BoB Survey Shows Tight Access To Credit Ahead

Rising interest rates to tighten access to credit But borrowing volumes expected to expand BoB maintains MoPR at 2.65 percent Due to rising interest rates, domestic businesses expect tight access to credit across all markets - locally, in South Africa or elsewhere. This is according to the latest quarterly Business Expectation Survey (BES) conducted by the Bank of Botswana (BoB). [ihc-hide-content ihc_mb_type="show" ihc_mb_who="4,2,3,1" ihc_mb_template="3" ] Participating businesses indicated that this is so because central banks continue to increase policy interest rates and/or maintain high-interest rates amid elevated inflation. Observers say these findings portend bad times ahead for the economy. An economist at First National Bank Botswana (FNBB), Gomolemo Basele, says the conclusion on interest rates in the BES report is most likely motivated by what businesses have observed since last year – inflation remaining elevated and global interest rates being hiked to contain rising prices. Below full capacity “This tightening is expected to weigh on global growth prospects this year,” he says. “Locally, the MoPR was increased by a cumulative 151 basis points in 2022 in response to inflation breaching the central bank’s upper objective. “Over the medium-term, the central bank expects the domestic economy to operate below full capacity in the short- to medium-term, which will limit demand-induced inflationary pressures and support an accommodative stance.” However, in Basele’s outlook, inflation will be challenged by potentially higher fuel prices as well as persistent production supply and logistical constraints. Locally, he sees higher administered prices in 2023 and entrenched expectations for higher inflation presenting upside risks to rising prices. Household spending “These pressures, in our view, leave open the possibility of interest rates being revised upwards in order to drive down price growth and narrow Botswana’s negative real interest rate,” he says. “However, this will likely act as a drag on Botswana’s growth prospects as it limits the level of household discretionary spending and dampens significant expansion plans from a business standpoint.” According to Basele, this pressure will be offset to a certain degree by the increased fiscal spending planned over the Transitional National Development Plan (TNDP) period, which should support broad-based economic growth, depending on the rate of successful implementation. An economist at Ba Isago University, Dr Lovemore Taonezvi, says the first effect of businesses not having access to credit is that economic growth is likely to slow down. “This is because businesses will not be able to borrow money to invest in new projects, hire new employees, or expand their business operations,” he says. “Furthermore, higher interest rates make borrowing more expensive. So businesses may be reluctant to take out loans.” Unemployment The second effect of businesses not having access to credit is that unemployment is likely to increase. “This is because businesses may not be able to hire new employees or expand their operations, leading to fewer jobs being available,” Dr says Taonezvi. In addition, he notes, this will most likely lead to a decrease in consumer spending as businesses may not be able to borrow money to purchase new equipment or materials, which would lead to fewer products being produced and fewer goods and services being available for consumers to purchase. Moreover, businesses not having access to credit could have a significant impact on the government’s budget. “This is because businesses may not pay taxes due to their inability to borrow money and expand their operations, leading to a decrease in government revenue,” Dr Taonezvi notes. Similarly, Kitso Mokhurutshe, Investment Analyst at Kgori Capital, holds that should the narrative of the BES hold true, rising interest rates will make it more expensive for both consumers and businesses to borrow money, thus reducing the amount of credit uptake in the economy. Cost-cutting measures “This will affect business activity both directly and indirectly,” he says “For businesses, it will make it more expensive for firms to service outstanding debt obligations with variable interest rates, which may lead them to take cost-cutting measures such as layoffs or reducing employee wages.” Further, Mokhurutshe believes rising interest rates will increase the cost of capital required for firms to expand, which may force firms to curtail previous expansion projects, thus limiting their growth. “During a period of elevated interest rates, consumer behaviour may also change as individuals will have to make greater mortgage and credit card payments, for instance, reducing their discretionary incomes and thereby reducing their propensity to consume business outputs,” he says. “Furthermore, saving becomes a more attractive prospect as banks will offer greater deposit rates, thereby constraining.” Both factors, Mokhurutshe notes, culminate in less consumer spending within the economy, thus affecting business activity negatively. BoB’s objective range According to this analyst, rising interest rates are generally associated with a decline in demand for goods and services within an economy. Along with other increased costs, such a decline may cause businesses to cut back on production (reducing output), reduce operational expenses (such as wages), and delay or halt expansion plans (reducing future output). “The positive effect, however, and the main motivation for increasing interest rates, is that it will help cool inflation, bringing it down towards the Bank of Botswana’s objective range of 3-6 percent,” Mokhurutshe points out. BoB’s Monetary Policy Committee (MPC) recently maintained the Monetary Policy Rate (MoPR) at 2.65 percent. This is because the MPC projects that in addition to the dissipating impact of administered prices, the economy will operate below full capacity in the short-to-medium term and therefore not generate demand-driven inflationary pressures. In the result, inflation is projected to trend downwards and revert to the central bank’s objective range of 3-6 percent in the medium-term, hence the decision to maintain the MoPR at 2.65 percent. World Economic Forum In their analysis, economists at the World Economic Forum, the recent bout of financial disruption is closely intertwined with monetary policy decision-making, particularly in the US. “One of the proximate causes of the flurry of bank collapses was the effect on bank balance sheets of rapid policy rate increases, which triggered sharp falls in the value of many assets, including the government bonds,” states a WEF report. According to the BES report, firms expect lending rates and the volume of borrowing from all markets (domestically, in South Africa, and elsewhere) to increase in the 12-month period to March 2024. Notwithstanding the expected increase in lending rates, borrowing volumes from all three markets are anticipated to expand, consistent with the expected rise in investment, supported by the anticipated improvement in domestic economic performance during the period. About 36 percent of the surveyed firms indicated that their choice of where to borrow from was predicated on accessibility, while 30 percent indicated that their borrowing decisions were influenced by the availability of appropriate credit facilities. Affordability Twenty-three percent of the firms cited the affordability of suitable loan products, and 11 percent cited the availability and affordability of the required loan products as determinants of their preferred credit market. While access to credit may be a challenge, it has emerged that companies mainly prefer to finance their business operations from retained earnings, as was the case in the previous survey. This was followed by loans, then equity, and lastly composite (combination of financing). Retained earnings as a preferred source of financing is prevalent among all sectors. However, most firms in the Finance, Professional, and Administrative Activities and Retail, Accommodation, Transport, and Communications sectors preferred loans as a funding source. But while projecting tight access to credit, companies that took part in the survey expect cost pressures to be subdued in the first quarter of 2023, attributable to the relatively lower fuel prices, and expect inflation to decline, though remaining above BoB’s objective range in 2023 and 2024. Major challenges “Overall, the anticipated improvement in Mining and Quarrying; Manufacturing; and Retail Accommodation, Transport, and Communications sectors is expected to have a positive impact on domestic economic performance,” says the BES report. Businesses, specifically those in the Manufacturing; Retail, Accommodation, Transport and Communications; Finance, Professional, and Administrative Activities sectors cited inability to raise external finance as a major challenge to doing business in Botswana. Other impediments to business operations cited were unavailability of skilled labour ( cited by all sectors except Mining and Quarrying and Agriculture), as well as weak domestic demand (cited by Retail, Accommodation, Transport and Communications; Manufacturing; Construction and Real Estate; and Agriculture). [/ihc-hide-content]

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BoB Survey Shows Tight Access To Credit Ahead

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