Households became more indebted as economy declined
While a direct relationship exists between indebtedness and GDP, there needs to be credit risk management to ensure that borrowing levels are within affordability levels and channelling of funds is towards more productive economic activities as opposed to consumption, Moatlhodi Sebabole, the Chief Economist at First National Bank Botswana, says.
Sebabole notes that unmanageable debt levels beyond affordability can cause market distress (witness the 2008/9 global financial crisis) which can ultimately cause economic overheating and ultimately a collapse of the economy (when the distress is systemic). “There is directional linkage between indebtedness and GDP in that money borrowed is circulated in the economy for either consumption, production, investment and/or savings,” Sebabole says, adding that debt can be channelled either to production or to consumption, both of which contribute to the total value of economic activity (GDP).
Botswana household debt-to-GDP remains within manageable levels of below 30 percent and NPLs as well as default rates for households in Botswana remain within historical averages. Sebabole says these imply a sound financial system and that while pockets of distress do exist, prudency and credit risk management matrices ensure manageable debt levels.
Last year, the Bank of Botswana (BoB) officials took knives to the monetary policy meetings which culminated in reduction of bank rate to a record low of 3.75 percent. Two rate cuts implemented in the course of a damaging global crisis were earmarked to make borrowings more affordable, increase production or consumption and boost economic activity.
Available statistics by the Bank of Botswana show that following the rate cuts last year, total credit extended by commercial banks increased by 1.3 percent as at November 2020. However, resident businesses and non-resident business loans decreased by 0.1 percent and 22 percent respectively. The business share of credit currently stands at 34.9 percent as at November 2020, lower than 35.4 percent recorded in October 2020.
It appears the modest growth in total credit was pumped up by loans to households which increased at the rate of 2.2 percent. The share of credit to the household sector sat at 65.1 percent in November 2020, higher than 64.6 percent recorded in October 2020, with the largest share of loans directed at personal loans (70 percent).
Kwabena Antwi, Investment Analyst at Kgori Capital, argues that being indebted is not necessarily a negative thing. However, he says, being over-indebted to a point where one cannot service one’s periodic debt payments is a bad thing. Botswana’s household indebtedness is deemed low by international standards compared to South Africa’s which stands at 43.3 percent of GDP.
Previously, banks expressed concern with “credit extension being driven by households”, especially because of the perceived indebtedness of the sector. Households that borrow “don’t invest” but “augment declining income levels”, Steven Bogatsu, the Chief Executive Officer of FNBB, which is the country’s largest bank by assets, lamented. Although these were his words two years ago, this publication unearthed information that this trend continues up to-date, especially at micro lenders with less credit score scrutiny than banks.
Borrowing for consumption can cause distress, especially where it is for an extended period of time and for non-productive activities which do not generate cash flow, Sebabole cautions. “Debt levels have to be within affordability levels and productive, as opposed to consumptive borrowing which is not ideal for sustainable economic growth trajectory,” he says.
Debt-to-income and debt-service-ratio, among others, are key debt evaluation matrices to evaluate household affordability. Sebabole says if debt matrices are not adequately managed, the level of distress can cause slower economic activity or GDP growth. “This is primarily because defaults and non-performance of loans, especially in a systemic manner, will disrupt economic activity and overall economic activity,” he says, noting that financial stability is important for economic stability.
Last year some argued that the reduction of bank rate by the Bank of Botswana would have negligible impact, given that the household statistics suggested that households were indebted and could not borrow more. By cutting the bank rate, the hurdle return on investment for business has also been cut as the cost of debt is usually a determinant. However, Antwi was of the view that in the current environment there may still not be opportunities that meet this lower hurdle rate of return.