BoB says market data point to adequate liquidity

Allays fears of acute liquidity shortage “It is the responsibility of banks to manage their liquidity position” Liquidity increased to P5.7bn in July While market liquidity has declined relative to pre-COVID-19 levels, the Bank of Botswana (BoB) says it has remained stable and adequate. Responding to media questions from this publication, the central bank notes that “recently, there has been a substantial increase in liquidity mainly supported by government spending”. According to data provided by BoB, market liquidity increased from P3.9 billion in April 2022 to around P5.7 billion as at the end of July 2022. In April 2022, average market liquidity from P4.7 billion recorded in March 2022. [ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ] “It should, nevertheless, be understood that market liquidity fluctuations are a normal market phenomenon, among others, arising from changes in government spending and tax payments, foreign exchange flows, as well as settlement of government securities,” Dr. Seamogano Mosanako, BoB’s Head of Communications and Information Services, told The Business Weekly & Review . “Thus, the availability of facilities and instruments for managing liquidity by both banks and the central bank.” The context is that at the first level, Mosanako maintains that it is the responsibility of individual banks to manage their liquidity positions in line with their overall operations. The second level she points to is the interaction of banks with the central bank to ensure access to liquidity in the event of shortage or absorption of residual liquidity. In order to enhance facilities and instruments for liquidity management, as well as to improve monetary policy transmission, BoB introduced reforms to monetary policy operations on April 28, 2022. As part of these reforms, the central bank introduced some instruments for commercial banks to use for liquidity management purposes. These include the Standing Credit Facility (SCF), which allows commercial banks to access unlimited funding from BoB at their own discretion at a predetermined rate, provided sufficient underlying eligible securities are submitted as collateral. Over and above the SCF, Mosanako says BoB lends to commercial banks and has always done so, as the lender of the last resort, through the Credit Facility (CF). “The CF automatically lends funds to commercial banks, overnight, where a bank had not been able to square their position at the end of each business day,” she explains, adding that use of the SCF and CF by commercial banks has been minimal, an indication that liquidity is adequate. In addition, the central bank’s Standing Deposit Facility (SDF) allows commercial banks to place excess liquidity overnight with it at a predetermined interest rate. As an indication of availability of liquidity, Mosanako says commercial banks have been using this facility, depositing an average of P1.5 billion daily since its introduction in April 2022. “Furthermore, the Bank has other instruments available, such as Repurchase Agreements (Repos) and Primary Reserve Requirements that can be used to augment liquidity, should the need arise and consistent with the monetary policy stance,” she explains, adding that the interbank market also plays a key role in redistributing liquidity among banks. Commercial banks by nature attract liquidity in various ways that can be related to size, strategy and operations. Mosanako says this explains why liquidity can be concentrated in some banks. What she argues is important, however, is a well-functioning interbank market to redistribute this liquidity and the role of the central bank is to intervene in the market by either injecting or mopping up liquidity to stabilise short-term interest rates. Commercial banks’ interest rates are reportedly at the highest as banks reportedly scrambled for liquidity. Mosanako says interbank borrowing remains robust and, according to data, all banks have been active in both the lending and borrowing sides with each other. Interbank activity increased to P8.8 billion in April 2022 from P7.8 billion in March 2022 in response to falling daily market liquidity, according to the Financial Stability Report. Large banks dominated interbank market trades. They accounted for 97.2 percent of total borrowings in April 2022 (December 2021: 92.4 percent) and 68.8 percent (December 2021: 64.5 percent) of total lending. While data shows that any bank that is short is able to access funding in the interbank market, Mosanako says what is still lacking is collateralised lending between banks. Since April 2022, the policy signaling rate, which is now known as the Monetary Policy Rate (MoPR), has increased by a cumulative 151 basis points. Mosanako says this has resulted in an increase in money market rates across instruments offered in the market, including deposit rates. Observers had previously noted a flattening of the yield curve, i.e. short-term rates rising to a greater degree than long-term rates. There were fears in the market that as short term rates accelerated, they may rise beyond longer term rates, triggering repricing of other financial instruments. One typically expects that, all other things being equal, capital will flow from where returns are lower to where they are higher. Botswana’s yield curve (which includes both short-term instruments and government securities) is certainly upward sloping, and Mosanako says the longer-dated government securities are yielding higher than the shorter-dated instruments. “It is this yield curve that other issuers of various instruments in the market refer to or reference in their pricing,” she says. In this regard, she says it should be noted that pricing of financial instruments is influenced by many factors, including inflation expectations and related thereto interest rate expectations. “If inflation is expected to increase, it is likely that interest rates along the yield curve would increase; albeit, if the increase in inflation and the related policy response are expected to be short-lived, the increase in short term interests could be larger than for long term interest rates,” Mosanako explains, cautioning that BoB continuously monitors market liquidity developments and has the appropriate facilities and instruments for liquidity management and provision and to intervene as warranted. [/ihc-hide-content][ihc-hide-content ihc_mb_type="show" ihc_mb_who="1,2,3,4" ihc_mb_template="1" ][/ihc-hide-content]

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