- Macroeconomic environment remains conducive for financial stability despite sovereign vulnerabilities
- Ratio of non-performing loans to total loans relatively low at 4.8% in February
- Commercial bank credit grew by 4.6% in the year to February 2022 compared to 3.6% in corresponding period of 2021
- Household debt drives bank credit at 66.4% of total credit in February.
- But household indebtedness remains modest at 23.5% of GDP
The domestic financial system is thus far resilient to COVID-19 shocks and continues to support the real economy, the country’s Financial Stability Council (FSC) has said.
The FSC was launched in February 2019 to foster and promote financial stability by coordinating development of regulatory, supervisory and other financial sector policies in recognition of interconnectedness across markets and institutions. It comprises CEOs of the Ministry of Finance (MoF), the Bank of Botswana, the Non-Bank Financial Institutions Regulatory Authority (NBFIRA) and the Financial Intelligence Agency (FIA).
These authorities have signed a Memorandum of Understanding (MoU) for information sharing, cooperation and communication in implementation of the Macroprudential Policy for Botswana.
The FSC met on 3 May 2022 to deliberate on domestic financial stability developments – including regulatory issues, performance and prospects for the domestic financial system – and to consider recent and prospective regional and global developments.
They found that the domestic financial system is thus far resilient to COVID-19 shocks. “However, there are emerging risks pertaining to, among others, the consequences of the Russia-Ukraine war, exposure to cyber threats due to increasing usage of technology, uncertain employment prospects as businesses restructure and hence possible increase in loan repayment defaults, pension withdrawals and early redemption of insurance policies,” reads a statement released after their meeting.
The FSC noted that the macroeconomic environment remains conducive for financial stability despite sovereign vulnerabilities (reduced fiscal and external buffers) due to the current depressed global economic environment combined with long-term structural trends. “The domestic macroeconomic environment will, however, continue to be shaped by the economic and price effects of the Russia-Ukraine war, COVID-19 profile and related containment measures and associated supply disruptions,” the statement said.
“The prevailing tight global financial conditions, which translate into high interest rates and therefore reduced access to credit and the likelihood of higher credit default risk, could spill over and test the resilience of the domestic financial system. Meanwhile, the domestic financial system continues to perform the expected function of financing other sectors of the economy, given the strong capital and liquidity position, profitability, as well as an enabling and effective regulatory environment.”
The FSC observed that vulnerabilities to the domestic financial system are generally contained. “Credit growth remains moderate and commensurate with the rate of increase in GDP, thus posing minimal risk to financial stability,” it observed. “Commercial bank credit grew by 4.6 percent in the year to February 2022 compared to 3.6 percent in the corresponding period of 2021. Household debt continues to drive bank credit, at P45.9 billion and constituting 66.4 percent of total credit in February 2022. Nevertheless, at 23.5 percent of GDP, the level of household indebtedness remains modest. The ratio of non-performing loans to total loans remains relatively low at 4.8 percent in February 2022.”
The FSC is of the view that the continuing fall in excess market liquidity due to persistent foreign exchange outflows is likely to moderate following improvements in diamond sales.