recent five percent reduction in Primary Reserve Requirements (PRR) has released around P2.3 billion in to the market and offered some easing towards liquidity challenges, with market players saying overnight liquidity is now currently trending around P4 billion. “This change indicates an attitude shift by the central bank — exploring structural reforms over and above monetary easing,” added the market report.