Covid-19 impact: CTA requests more courageous measures from the Bank of Mozambique – unabridged

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Covid-19 impact: CTA requests more courageous measures from the Bank of Mozambique – unabridged

4:19 CAT | 03 Apr 2020

File photo: Lusa

At a time when companies are clamouring for the easing of their obligations in order to survive this difficult period, we see the market’s prime rate rising again, albeit slightly, from 18% to 18.4%. In practice, this means an increase in the market interest rate, that is, the obligations of companies with banks in this difficult period will be even greater than in the previous period, when the situation was relatively better.

The rationale of the measure is not very clear, namely in the face of the prospect of rising inflation in the near future.

The International Monetary Fund itself has been emphasizing that, for now, we are going to save the economy, we are going to take care of health and, later, we will see how to stabilise the indicators.

The point is that the banking sector itself will also be affected by the consequences of Covid-19, given the impact that this pandemic will have on Mozambique’s business fabric. A large part of borrowers will have difficulties honouring their obligations, servicing bank credit amongst them.

When analysing the impact of this probable default scenario in the banking sector, repercussion fall within two perspectives.

(i) Debt service default (monthly instalments). That is, the borrowing companies, due to the probable total or partial stoppage of activities, fail to generate sufficient cash flows to honour their obligation to the banks. As a result, there is a default that can lead to an increase in bad loans in the system, forcing commercial banks to create provisions which, in turn, will consume even more liquidity, and

(ii) Reduction of bank revenue. Companies, by failing to fulfil their debt service obligation, causes the banks to lose expected revenue, corresponding to the interest they would periodically obtain as a result of assigned credit.

Taking into account the data from the central bank, the three sectors most affected by Covid-19 in Mozambique – Tourism, Civil Aviation and Agriculture – in January 2020 jointly contracted debt with the banking sector of approximately MZN 43 billion, corresponding to about 19% of the total volume of credit to the private sector.

Considering that this loan has an average maturity of 5 years (60 months), and that the applicable average interest rate is equivalent to the Prime Rate fixed at 18%, we have two scenarios, an optimistic one and a pessimistic one.

In the optimistic scenario, which posits a risk of defaulting on three instalments, the volume of losses in the banking sector could amount to MZN 3.3 billion, of which the loss referring to bank revenue (interest) could amount to MZN 1.9 billion.

In the pessimistic scenario, which presupposes a default period of six months, the volume of losses in the banking sector may amount to approximately MZN 6.6 billion, of which MZN 3.7 billion refer to losses in the income of banks (interest).

In short, on account of Covid-19, the financial sector has the potential to record additional defaults estimated between MZN3.3 billion and MZN 6.6 billion, which means that, without specific intervention, default on the current volume of credit may be between 1.5% and 2.9%. This scenario may have an impact on the growth of the financial sector, causing it to present a growth rate between -2% and 3.6%, significantly below its potential growth estimated at 9% for 2020.

In order to minimise any default situation, the banking sector and companies must seek out possible solutions which alleviate corporate obligations in this difficult period.

The Bank of Mozambique’s measures to authorise the non-constitution of additional provisions by credit institutions (commercial banks) in cases of renegotiation, opens the possibility of restructuring private sector debt, and urgent actions are necessary to avoid failing in the timing of these measures.

Still on the Bank of Mozambique side, in addition to looking at the interest rate level, it is necessary to look more flexibly at the interbank exchange market, providing foreign exchange for essential exports in this period.

It is known that exporting companies are in a difficult situation, either due to the effect of commodity prices, especially agriculture, which has fallen sharply, or to the difficulty of finding open markets to source stock.

This in itself creates difficulties in generating foreign exchange and, at a time when companies are looking to provide the market with essential imported goods, the Bank of Mozambique has a say, by making foreign exchange available.

The US$500 million credit line introduced in the Interbank Foreign Exchange Market is not the most suitable measure, because it is not flexible. A more flexible measure, such as the injection of liquidity into the market through the sale of foreign currency, should be introduced, and would support the metical itself.

Source: CTA