lochaz-index wrote:wukan wrote:lochaz-index wrote:[quote=wukan]
The writer got that correct. Interest caps served to make a bad situation worse. However, the real culprit for high interest rates and the mess KE finds itself in is the govt. By introducing the capping regime it passed its cross to the banks and the private sector in general. It doesn't end well from there whichever way you slice it.
Assuming the interest caps are repealed, I expect a crisis on NPLs and liquidity fronts at least in the short term. If they are not repealed by end of 2018, KE is going to have a banking crisis which will force GoK's/parliament's hand in a quick about turn/repealing of the caps. Not pretty either way but the former is the more palatable option.
A short term-long term trade off structurally, fiscally and monetary wise is lurking in the shadows and will have to be dealt with very carefully. To steady the macros, public sector driven growth, the resultant borrowing and heavy taxation has to be dialed down significantly which will help with slimming the twin fiscal and current account deficits. This will afford the private sector some breathing space and thereafter enable it to thrive. Failure to do that will lead the govt into a strait jacket of uncomfortable/painful decisions followed by long term ugly consequences.
It's unlikely that KE will slim the fiscal and current account deficits. Elections promises and political trade-offs to buy loyalty in the current contest means the fiscal deficit will get worse, no spending cuts. Our prolonged political contest will soon fatigue foreign capital which finances our current account deficit. Taxation cannot be dialed down not with the upcoming debt commitments. KRA will get more aggressive better get your books in order.
Private sector is about to get very squeezed. Bond yields are on the upward trend. Even if rate cap is repealed the damage done is significant. A sudden sharp rise in interest rates following repeal will squeeze out all the weak hands.
The private sector response will be capital flight. As capital flees the reserves will get depleted the currency will be more vulnerable to speculative attack. Govt will soon have very little room for maneuver. Inflationary finance will be the only way out.
If bold measures are not taken in the near term KE will find itself in a very sticky situation. That being said, govts have a nasty habit of taking the easy way out... consequences be damned. At this rate, KE could follow Zambia's example and hold a national prayers day for its currency.
Fitch are of the opinion that the interest caps will be reviewed not repealed.
Interest caps eliminated interest risk but introduced refinancing risk.
Quote:The reduction in lending has contributed to a rise in credit losses, as some customers are no longer able to get refinancing. The sector's NPL ratio continued to rise in 2017, ending 1H17 at 11%. Profitability is down across the sector, even for the larger banks, despite their stronger franchises.
The bigger problem however from the rate cap is the funding risk. If you look at the chart, there is a slight uptick in the average deposit rate in February without an offsetting rise in average lending rate thanks to the caps. In short, if rates rise significantly from the current levels (which is almost a certainty at this point) there will be an armageddon in the banking sector.
https://www.fitchratings...amp;utm_campaign=buffer
The refinancing risk feeds into and compounds the macro risk...banks deny loans to most applicants who in turn can't service their loans and or support their businesses due to tough economic conditions. Most of these businesses go burst further vindicating banks on denying them credit. This is in addition to liquidity preference when the economy turns down. Tough luck.
http://www.businessdaily...1462-ejjra5z/index.html
Quote:The report indicated there were more than 3.2 million loan applications — the highest since the rate caps came into effect — between May and June this year, but banks only approved about 1.1 million of them.
The main purpose of the stock market is to make fools of as many people as possible.