Fair skies greet new BoB governor
Mbongeni Mguni | Friday May 19, 2017 12:05
Prevailing low inflation
Pelaelo’s predecessor wrestled with the various cycles of inflation during her 17-year tenure as governor, famously raising the bank rate to its highest (16.5%) in January 2009 amidst spiralling inflation. Linah Mohohlo was panned by critics for her austerity prior to the global recession and thereafter, for not doing nearly enough to support recovery through monetary policy. Meanwhile, inflation was at record lows (2.7 percent) when Pelaelo assumed office in October and has since averaged 3.1 percent in the months to April. Prior to his ascension, inflation had trended within the target three to six percent threshold since June 2013. As Mohohlo and Pelaelo have both said, the low inflation is due largely to “subdued domestic demand, against the background of sluggish economic activity and restrained growth in personal incomes”.
Banking sector stability
Although the level of non-performing loans rose last year and the era of super-profits seems but a memory for most banks, the sector in general continues to record robust growth. According to the BoB’s Annual Report for 2016 released on Wednesday, the banking sector was ‘adequately capitalised, profitable and liquid’, while the industry’s compliance with the regulatory and prudential requirements, was ‘satisfactory’. In fact, most banks reported higher levels of profits compared to 2015, the report states. Pelaelo’s predecessor, meanwhile, faced tough questions after the global recession burst the local credit bubble in 2009, leaving many banks with impairments and leaning towards the red. One threat to Pelaelo’s peace of mind in this regard – the collapse of BCL Ltd – appears to have sailed over the banking sector without trouble due to the guarantees and checks put in place ahead of time.
Pesky interest expenses in check
Several years ago, Mohohlo endured a heated press briefing, followed by strong media criticism when the BoB’s interest expenses sailed into the billions of pula. In 2006, the bank’s interest expenses were pegged at P1.68 billion, rising to P1.9 billion in 2007 before peaking at P2.13 billion in 2008. The expenses were related to the BoB attempting to mop up excess liquidity in the banking sector through the use of Bank of Botswana Certificates. The criticism was that BoB had become a source of quick, guaranteed risk-free returns for banks unwilling to innovate. The recession and interventions to limit the issuance of BoBCs in 2009 have, however, meant a gentle downward spiral in interest costs. The 2016 Annual Report released on Tuesday showed interest expenses of P92.5 million down from P182.6 million in 2015.
Liquidity stable
One of the biggest challenges in Mohohlo’s latter years came via the 2015 liquidity crisis in the banking system, where funds dried up to the point that some banks began offering unsustainable rates, as they scrambled for deposits. The BoB responded by cutting commercial banks’ primary reserve requirements from 10% to five percent, thus releasing P2.3 billion back into the banking system. Pelaelo has little trouble thus far, although declining rates of the 14 and 91-day BoBCs during 2016 point to lower liquidity. In this area, analysts have said the new governor may face tightening going forward, due to the sluggish movement of deposits, compared to credit output. However, Pelaelo not only has the 2015 experience to back him up, but also an arsenal of interventions to provide relief.
Fees resolved
The former governor for years faced the heat over the level of fees and charges levied by commercial banks against their customers. Rightfully so, many observed that the rampant fee increases made banking inaccessible to many, while unfairly penalising those already in the system. The increases were largely due to the introduction of new technology products by banks as well as their desire to shore up their non-interest income, following the harsh lessons of the global recession. Pelaelo again has little worries here. A two-year moratorium on the increase of fees and charges expired on December 31, 2015, with lessons learnt all around. The BoB has since been circumspect in awarding fee increases to banks, forcing them, rather to innovate around products and services for their non-interest income.
Pula behaves
May 29, 2005 is a day the former governor will remember with clarity. On that day, the BoB devalued the pula by 12%, in a move that took many by shock, while also introducing the crawling peg system. The debate around that devaluation was long and loud, with the heat piled on the central bank. Since then, however, the crawling peg has negated the need for shock devaluations and Mohohlo’s latter years were generally peaceful, being limited to annual adjustments to the rate of crawl and the exposures in the currency baskets. Pelaelo is inheriting a generally stable pula, which actually shot up in 2016 against most major currencies (27.5% against the pound, 9.5 percent against the euro, 5.5 percent against the dollar). The new governor’s concern will be the political rumblings in South Africa and the potential spill over onto the rand against the pula.