2016 is definitely not a good year economically. Thanks politicians...

I acknowledge the fact that today people in general and Congolese in particular are more focused on the country political situation as today is supposed to be the last day in office of the incumbent president but the probability for him to leave by tomorrow is null.

However, the political situation has a serious impact on the economy of this country and the latter on the lives of millions. Therefore, it is important to talk a little bit about the economical situation as it stands currently.

The former primer minister was very proud of his macroeconomics achievements. Therefore, I would like to summarize some of the key indicators, few weeks after his resignation.

The GDP growth rate forecast for 2016 went down from 8,8% to below 4,3% and it is expected to grow to 5,5% in 2017 according to Central Bank. Data. The shrinkage of the economy led to several (small) businesses to close shop. The impact on the financial sector is enormous with a significant increase in provisions for non-performing loans. This could further damage the sector already weaken by the bankruptcy of the fourth largest lender.

The reduction of foreign currencies inflows has put pressure on the Congolese Francs that has depreciated by 38% since the beginning of the year leading to an inflation of 16,39% y-o-y. I hear, here and there, that this is mainly due to the mining companies revenues decrease following weak copper and cobalt prices. Although this is partly true, the lack of energy is one of the major reasons the output of those mining companies has dropped. Mining companies have been crying for years for a more electricity but nothing has been done except of lot of conferences on the country hydroelectric potential.

In addition to that, the failure to diversify our economy has increased our dependency to the commodities market (the mining sector was representing 50% of the GDP last year…) and made us vulnerable to any price shock…

With the Central Bank prime rate up to just 7% p.a., the real interest rate on the local currency is actually negative. This will lead people wanting more and more hard currencies with further depreciation to come.

The 2017 state budget has being presented at USD 4 billion against 8 billion the previous year. This will have a negative impact on several industries, as the State is the #1 customer in many of them such as automobiles, airlines, hotels, etc.

Why is the budget size extremely important for the years to come? Because the budget constraint was the main argument used not to organize elections this year. Therefore, I wonder how are we going to organize those costly elections in 2018 with a budget 50% smaller than the one not big enough to organize the 2016 elections…

There are many more things we could say regarding the (poor) state of this economy but my heart is not there… I will stop here by saying that while politicians are fighting to obtain positions, no wealth is created and worse, no (serious) investors will risk their money in this long period of uncertainty ahead of us…

But I guess the name of the game for them is to make as much money as possible in the shortest time possible to ensure their family can study and receive medical treatments in proper schools and hospitals they deny to their own people but I digress here… this is not a political blog remember? but I guess I am just a concerned citizen…

2016 is not a good year (at all) !!!

Congolese Franc (CDF) depreciation, Inflation, slower growth, budget costs (and in deficit), financial scandals, a big bank bankrupt, etc.

The least we can say is that the DRC economy is not doing well at all in 2016.

In less than a year, the CDF has lost more than 32% of its value against the US dollar while it was stable for the last 5 years.  The reduction of foreign currencies (Forex) entering in the country due to the decrease of repatriation from mining companies is the main explanation. This situation will continue to pressurize the CDF as the mining sector (the biggest generator of Forex) continues struggling with low commodities prices and inadequate power supply.

As a result, the government has already reduced his GDP forecast 3 times! From 9% to 6.6% to 5.3% to 4.3% and he could do it again before the end of the year.

This high level of depreciation, in a country where even tomatoes are imported, led to higher consumer prices. The inflation is skyrocketing (+6,4% y-o-y) while it was contained below the 2% over the last two years. Some shops in Lubumbashi (the economic capital) have stopped displaying prices below items because they are moving too often…The direct consequence is the increase of the Central Bank prime rate to 7% from 2% leading to a higher cost of borrowing for those borrowing in CDF (a minority as more than 90% of the loans are disbursed in USD but still…)

The prime minister has presented his budget for 2017 and the latter stands at USD 4,5 billions.  This is a 50% decrease compared to the 2016 budget (that was also reduced by 22% few months ago).

Thousands of people have lost their jobs and this will continue if we do not take the necessary measures and those measures include creating the environment for investors to put their money in this country! The political uncertainty surrounding the (not-to-be-held-on-time presidential elections) is not conducive to business…

BIAC- what was the Government/Central Bank thinking about?!

This article is not about throwing stones at the 4th largest commercial bank of the DRC but about the reactions of our government/central bank (BCC) to the issues faced by one of the most important lenders in the economy.

By withdrawing the credit line that BIAC was enjoying for a while, the BCC has created a general panic among the bank’s customers.

It is difficult to understand why the authorities will just shut down this credit line, create panic, and then publish press release saying everything is fine don’t worry we are putting that credit line back!

Why would you do something like that!? Especially if it’s to put that credit line back few days later.

How did they expect the 340 000 customers to react to a news that the bank is facing liquidity issue?! Off course people will try to take back their savings before it is too late and this is exactly what is happening now. The confidence is broken and it will take a long time for the bank to regain its customers’ trust. Thanks to who?!

Don’t get me wrong, I am not against BCC punishing banks that are not respecting the regulation but instead of reacting a posteriori, the authorities should have ensure this situation never have happened. Why do we have all those regulations if they are not controlled and enforced efficiently?

The reason I am mixing the government and the BCC here is because it is not clear which entity was at the origin of this situation. However, the BCC is not independent from the government, therefore it is not a big deal to know who caused this as at the end of the day it is the same…

In default of creating jobs, the government should try to avoid destroying the existing ones by using outrageous maneuvers.  BIAC has the largest number of employees of the banking sector and the consequences of this foolish decision could have disastrous effects on an economy that is already struggling due to the commodities crisis and the political uncertainty.

DRC to issue Treasury bonds… is it the right time?

The government of the Democratic Republic of the Congo has decided to issue Treasury Bonds to finance its short/long term operations. The main reason for a government (or a company) to issue bonds is to diversify its sources of funding. Central bank regulation limits the amount any bank can lend to a single borrower. This amount is particularly true in the DRC where banks balance sheet are too small to finance big infrastructure projects even through credit syndication.

The maturity to be offered are 3,6 and 12 months for “bons du trésor” and above 12 months for « Obligations ».  “Bons du trésor” can be regarded as T-Bills in other countries although they won’t be auctioned off to investors at a discount to par. The “obligations” will be working more like your regular T-Bonds. The bonds will be issued in Congolese Francs.

There are several issues in my opinion in issuing bonds in the current situation. The most obvious one is the lack of trust in the local government. What will happen if the government fails to pay its debt at maturity? The treasury could print more money to fix the issue, right? The issue with printing more money is that the currency will lose its value and the investors their money. As a consequence, the investors will request higher yield to compensate the potential inflation.

Another issue is linked to the purpose of those bonds. What will the money be used for? The reason I am asking that is that the bonds will be issued in the local currency but the country is dollarized at more than 85%!  If the government raises money to pay for expenses that will be probably in USD dollars then they will increase the demand for foreign currency on a market that is already extremely tense (we will come back to this in a different article)           

My last observation and I am sure that we could find many more is related to the political situation in the DRC. It is difficult to imagine investors purchasing DRC long-term debt not knowing what will happen in the near future. Uncertainty is very bad for business in general and it will certainly be a major factor on either or not these issuances are a success or not…