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. 

De-dollarization

First of all, I would like to wish you a Merry Christmas and a happy new year 2013.

Today we have had our last meeting of the year with the Central Bank of Congo (BCC). The topic was: the country de-dollarization process. For those of you unaware of the project, the BCC has started a process few months ago to ensure the Congolese Franc (CDF) finally plays its roles (payment, saving, investments tools…).  Indeed , today, the Congolese economy is highly dollarized and the local currency is replaced by the USD in almost all transactions; banks balance sheets are 90% in USD, bank loans are granted in USD, ATM distribute USD notes, shopping is done in USD ( and sometimes even in EUR). Therefore, the CDF is seen as a sub-category of the USD. One of the only reason people maintain CDF is to be able to pay taxes; although some taxes can also be paid in USD.

The monetary authorities’ objective is to inverse this trend by 2017. A committee including members of the BCC, the government and the Congolese banking association has been appointed to work on the matter. A very detailed timeframe has been put in place to reach this objective (headlines can be provided on demand).

As always the key word here is 'trust'. There is a reason why Congolese has turned to the USD at the first place. The lack of trust in the local currency and in the ability of the country authorities to maintain its purchasing power are the main reasons the demand for CDF remains marginal.

 Duchene and Goujon (2006) argue that the following conditions have to be fulfilled to successfully implement an economy de-dollarization:

·         Price and currency stability

·         Strong growth

·         Significant Forex reserves

·         …

The track record observed over the last 5 years is positive when it comes to those  factors.

However, the authors insist that the biggest risk is the political changes. I am not a political expert but I am pretty sure the political stability will be the main stumbling block toward the authorities’ objective…

Recently, the BCC has successfully introduced CDF notes of 1 000, 5 000, 10 000 and 20 000 without fuelling the inflation as feared by many. This is one of the many steps toward the above objective. The success of this operation was based on the people trust toward the Congolese authorities and I have to admit it was a success. However, this was a small operation compared to the magnitude of the de-dollarization

I argue that this process was long overdue and I am glad the government/BCC have decided to work on this issue. The method will be key (the BCC has already pledged that no one will be forced to convert its foreign currencies in CDF) as well as the trust in the authorities to achieve this goal…

Rendez-vous en 2017…

DRC new notes of 1000, 5000 and 10000 and its ‘Polémique’- some reactions

Yesterday I had a lunch with several friends and two of them told me: ‘this is very good but but it does not change 'real people' lives’. Indeed, what is the point of having new 'big' notes if people are unpaid and/or still live with less than a dollar per day anyway...?

According to the World Bank, 95.15% of the Congolese was living with less than 2 dollars per day in 2006 while 87.72% with less than a dollar. The GDP per capita (constant 2005 international $) was USD 329. Please note that this number assumes that the wealth is equally distributed among all Congolese!!!  

I fully agree with them but I do think it is still something that had to be done for the 'overall good’ of our currency and our economy. The main challenge remains to grow this economy faster without leaving anyone behind...

DRC new notes of 1000, 5000 and 10000 and its ‘Polémique’

Lately the hottest economic topic on Congolese lips was the issue of bigger notes. From waiters to economists, everyone was debating on the effects on inflation and/or local currency depreciation that those new notes would have.

Before giving my own opinion on this matter, let me provide you with a little bit of context. The data are provided by the Central Bank of Congo (BCC).

When the Congolese Franc (CDF) was launched on the 30^th of June 1998, CDF 100 represented $ 72.5. At that time the biggest note was CDF 100. Until the 2^nd of July 2012, and the release of the new notes, the biggest note was CDF 500. However, this note only represents 60 cents of a dollar today. To purchase a good of $ 72.5 in 1998, you only need a note of CDF 100, today you need 133 notes of CDF 500. My friends, amateurs of good champagne, will need around 360 notes of CDF500 for a good bottle!!! No wonder why the local currency is naturally replaced by the USD in Congolese daily transactions...

Regarding the inflation concerns, the BCC plans to release CDF 8.9 billion ($11 million) of new notes while withdrawing from the market CDF 17 billion ($19 m) during the month of July. This will prevent an increase of the liquidity in circulation. To avoid, merchants to round up prices, the BCC will also ensure small notes do not disappear from the market.

Regarding the CDF depreciation worries, the BCC is ready to intervene on the market and use its international reserves (USD 1.3 billion) to do so.  

So where are we 11 days after the release of those notes???

The exchange rate remains fairly stable with a small apreciation of the CDF (+0.3%) . The inflation remains below the 8%. Although it is a little bit early to claim victory, I argue that if the government continues to manage this process with the same rigour, the apocalypse on the economy predicted by my hairdresser and several economists won’t happen. 

I argue that if we want this currency to play its ‘legitimate’ role in this economy; this is a good first step. But the authorities should not stop there on their quest for economy ‘de-dollarization’. The next logical step to me should be to oblige ALL companies to pay their taxes in local currency. This will increase the demand of CDF by large companies and increase its value...

Time will tell if the BCC has won its bet. There is a huge lack of trust toward the Congolese authorities and this represents a good opportunity to demonstrate that they can be trustworthy.

I hope they will grab it...  

For the first time in years, the real interest rates on Congolese Central Bank (BCC) treasury bills are negative...

The BCC T-bills have been one of the most lucrative financial tools over the last 5-6 years with a real yield well above the ones in other monetary zones. While placements in EUR and USD was generating a 0.5 to 2% yield (in nominal terms), the BCC T-Bills interest rates (in real terms) have been above 20% p.a. for a long time.

However, the T-Bills interest rates have decreased to a meagre 3% p.a. on the 11^th of April from 16.3% a month earlier (both rates in nominal terms)!

There are two main factors explaining this decrease. First, the Central Bank has decreased its prime rate to 17% which has a direct impact on interest rates. The second and most important factor is the volume of T-bills sold by the Central Bank. In a one month period the BCC has reduced its offer by more than CDF 65 million increasing the competition among the commercial banks. As a result, to get a piece of the cake some banks have bid as low as 3%.

Central Bank T-bills are the only financial instruments available for investors who are looking to invest in the DRC local currency. There are two possible consequences from this drop. The first one (my favourite) is nothing will happen as investors have no other choice whatsoever.   The second choice (my colleagues favourite) is that people will start selling their Congolese Francs (CDF) to buy USD and invest somewhere else leading to a depreciation of the local currency. The reality is that most people keep CDF for only one reason, which is to pay taxes. Their excess CDF liquidity is only kept because they are waiting for a good opportunity to buy some dollars... 

As a result, I argue that the only impact will be a dramatic drop in commercial banks interests’ revenues...