Tonga's banks remain flush with funds, and are being urged to lend more to help stimulate an economy that looks as if it has stalled this year, according to figures released today.

The National Reserve Bank of Tonga (NRBT) in releasing its Monetary Policy Statement for September 2013, stated that, “the NRBT will continue its monthly dialogue with the banks on ways to encourage lending of their surplus liquidity levels.”

All key industries in Tonga except for construction recorded falls in lending.

The new Governor of the Reserve Bank,  Dr Sione Ngongo Kioa believed that a contraction in lending would have contributed to Tonga's slower economic growth outcome.

“Business lending contracted most over the year to September. It fell by 15.1 percent compared with 12.8 percent over the year to March,” according to the statement.

The Reserve Bank reported that the frequency of borrower defaults had increased in 2008 and remained elevated since, and banks had responded by tightening their lending criteria.

“A weak and uncertain short-term economic outlook is likely to have reduced the number of attractive lending opportunities as well.”

Total bank lending balances fell by 1.5 per cent over the year to September, when all categories, such as housing and personal loans were included.

Lending take up is also historically low. According to the statement, “Lending rates overall appear to be low by the standards of the past decade.”

The report also noted other factors and that an increasing share of lending had come from outside of the banking sector. “The Retirement Fund Board is offering non-housing personal loans to members, and a microfinance enterprise the SPBD is lending to people who have difficulty meeting the bank's criteria, and government has been lending to private sector for infrastructure projects in Nuku'alofa.

“If these extra lending activities were included into the official figures, recorded [lending] growth would have been 2.3 percent,“ according to the statement.

Lower GDP growth

The NRBT estimated that real GDP growth was only 0.2 per cent over the 2013 financial year. “The figure is lower than the outcome of the previous year, owing mostly to a fall in construction activity. The agricultural industry is estimated to have grown firmly, although its growth is unusually difficult to estimate this time. The outcome for agriculture will have a very important bearing on the overall growth figure.”

With economic outcomes subdued, the NRBT had implemented expansionary monetary policy, supporting an elevated level of Exchange Settlement Account balances (domestic liquidity).

The report noted that total liquidity in Tonga's banking system rose by 5 per cent over the six months to September. The rise was underpinned by a net increase in foreign reserves.

Excess liquidity

“[Foreign reserves] had total balances of $136.7 million, which equates to 17 per cent of nominal GDP and 30 per cent of banking system assets. These figures are very high by international standards,” stated the NRBT, which estimated that the Exchange Settlement Account balances “are significantly in excess of the banks' actual and precautionary liquidity needs.” 

Lending rates fell over the six months to September.

Gross official foreign reserves increased by 4 per cent from the last Monetary Policy Statement, to reach an equivalent of 8.4 months of imports. This is well in excess of the NRBT benchmark of 3 months of imports.

“Inflation was recorded at 1.5 per cent, which was faster than recorded in last Monetary Policy Statement, but well below the NRBT reference range of 6 to 8 per cent.”

Going forward, the National Reserve Bank remained optimistic for recovery.

“Tonga’s economic growth is expected to improve, recording real growth above 2 per cent in the 2014 financial year. The expected improvement is driven by an anticipated turnaround in the construction and finance industries, and ongoing growth in the agriculture and distribution industries.”

Outlook

Foreign reserves are projected to increase throughout the remainder of 2013 and early 2014 and, consistent with the outlook for higher economic growth, lending growth is expected to improve. The NRBT projected inflation to fall to around 0 per cent by July 2014, following declines in world food and oil prices.

Tourism concerns

The statement noted that tourism activity was mixed in the 2013 financial year. While data from the Tonga Department of Statistics showed that air visitor arrivals had increased by 14 percent in the first half of the financial year, compared to the same half of the year before, the visitor data had not yet been released for the second half. “Anecdotal evidence suggests that the numbers were low. .. tourist operators in the outer islands reported a slow stream of tourists during the June quarter, [the high season].

“The slowdown probably stems from recent disruptions to the reliability of Tonga's domestic air services and concerns overseas about the safety of Real Tonga's new Xian MA60 aircraft.

“Overall we expect tourism activity to have contracted slightly in the 2013 financial year,” the NRBT stated.

“If the domestic airline services can improve their reliability and ease offshore safety concerns, tourism activity is likely to stablise over the year, supported by continuing economic growth and falls to unemployment in key source countries.

“Ongoing problems with the domestic airline pose the biggest downside risk,” the statement said.

The full  "Monetary Policy Statement, September 2013” can be seen at http://www.reservebank.to/docs/Publication/MonetaryPolicyStatement_Sep2013.pdf [2]