- For the first time in 20 months the banking system was recently short, a development analysts feared marked the return of the 2014 liquidity crunch that forced the central bank to intervene and release P2.3 billion into the system to boost liquidity.
Director of financial markets at the central bank, Matthew Wright told BusinessWeek that the reduced liquidity, which was first noticed at the end of November last year, was a temporary occurrence at this time of the year as foreign companies repatriate profits while government does not sell any diamonds in December.
“Over the festive season and into early January we noticed some signs of tight liquidity but we believe it’s mostly due to seasonal factors. There were net foreign exchange outflows as companies repatriated dividends whilst the inflows are constrained due to low diamond sales in December and January. There was also limited government spending over that period with the construction industry on shut down. We see the liquidity situation stabilising very soon,” he said.
Liquidity in the banking system reduced to about P7 billion in early February from the P10-P12 billion the market was accustomed to.
“If you consider that Bank of Botswana Certificates (BoBCs) holdings by banks are around P7 billion, it means the excess liquidity would also have shrunk as BoBCs would be security pledges with the central bank and part of Liquid asset Requirement (LAR) holdings,” said a market analyst who declined to be named.
Although delayed government payments as well as repatriation of dividends have been blamed for the tight liquidity, there is also suspicion that some investors are taking out their funds from Botswana due to the low interest rates currently prevailing.
Thanks to a benign inflation, interest rates are currently at record low levels here resulting in a significant interest rates differential between Botswana and South Africa. However, Wright dismissed the possibility of capital flight saying their study of the profiles of foreign exchange purchasers does not suggest any risk of capital flight as the bulk of buyers are just importers of goods and services.
Following the last rate cut by the BoB in August last year, some banks have been dropping their
The tightening of liquidity also comes at a time when credit growth has decreased despite an accommodative monetary policy stance.
According to the central bank, annual growth in commercial bank credit decreased from 7.1% in December 2015 to 6.2% in December 2016, against a background of subdued economic activity and restrained growth in personal incomes.
The slowdown in annual credit expansion was mostly associated with the decrease in growth in lending to households from 12.8% in December 2015 to 7.6% in December 2016, largely reflecting the effect of restrained growth in personal incomes.
“The lower rate of increase in lending to households was mostly due to a slowdown in the yearly rate of expansion in unsecured loans to this sector from 15.5% to 8.3% in the same period,” said governor, Moses Pelaelo.
On the other hand, the annual growth in mortgage lending to households also slowed from 7.2% to 6.3% in the same period.
For businesses, year-on-year growth in lending accelerated from a contraction of 0.3% in December 2015 to growth of 4.2% in December 2016.
“Over the festive season and into early January we noticed some signs of tight liquidity but we believe it’s mostly due to seasonal factors. There were net foreign exchange outflows as companies repatriated dividends whilst the inflows are constrained due to low diamond sales in December and January. There was also limited government spending over that period with the construction industry on shut down. We see the liquidity situation stabilising very soon,” he said.
Liquidity in the banking system reduced to about P7 billion in early February from the P10-P12 billion the market was accustomed to.
“If you consider that Bank of Botswana Certificates (BoBCs) holdings by banks are around P7 billion, it means the excess liquidity would also have shrunk as BoBCs would be security pledges with the central bank and part of Liquid asset Requirement (LAR) holdings,” said a market analyst who declined to be named.
Although delayed government payments as well as repatriation of dividends have been blamed for the tight liquidity, there is also suspicion that some investors are taking out their funds from Botswana due to the low interest rates currently prevailing.
Thanks to a benign inflation, interest rates are currently at record low levels here resulting in a significant interest rates differential between Botswana and South Africa. However, Wright dismissed the possibility of capital flight saying their study of the profiles of foreign exchange purchasers does not suggest any risk of capital flight as the bulk of buyers are just importers of goods and services.
Following the last rate cut by the BoB in August last year, some banks have been dropping their
deposit rates to very low levels, which could have forced depositors to take their funds elsewhere.
“There is some level of tightness although it hasn’t reached the levels of two years ago. Banks have been dropping their rates to very low levels since the last rate cut by the central bank. Most banks were paying close to zero percent on call accounts and a maximum 2.5% on three-months deposits,” said another banking executive, who declined to be named for professional reasons. According to Econsult, the declining returns on the Botswana Stock Exchange where the market fell 11% in 2016, coupled with perceptions of a deteriorating business environment and economic growth prospects, may also be driving capital outflows. “There are also indications that government is delaying or deferring payment due to firms for the procurement of goods and services. This means less money deposited in the banking system, and greater use of loans and overdrafts, which further reduces liquidity. While there are no major liquidity related concerns in the banking system yet, it will be necessary to monitor developments closely,” reads a report from Econsult.The tightening of liquidity also comes at a time when credit growth has decreased despite an accommodative monetary policy stance.
According to the central bank, annual growth in commercial bank credit decreased from 7.1% in December 2015 to 6.2% in December 2016, against a background of subdued economic activity and restrained growth in personal incomes.
The slowdown in annual credit expansion was mostly associated with the decrease in growth in lending to households from 12.8% in December 2015 to 7.6% in December 2016, largely reflecting the effect of restrained growth in personal incomes.
“The lower rate of increase in lending to households was mostly due to a slowdown in the yearly rate of expansion in unsecured loans to this sector from 15.5% to 8.3% in the same period,” said governor, Moses Pelaelo.
On the other hand, the annual growth in mortgage lending to households also slowed from 7.2% to 6.3% in the same period.
For businesses, year-on-year growth in lending accelerated from a contraction of 0.3% in December 2015 to growth of 4.2% in December 2016.
