DRC’s Moody’s credit rating and market update

DRC enters the game…

On September the 6th, Moody’s Investors Services assigned Congo a B3 ranking with a stable outlook. This is two levels below Ghana, Kenya, Senegal and Zambia and three steps below Nigeria and Angola, according to Bloomberg. 

This is a very important step for the country as it will increase the visibility of the rising economy and boost investment according to Michel Losembe, president of the Congolese Banking Association. He added that: “it may enable the country to sell debt abroad and set a benchmark for companies seeking to tap international financing. The private sector will be able to access more funds for projects because you can use the rating in risk models. The rating allows Congo to be on the map of the economic decision makers of the world”

 “If the government can get its act together, why not raise funds from financial markets rather than wait for donors or make agreements, like the one with the Chinese, that are questioned,” Losembe said. 

This is indeed a good news for the country. let's see how the authorities take advantage of the country new status (still considered as speculative but still better than not being rated)  

full article: http://www.bloomberg.com/news/2013-09-09/democratic-republic-of-congo-s-credit-rating-to-boost-investment.html 

Market update (quick one) 

The macroeconomic situation remains stable (it does help for the ranking :) ) with a year on year inflation rate of 0.88% at the end of August 2013 and an annualized rate of 1%. This is an incredible performance from the authorities! 

However, I can’t stop thinking about the fact that the situation would have been completely different if the government had respected its commitment to its local creditors. Indeed, according to its own budget, the government has only honored 14% of what it intended to pay to its creditors. If I am not mistaken, there is a link between public expenditures and inflation… but I may be wrong…

As a result, the government has a fiscal surplus but I argue that it is a little easy not to pay your debts and say you have excess liquidities…

On the foreign exchange market, the local currency remains stable too although there is a growing pressure on the Congolese Franc due to a shortage of USD. The market is really dry and banks are expecting a Central Bank intervention, although unlikely due to the low level of its international reserves. The VAT payment of the 15th should help reduce this pressure. Indeed, major corporations will reduce their demand for USD (and not necessarily sell the USD they don’t have) to face their taxes obligations. 

A suivre…

A snapshot of the DRC banking sector as of December 2012…

Commercial banks in the DRC have the obligation to publish their audited financial statements on the following 31^st of March…

Balance Sheet:

The sector continues to grow with the total sector balance sheet growing to USD 3.6 billion up by 29.4% year on year. The Compound Annual Growth Rate (CAGR) for the last 4 years is 31%.
It is worth noting that the market shares of the top 5 local banks have decreased over the same period, from approximately 72% in 2009 to 66% in 2012.

From a customers’ deposits point of view, the growth was steady with a 26% increase y-o-y and a 31% CAGR over the last 4 years. The top 5 local banks Rawbank, BCDC, BIAC, TMB and BIC are still leading the pack although they have lost market share lately in favor of international and Pan-African banks.

Income statement:

Despite an increase of the total income of 22% to USD 396m y-o-y, the net income has registered a significant drop (-51.4%) during the same period to USD 7.1m! Only 50% of the commercial banks have made a profit in 2012. This could be explained by the investments made by most banks to expand and modernize their network.

Overall, the sector is benefitting from the growth of the economy. The fact that the economy is more and more formalized has contributed positively to the sector…

Do not hesitate to contact me should you need more details…

Central Bank prime rate down , pressure on commercial banks from the government up...

Following the 'good' results observed recently in term of inflation, 1.48% p.a at the end of January 2013 according to the Central Bank of Congo (BCC), the BCC has decided to reduce its prime rate by 1% to 3%.

As a Result, the government has requested from the 'independent' BCC to request the commercial banks to reduce the interest rates they charge customers on loans and/or overdraft facilities... Indeed, the government is blaming the commercial banks for charging interest rates that discourage investments and consumption. They do not understand why commercial banks can refinance themselves at the Central Bank @ 3% p.a. and charge customers 15% and plus...

MY ANSWER: banks are essentially lending in USD. Therefore, they do not have recourse to the BCC for refinancing!!! Thus, those rates do not apply to them. The only way this could work would be if commercial banks were indebted to the BCC which is not the case!!!

When commercial banks set their interest rates they take into consideration several other criteria such as the counterpart and country risks, the cost of funding (here in USD), the securities provided...

I argue that it is not the role of the government to dictate the market prices; the competition is more efficient in doing so... As an example the interest rates on a car loan could go up to 36 % p.a. few years ago. Today, banks are ready to charge as little as 10% p.a. for the same loan thanks to the competition...

The government should be focusing on one of its only 'business duty' which is creating a favorable business environment for investors...

Is the DRC fiscal surplus really good news…?

The Central Bank of Congo has published on its website (www.bcc.cd) the figures related to the country Public Finances. The first observation is that no currency is mentioned! Therefore we are assuming they are talking about millions of Congolese francs.

At first glance, the result looks 'fantastic' with the State generating a surplus of CDF 164m (approximately USD 180k). This is good news for a country known for poor public finance management. However, we need to look at the figures closer to have a better appreciation of what happened in 2013.

On the revenues sides the government has only managed to reach 55% of its budget. This is a poor performance. The question is whether the budgeting exercise was poorly done (which I suspect) or the government did not managed to collect as much as they anticipated which I doubt as the data (Central Bank -to be discussed soon) show a significant increase in the national output.

The direct consequence is that the government expenditures were 48% below budget. You can ask me:" where is the problem as they have managed to maintain a surplus?"

The problem is that the government only paid 11% of what it was supposed to pay to State local suppliers!!! This has terrible repercussions on these companies that have provided a service to the State without being paid. The consequence for some of them was to lay-off employees and close doors...

As a result, the 'prudent' fiscal approach of the government has had negative consequences on local SME activities.

The question we can ask ourselves is whether or not the government would have achieved such good performance in term of inflation and forex stability if they had made all those payments...

Interests and inflation rates in 2012: strong performance for the country = catastrophic year for commercial banks…

2012 has been characterized by an incredible stability of the consumer prices side. Indeed, as of December the 30^th2012, the inflation was standing at 5.67% from 16% in January (the index used by the Central Bank to measure the inflation is based on Kinshasa figures only). As a result, the central bank prime rate has gradually decreased since the beginning of the year; from 25% in January to 4% p.a. in December.

During the last decade, the real interest rates in the DRC were among the highest in the world (around 50% at some points). Corporate banks have made a lot of money in the T-Bills market during the same period. Some international banks have purchased Congolese T-Bills for millions of USD during that period enjoying high yields offered locally. The margin differential between the DRC and the rest of the world was so significant that the country sovereign risk came second.

However, the game has changed lately. The central bank has (finally) realized that the T-Bills are the only financial instrument available to investors in Congolese Franc (CDF). Therefore, they have regularly decreased their offer lately, leaving the commercial banks competing on the rates. Today, the average rate on T-bills stands at 0.20% against an inflation of 5.67%.

As shown on the graph below, the real interest rates is close to -6% in December 2012 while it was approximately +5% in March 2012. The de-dollarization of the economy discussed in my previous article will probably help providing local investors with other instruments such as facilities in CDF but at this point the margins will remain negative as the BCC has noticed that those unattractive rates have had no negative impact on the inflation or the currency…

Source: Central Bank of Congo

Although the performance regarding the inflation in 2012 is remarkable, it is worth noting that the government continues to freeze millions of dollars of payments in favor of local State suppliers. Therefore, the results would have been different assuming all those payments were made. We understand the necessity to control/review the contracts agreed previously but if this country wants to be taken seriously, it will need, sooner than later, to ensure continuity in State matters.