Public sector sees new bank loans grow in 2012, private sector sees decline
*Govt/public corporations see credit growth surge ahead of private businessesFebruary 25, 2013, 7:53 pm
The engine of growth, the private sector, saw credit growth fall sharply to 17.6 percent as at end December 2012 from 34.5 percent a year earlier with the value of new bank loans generated during the year falling sharply, while in contrast, new loans created in 2012 for the government and public institutions grew, data released by the Central Bank showed last week.
Government borrowings grew at a much faster pace at 25.4 percent during the year, although down from a 32.9 percent growth rate a year earlier. Also, credit to public corporations surged 47.3 percent in 2012, up from a 37.3 percent growth rate a year ago.
New loans granted by domestic banks to the private sector in 2012 amounted to Rs. 350.6 billion, down from new loans amounting to Rs. 487.7 billion the previous year. New loans created in 2010 amounted to Rs. 290 billion.
Outstanding credit to the private sector grew 19.2 percent year-on-year to Rs. 2,172.1 billion as at end December 2012, slower than the previous year after the Central Bank took steps to curb credit growth to contain a balance of payments problem last year. As at end December 2011, private sector credit growth from the domestic banking system amounted to 36.6 percent, with total outstanding credit amounting to Rs. 1,821.5 billion.
Total net credit to the government grew 25.4 percent in 2012, generating new loans amounting Rs. 211.6 billion (Rs. 16.1 billion from the Central Bank; Rs. 161.2 billion from domestic banks; and Rs. 34.4 billion from foreign banks).
Total net credit to the government grew 32.9 percent in 2011, generating new loans amounting to Rs. 206.4 billion from the Central Bank, domestic banks and foreign banking units. Domestic banks generated new loans amounting to Rs. 54.9 billion for the government during the year.
In 2011, the government’s borrowing from the Central Bank had grown at a massive pace, but declined in 2012.
Last year, net outstanding credit to the government from the Central Bank grew 6.1 percent year-on-year to Rs. 278.8 billion as at end December 2012. New loans generated during the year amounted to Rs. 16.1 billion. The government’s net outstanding borrowings from the Central Bank amounted to Rs. 262.7 billion as at end December 2011, up 241.7 percent from the previous year. In 2010, credit from the Central Bank had actually declined 29.5 percent to Rs. 76.9 billion by the year’s end.
Public institutions borrowed Rs. 94 billion in 2012; Rs. 19.9 billion from domestic banks and Rs. 74.1 billion from foreign banks. In 2011, public intuitions borrowed Rs. 53.9 billion.
Outstanding net credit to public corporations amounted to Rs. 292.5 billion as at end December 2012, up 47.3 percent from a year earlier, accelerating from a 37.3 percent growth rate the previous year.
"Broad money growth continued to moderate to 17.6 percent in December from a peak growth of 22.9 per cent in April 2012. Growth of credit extended to the private sector also decelerated to 17.6 per cent by end 2012 from 34.5 per cent at end 2011. However, with increased borrowing by the Government and public corporations from the banking sector, the overall expansion of domestic credit remained at 21.7 per cent at end 2012," the Central Bank said earlier this month in its monetary policy statement.
The government is planning to finance a bulk of this year’s budget deficit from domestic non-banking sources, which economists warned would make monetary policy implementation challenging for the Central Bank and threaten to crowd out the private sector of much needed funds.
The International Monetary Fund (IMF) has said this would not threaten macroeconomic stability provided the government stayed within budgeted borrowing limits. However, it said high inflation, losses at the CEB and CPC, high government debt, falling tax revenue and declining exports were already undermining macroeconomic stability in the country.
With around Rs. 500 billion in Treasury bonds expected to mature during the first nine months of this year, market analysts say it would be tough for the Central Bank to maintain price stability and lower interest rates unless the government introduces significant fiscal reforms and foreign direct inflows increase this year.
"We doubt local investors could absorb this capacity which means foreign investors would have to carry the weight," a market analyst said. "Unless this happens, the Central Bank would have to print money and this would put pressure on inflation. Increased domestic borrowings by the government would also put pressure on interest rates and if rates are manipulated, the exchange rate would be affected, "leading to another cycle of balance of payments problems," the analyst said.
"It is tough to be optimistic about macroeconomic stability going forward considering the fact that the government is not going to international capital markets this year. Significant fiscal reforms would have to be made, starting with the CEB and CPC, where consumer prices would have to be determined by realistic formulae."
Persistent government borrowings from the domestic market must not be accompanied by manipulations to the interest rate. Keeping interest rates low will only create credit, and then the exchange rate could come under pressure as well, market analysts warn.
Secondary market bond yields had been on the rise over the past few weeks despite a monetary policy rate cut in December which was left unchanged in January and February.
"This is because deposit rates are still high with competition among banks stiff. So naturally bank lending rates are also high, but the Central Bank believes this would ease soon. Treasury bill and bond auctions are being subscribed at higher rates on account of this, but of course with captive sources such as the EPF, NSB and other state banks in play, yields are kept under control," one analyst said.