Banks and borrowers hurt by weak Tongan economy [1]
Monday, May 6, 2013 - 15:02. Updated on Monday, September 9, 2013 - 18:40.
Steven Edwards and Siosi Mafi, National Reserve Bank of Tonga, Nuku'alofa, 3 May 2013.
The National Reserve Bank of Tonga is running out of ideas on how to encourage commercial banks to lend more money at a time when the Tongan economy is very weak, the Reserve Bank Governor Siosi Mafi said on Friday May 3 when she presented the Monetary Policy Statement for the end of February.
Commercial banks had tightened their lending criteria while borrowers continued to have difficulty servicing their debts because remittances and other sources of disposable income have fallen. A weak and uncertain short-term economic outlook is likely to have reduced the number of attractive lending opportunities as well.
Siosi said that in response to the low lending since November 2012 the Reserve Bank stopped all interest payments of 1% they used to pay to the commercial banks on the Exchange Settlement Accounts with the NRBT. It was hoped this would encourage the commercial banks to lend more to the public. Since then some banks had started offering loans at lower rates or longer terms.
"The objective of this exercise was to encourage the banks to lend more money at a lower interest rate from their mounting liquidity of about $140 million."
The competition to find borrowers in the Tonga money market, however, has been further intensified by the entrance of other lenders into the market.
Retirement Fund loans
Since 2011 the Retirement Fund Board (RFB) had started offering non-housing personal loans to its members.
In 2010 a privately owned microfinance enterprise, South Pacific Business Development (SPBD) started providing financial services to individuals and community groups who otherwise have difficulty meeting the banks lending criteria.
In 2008 the Government started on-lending large amounts of a loan from the Export-Import Bank of China for major infrastructure projects in the Nuku‘alofa central business district.
However, the government on-lending scheme had not produced the result that was expected. The multi-million reconstruction of Vuna Wharf had attracted about five cruise ships so far this year.
The Chairman of the Board of the NRBT, Steven Edwards, said that a minimum of 100 cruise ships should call into Nuku'alofa annually to make the scheme profitable. He said that 200 cruise ships call into Port Vila, Vanuatu annually.
China loans
The Policy Statement reported that while the on-lent amounts of the China loans had been fully extended for over 12 months now, the amounts of the other loans had grown. Had they been included in the aggregate financial system figures, the household sector credit would have grown by 5.1 percent over the year-ended February and overall credit would have contracted by 4.2 per cent.
The Policy Statement noted that these growth rates are well below the average rates recorded over the ten years that preceded the global financial crisis. With the frequency of borrower defaults having increased markedly in June 2008, and having remained elevated since, banks have responded by tightening their lending criteria.
Borrowers have had difficulty servicing their debts because remittances and other sources of disposable income have fallen. A weak and uncertain short-term economic outlook is likely to have reduced the number of attractive lending opportunities as well.
The Monetary Policy Statement outlined what the bank has been doing during the past six months, and its work-plan for the coming six months.
The NRBT on May 1 established a Complaints Unit to address customers complaints about the Reserve Bank's services "as well as the services of the licensed banks and authorized foreign exchange dealers."
Foreign Reserves
Meanwhile, Steven Edwards said that the bank is holding Tonga's highest foreign reserves ever, of $258 million, or enough for nine months of imports. The standard requirement is for the Bank to hold reserves enough for three to four months of imports.
Unfortunately, the increase in Foreign Reserve was due to grants from aid donors, and budget supports which have been injected into the budget to pay for civil servants salaries.
Export earnings
Tonga's foreign earnings are further constrained by the fact that earnings from exports either remain overseas or return to Tonga as goods, and not as cash.
Siosi said that they are proposing for government to pass an act, setting a definite percentage of foreign earnings from exports to return to Tonga.
Tonga's Gross Domestic Product (GDP) has declined during the past few years, and it is predicted to grow by only half a percent during the coming financial year.
The increase in Tonga's Foreign Reserve is attributed to a drop in imports, because of a decline in consumer demand for imported goods.
A drop in consumer demand for imported goods reduced the inflation rate. The inflation rate in February was 1.1%.
Siosi pointed out that a high Foreign Reserve with a low inflation rate tells us that the Tongan economy is very weak.