Cracks emerge in the banking sector

• Banks Liquidity falls to 3.9% of total assets
• Liquidity is not a Panic-Button Issue (Yet)
• Excess Liquidity falls from P4.7bn to P3.7bn
• Liquidity falls to the lowest level since January 2015
• Restrictions on credit availability loom

In its quarterly report, Econsult Botswana, the company founded by former Bank of Botswana (BoB) deputy governor, Dr Keith Jefferis, says excess liquidity held by banks fell to 3.9 percent of total assets in April 2022; average market liquidity slumped to P3.7 billion in April 2022, down from P4.7 billion in March 2022 (according to Bank of Botswana).

Impact on access to credit

This is the lowest level since January 2015, according to Econsult economists Sethunya Kegakgametse and Kitso Mokhurutshe. They warn that the squeeze on liquidity is posing an increasing problem to banks, cautioning that it could result in restrictions on credit availability to both firms and households. “There has been a squeeze on excess liquidity within the commercial bank sector which could, in the future affect access to lines of credit,” Kegakgametse and Mokhurutshe wrote in a Q2 report released last week.  It is a view shared by experts at African Alliance, an asset management firm. Jonathan Paledi, the firm’s Portfolio Manager, responded to media questions thus: “Bank lending capacity is directly related to deposits and capital available for lending, so clearly this will have an impact on the ability of banks to lend.”

Gov’t absorbs liquidity from banks

Average excess market liquidity of the banking sector has been trending downwards, as observed by the Bank of Botswana (BoB). In its Financial Stability Report, the central bank ascribed this to net foreign exchange outflows because of dampened trade, payments for external obligations, as well as settlement of some government bonds. Government increased its local borrowing limit to P30 billion and this condition could lead to less liquidity for banks, Allan Gray’s Managing Director (MD) Phatsimo Ncube explains in response to this publication’s questions. She noted that some funds that may have been placed with the banks rather found their way to government bonds. “Government also increased the frequency and quantum of government bond auctions in the local market which absorbed some excess liquidity,” she says.

Essentially, observers say this was bound to happen. The issue on liquidity has generated heated debate since its onset. It is a question that one of the top banking executives with expertise in Liquidity, Capital and Interest Rate Risk Management raised at a recent Absa Economic Forum. Salma Baduel’s concern was around crowding out the private sector, a concern she shared with Ninety One analysts Pako Thupayagale, Leano Babitse and Onkabetse Tadubana. They advised against issuing bonds, arguing that all the money will flow to government. The fact of the matter is that the central bank mopped up liquidity through bond auctions.

Investors move deposits to bonds

For the past two years, when government had increased their note programme, asset managers moved funds to bonds, taking liquidity out of deposits. The funds go into BoB and out of the system. Banks raised the potential of this causing a problem with the central bank and BoB reportedly assured the banks that they are raising the money to fund projects in the economy. In other words, they were saying they were taking this liquidity but will be injecting it back into the system.

However, it is a known fact that project implementation is poor in Botswana. So the funds would not ordinarily move back into the system as they did out. The general consensus is that there has been a lag in funding projects. Even in finance minister Peggy Serame’s budget speech, the development expenditure constituted a lower proportion of the national budget, which lays credence to the view that government was not spending to the level that it should have been and was hoarding some of the liquidity.

Bank to Bank activity picks due to tightened liquidity

Liquidity shortages/reductions have typically been very seasonal, declining towards the end of the government fiscal year (March) and increasing shortly thereafter following budget allocation, according to African Alliance’s Paledi. Such situations are short term in nature, hence it is an imbalance that is normally cleared out in a few months. But this seems to be persisting. The activity between banks had somewhat dried up and Bank ‘A’ borrowing from Bank ‘B’ was limited.

Banks and BoB have in the past commented about the need for a more active interbank lending market. Interbank activity has certainly picked up a lot more than in the past, this being a result of having tightened liquidity. “The interbank activity picked up in response to reduced market liquidity as banks managed their intraday short-term position,” Tapiwa Butale, the CFO of Standard Chartered, told this publication.  Financial Stability report shows that interbank activity increased to P8.8 billion in April 2022 from P7.8 billion in March 2022, in response to falling daily market liquidity. The report notes that 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.

June heightened liquidity squeeze

But the interbank activity does not mean the fundamental issue of liquidity has been resolved. Bankers who spoke to this publication say things have actually gotten worse. Banking treasurers observed that June was reportedly a very bad month and will always be as a lot of government funds or expenditure runs down. Botswana Public Officers Pension Fund (BPOPF), the country’s largest pension fund, has also been moving money and a lot of it is reportedly concentrated at FNBB, the country’s leading bank by market value. Over a period of time, the government has been mopping up liquidity from 2020 to 2021, liquidity has essentially been retreating. The market even got into this year at a lower level than it would have in the past. Bankers envisage that the next worst month will be December mainly when government has a run down on all their money. Companies also close earlier due to holiday break.

