Weak demand in the economy has seen banks cut on loan approvals
Banks are taking a cautious approach towards lending as borrowers continue to struggle owing to a weak economy.
According to Bank of Uganda’s Monetary Policy Report for October 2022, Private Sector Credit (PSC) growth remains weak owing to weak aggregate demand in the economy.
“The weak demand is being amplified by weakening balance sheets of both households and firms as the rising inflation takes a toll on the cash flows of both households and firms, inducing higher risk aversion of the lenders. The increasing risk aversion is exhibited by the static and relatively lower loan approvals since the quarter to August 2021. Both the value of loans received and approved continued a downward path in the quarter to August 2022, with lenders approving just 54.4 percent of the value of loans applied for,” BoU says in its recently published Monetary Policy Report for October 2022 obtained by Business Focus.
The report adds that adjusting for capitalized interest and exchange rate changes, year-on-year growth in PSC averaged 8.3 percent in the quarter to August 2022, a slowdown from the 9.3 percent growth in the quarter to May 2022.
“Over the same period, growth of foreign currency-denominated loans also slowed to 3.9 percent from 6.5 percent while shilling-denominated loans growth fell to an average of 10.1 percent in the quarter to August 2022 from 10.4 percent in the quarter to May 2022,” the report says.
It should be noted that in October 2022 BoU’s Monetary Policy Committee (MPC) assessed that the risks to inflation were significantly tilted to the upside and therefore decided to raise the CBR by one percentage point to 10.0 percent. It was also left unchanged earlier this month.
The report adds that lending rates on shilling-denominated loans declined to 17.4 percent in the quarter to August 2022 compared to 18.8 percent observed in the quarter to May 2022.
“Declines in shilling lending rates were observed in all sectors but were most pronounced in Trade, Transport & Communication, Manufacturing, and Personal and Household Loans. The decline in the overall shilling lending rates was driven by significant lending to prime borrowers in the Trade, Manufacturing and Transport, and Communication Sectors in the first months of the quarter. However, in August 2022, the average weighted shilling lending rates increased to 20.2 percent from the 16.3 percent observed in June 2022,” the report says.
The report adds that Credit growth remains weak and embarked on a downward trend in most of the major sectors of the economy.
“The slowdown of credit growth is apparent in the Personal and Household loans sectors and Agriculture,” the report says, adding: “The domestic economic prospects continue to be darkened by negative spillovers from the global economic environment including the war in Ukraine, high global commodity prices, slowing global demand and lingering effects of Covid-19 in Asia, and tightening financial conditions while on the domestic front, lagged impact of the dry weather conditions and increasingly high cost of living feeding through to weak consumer confidence, and tightening financial conditions that are further slowing down credit to the private sector are weighing down on economic activity in addition to the prospective impact fiscal tightness on aggregate demand,” the report says.
Notwithstanding the above, the report says business confidence seem to be making a comeback after dropping in the lead-up to July 2022.
The Bank of Uganda’s Business Tendency Index (BTI) and the Stanbic Purchasing Managers Index (PMI) data signal an improvement in business operating conditions during September 2022.
Both indices ticked up to 52.9 and 51.6 in September 2022 from 52.6 and 50.5 in August 2022, respectively.
“The improvement in business activity is reflected in increased Output and new orders while a dip in employment and purchasing activity was a drag on these indicators. However, Consumer sentiments about the present and expected economic situation remain negative and were more pessimistic in September 2022, declining to 38.2 which is a continued deterioration of consumer sentiments since March 2022 and reflects the effects of rising inflation on the cost of living,” the report says.
The growth outlook has been revised slightly upwards, with GDP growth expected in the range of 5-5. 5 percent in FY 2022/23, up from the previously assumed 4.5-5 percent. Nevertheless, economic growth is expected to remain below its long-run trend until FY2025/26.