BoG rate cut will spur lending and growth
The reduction in Bank of Ghana’s (BoG) benchmark interest rate (policy rate) from 22.5 per cent to 21 per cent signals a gradual improvement in the economy that will boost lending by commercial banks, according to ratings agency, Moody's.
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A statement by Moody’s Investor service said the latest monetary policy rate reduction would reduce banks’ lending rates and asset risks, which increased substantially in 2016 and caused banks’ non-performing loans to rise to 21.7 per cent of gross loans as of May 2017 from 14.6 per cent at the beginning of 2016.
The rating agency said the 150 basis points policy rate cut by the Bank of Ghana last week was credit positive for the country’s banks.
“The rate cut and falling inflation also will support Ghana’s operating environment, boosting demand for new loans and benefiting banks' revenue," Moody's added.
Moody’s further states that the rate cut and falling inflation also will support Ghana’s operating environment, boosting demand for new loans and benefiting banks’ revenue.
The Governor of the Bank of Ghana, Dr Ernest Addison, who had earlier cited a continuous drop in consumer inflation and the potential for higher economic growth on increasing oil output, said the bank’s Composite Index of Economic Activity (CIEA) showed a pickup in economic activity in the first five months of 2017.
Economic slowdown
Real private sector credit contracted by 0.8 per cent in 2016 because of Ghana’s economic slowdown, during which real Gross Domestic Product (GDP) growth decelerated to 3.5 per cent from an average of 7.7 per cent in 2010-15.
Ghana, which for years saw strong average GDP growth of around seven per cent on exports of gold, cocoa and oil, is grappling with a raft of macroeconomic problems and was forced to sign a $918 million aid deal with the IMF in April 2015 to restore fiscal balance.
Since November 2016, the central bank has cut the monetary policy rate by five percentage points from a peak of 26 per cent to the latest drop to 21 per cent.
Last week’s rate cut is the central bank’s fourth consecutive reduction since November last year and is in response to the bank’s expectation that Ghana’s inflation rate will fall to its six per cent to 10 per cent target range from 12.1 per cent in June, Moody’s said.
The increased cost of deposits reduced banks’ interest spread to 4.1 per cent from 5.1 per cent over the same period, lowering profitability as reflected by an average return on assets that fell to 4.0 per cent from 4.7 per cent over the same period,” the rating agency said.
“We expect borrowers’ debt repayment burden to fall further as the average lending rate decreases. The system average lending rate declined to 30.5 per cent in April 2017 from 32.03 per cent in November 2016, when the Bank of Ghana first began lowering the monetary policy rate, and we expect additional reductions in the system’s average lending rate to follow.”
“However, banks will partly offset the effect of lower interest income by reducing their deposit rates, thus lowering funding costs that constrained interest margins and profitability in 2016, albeit from a high base. As an example, the 90-day deposit cost increased to 15.25 per cent in April 2017 from 13 per cent in April 2016.”
Lower lending rate
“Lower lending rates, together with declining inflation, will provide cash flow relief to borrowers, improving their repayment capacity and improving banks’ asset quality, although the system’s non-performing loan ratio will remain high,” it pointed out.
“We expect GDP growth to recover to 6.1 per cent this year and 7.5 per cent in 2018,” it said.
According to Moody’s, the rate cut will reduce banks’ interest income earned from treasury bills, whose yields have already declined by an average of about 600 basis points since November 2016.
The banks’ investment in government bills and bonds, Moody’s says, was high at 21 per cent of total assets as of April, and the Bank of Ghana classifies 72 per cent of these as short term, which creates reinvestment risks for banks.
However, for GCB Bank Limited (B3 stable, b31), the only Ghana-based bank that Moody’s rate, the agency indicated that the rate reduction would benefit its asset quality.
“However, the lower rate will likely harm GCB’s interest income because of its large sovereign debt portfolio (about 43 per cent of total assets as of the end of 2016),” it noted. — GB
