I have been waiting for this coming Friday with much anticipation. There has been so much buzz around the 1st of September! Multichoice announced reduced DStv prices across all its bouquets effective 1st September (great news for the subscribers and a possible indication of the effectiveness of competition in any industry but that’s a subject for another day). It is also a signal of the looming 25% upward electricity price adjustment coming into effect which is unlikely to receive the warm reception that the Multichoice news would receive. However, “how will the Government Bonds move and to what extent?” are questions that I have been mulling over for the past few weeks. My inclination has been that the yield curve will come down as market fundamentals have been pointing in that direction, “to what extent?” however, is a question that would perhaps need a crystal ball.
Since the beginning of the year, we have seen the Monetary Policy Rate (MPR) come down as well as the yields on Government Paper (both Treasury Bills and Government Bonds). The 2017 Monetary Policy Committee (MPC) sittings have resulted in downward revisions of the MPR from 15.50% to 11.00% while the statutory reserve ratio has come down by 8.5% from 18.00% to 9.50%. It is very clear that the Zambian Central Bank has been committed to implementing an expansionary monetary policy in an effort to stimulate economic growth through the reduction of interest rates while keeping inflation levels low. Quite the balancing act if you as me. The expectation is that these expansionary measures would translate into increased capital investments that would in turn boost business activity and production in the country without cannibalization by inflation
My current intensified interest in the movements of the policy rate and government paper has been because the prevailing policy rate and (or) government paper yields in most markets are used as the starting points (or risk free) benchmarks on which premiums are then added for onward corporate lending. This has been the practice in Zambia since 2012, when the Central Bank made MPR the mandatory lending benchmark in an effort to promote transparency of lending rates. In 2014-2016 we saw interest rates ratchet up in Zambia with bonds hitting yields as high as 30%. This had very far reaching effects on the business environment as leveraged companies faced excruciatingly high finance costs. Annual Report after annual report of companies listed on the Lusaka Securities Exchange (LuSE) over the 2014 and 2015 reporting periods indicated high finance costs as a major contributing factor to their depressed performances.
Now in 2017, we are no longer seeing the high interest rates that we saw in 2015 and 2016 which should be great for businesses, maybe except for banks who will have to look to much more creative ways of making their money. However, the low interest rate environment may also make “savers” restless, particularly the type who shop for savings and investment products that will give them good returns over 30-365 day periods. Prevailing rates in the retail markets just don’t look as lucrative as they used to in the years prior.
So what does this all really mean? Ideally what savers investors must really be concerned with is the real rate of return, that is, determining whether expected inflation would be erode their returns and if so to what extent? What one should note is that the high interest rate environment Zambia experienced was equally characterized by high inflation. Now that we have transitioned into a low interest rate environment it would be prudent to look at the expectations around inflation before completely dismissing money market products as a way to save or invest; the real returns may not be so bad after all.
What about the borrowers? Unfortunately the story may not yet be as exciting as one would like to think. Indeed the reduction of the MPR and statutory reserve ratios has reflected in the economy, with some major commercial banks publishing notifications in public media indicating reduced lending rates by 1.5% on average. However, according to the Bankers Association of Zambia (BAZ) some commercial banks may take a cautious approach in reducing interest rates due to the increased levels of non-performing loans (NPLs) that are beyond acceptable industry thresholds of 10%. BAZ reported that Zambia’s NPLs currently stands at 12.4% of the average bank loan book while a 2016 World Bank Report indicates a global average of 6.6% on NPLs. Furthermore, BAZ indicated that banks may find it difficult to continue lending to sectors that have failed to pay back such restaurants, hotels and construction which appear to be luxury and seasonal and as a result are vulnerable to economic risks.
The proportion of NPLs speaks volumes on the borrowing culture in Zambia. It appears a lot of us (whether in our individual capacities or through the companies we control) borrow with no intention to pay back. I have been party to conversations where people have admitted to borrowing with no intention to repay and happily “dumping” their collateral on to the banks because the goal was to get access to quick cash. In many instances this results in lengthy litigation processes and or liquidation of collateral to offset the unpaid debts. Despite the banks “getting their money back,” the unintended consequence however, is as BAZ articulated, a reluctance of banks to bring down the priced in premiums on borrowers (maybe even those who have every intention to pay) and in the end the “bad borrower” behavior punishes the rest of the market.
Overall it appears savers and investors will have to do some homework around determining their real rates of return and borrowers will have to be a little bit more patient before the rates on their end move as quickly as MPR has. All things being equal, in medium to long term, we can hope to see the efforts of the Central Bank fully materialize with a low and stable interest and inflation rates as well as an improvement in the borrowing culture. This would provide a conducive environment for business and see money market investors diversify their portfolios by investing in asset classes such as stocks, private equity and real estate in addition to their money market investments as they would yield comparable or even better returns.