Is it a crisis?

Although liquidity touched 2015 levels, experts are confident that this is not a crisis where the banks have to start hitting the panic buttons. Actually, 2014 was an actual crisis but that did not last long and it started tapering off in 2015. But the general consensus is that this is something that if it gets significantly worse, it could be something the market starts to worry about more. This is not to say banks are not profitable (banks’ net after tax profit hit P1.8 billion in 2021 after 24.4 percent jump). But liquidity is the oil that runs the financial system.

Banks price up deposits to defend liquidity 

The liquidity debacle is evidenced in the deposit rates that the banks are offering. With a decline in deposits, Ratang Molebatsi, Finance Director at Access Bank Botswana, expects the market funding curve to shift up as banks price up deposits to attract funding and/or defend liquidity in their books. Paledi lays credence: “Shortages in liquidity lead to competitive bidding by banks for the liquidity available in the market which comes in the form of higher deposit rates”. Butale sticks up for them: “In response, the banks priced up on deposits to be able to secure the little that is available in the market, thus driving up the cost of funding”. Going forward, if the current situation persists, Butale argues that banks may slow down lending to reduce the funding demand, which could be through increase in lending rates.

Competition for wholesale deposits

Week to week, the situation on the ground is such that banks reprice their rates. There will be one bank that is short of liquidity and offer more and then the next week another bank may offer a higher rate. Butale notes that the market has become very competitive, especially for wholesale fixed deposits. As a result, she has noticed that the fixed deposits have been increasing faster than other types of deposits possibly because clients moved some of their investments to fixed deposits, taking advantage of the elevated rates.

Paledi opines that institutional investors typically see most of the benefit from this because they are multi-banked and have a greater ability to negotiate for higher deposit rates. As such, he has discovered increased deposit rates across large and smaller banks alike. Reetsang Taudi, FNBB’s Funding and Liquidity director, argues that a deposit rate increase is aligned to expectations on inflation and interest rates and is not necessarily a reflection of a squeeze.  A lot of the banks are still funded by retail deposits in current accounts and savings accounts. Those ones are reportedly not being priced upwards. But once it starts filtering into the general deposits, that is perhaps when the market will start to be worried.

Liquidity was quite comfortable in 2020 going into 2021 mainly because the retail sector parked funds in banks due to lockdowns. The expectation was that liquidity would be a problem with COVID but the market saw a complete reverse. This was not only a Botswana phenomenon but was mainly global. Now bankers say household deposits are a bit under pressure because people are now spending their money. As the economy started to open, this change in excess liquidity was expected to facilitate economic activities and the banking sector remains adequately funded, says Taudi.

What the trend has been for wholesale deposits is that rates have shot up significantly as the bigger and more established banks price aggressively. Because there is limited liquidity in the market, economists have noted that banks are quoting rates that have not been seen in more than a decade. For instance, for a call account, banks reportedly charge as much as 8 percent or 9 percent, which economists say is “unheard of”. Before a call account would get you 1 percent or 2 percent. If one was lucky, it could go up to 3 percent. One week a bank might say 10 percent, the next week 8 percent. But on aggregate, they are higher than they have been historically.

Market getting ahead of itself

It is almost like a self-fulfilling prophecy. What happens is that this week, Bank ‘A’ will have excess liquidity of say P300 million that is maturing. They will be worried about losing that deposit because other banks are going to quote higher, hence everyone is now quoting higher each week. Naturally, this means the market is getting ahead of itself because everyone wants whatever liquidity is available. They want it on their balance sheet. Experts have noted that even a lot of the state-owned enterprises do not have much cash on their balance sheets.

Short term rates growing at a higher rate than long-term rates

Economists worry that the current situation does create a challenge for the entire sector. Interest rates in Botswana’s market are on an upward sloping curve. The banks in Botswana are expected to maintain a positive yield curve. Therefore, Butale notes, short-term yields are normally lower than the long-term rates. Although these fluctuate, Paledi says at African Alliance they have observed a flattening of the yield curve, i.e. short-term rates rising to a greater degree than long-term rates.

Put differently, Molebatsi explains that short-term rates are still lower than long-term rates but are growing at a higher rate than long-term rates. Taudi attributes the increase of short-term rates to signal short-term uncertainty associated with the Russia-Ukraine conflict and higher global (and domestic) inflation. “These rates are increasing in the shorter end as these activities are expected to be short-lived,” says Taudi, adding that although the money market curve is becoming flat, long-term rates remain higher than short-term rates. Read more: Fund Managers take advantage of the liquidity squeeze