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.