Looser Monetary Policy Will Have Little Growth Effect

BMI View: A 30-basis-point cut to interest rates in the CEMAC zone will have little impact on the bloc's economy, which remains poorly integrated and heavily dependent on oil exports. Official growth forecasts remain overly optimistic.

Central Africa's Banque des États de l'Afrique Centrale (BEAC) cut its key interest rate on July 8 by 30 basis points (bps), taking the Taux d'Intérêt des Appels d'Offres to an all-time low of 2.95%.   The most recent cut is only the latest in a multi-year period of monetary loosening that has seen the BEAC halve its key interest rate.

The goal of this policy is to boost economic growth within the Communauté Économique et Monétaire de l'Afrique Centrale (CEMAC), which is struggling owing to a combination of stagnating oil production, poor business environments, and - to a lesser extent - the security crisis in the Central African Republic (see '20 Years of CEMAC: Little To Celebrate', March 21).

Slashing Rates Further
CEMAC - Taux d'Intérêt Des Appels d'Offres, %

Looser Monetary Policy Will Have Little Growth Effect

BMI View: A 30-basis-point cut to interest rates in the CEMAC zone will have little impact on the bloc's economy, which remains poorly integrated and heavily dependent on oil exports. Official growth forecasts remain overly optimistic.

Central Africa's Banque des États de l'Afrique Centrale (BEAC) cut its key interest rate on July 8 by 30 basis points (bps), taking the Taux d'Intérêt des Appels d'Offres to an all-time low of 2.95%.   The most recent cut is only the latest in a multi-year period of monetary loosening that has seen the BEAC halve its key interest rate.

The goal of this policy is to boost economic growth within the Communauté Économique et Monétaire de l'Afrique Centrale (CEMAC), which is struggling owing to a combination of stagnating oil production, poor business environments, and - to a lesser extent - the security crisis in the Central African Republic (see '20 Years of CEMAC: Little To Celebrate', March 21).

Slashing Rates Further
CEMAC - Taux d'Intérêt Des Appels d'Offres, %

BMI doubts, however, that the cut will have any significant impact on the region. As we have previously argued, a weak financial system and limited transfer mechanisms mean that monetary policy has little effect on regional economies, which are largely based on the extractive industries.

Only a tiny minority of consumers has access to bank accounts, so changing rates has very limited influence over their purchasing decisions. Larger corporates borrow on the international markets (see 'CEMAC Monetary Policy To Have Little Effect', May 8).

Still Too Optimistic
CEMAC - 2014 Real GDP Growth Forecasts, %

The monetary policy announcement published after the July monetary policy committee (MPC) meeting lowered the BEAC's 2014 CEMAC-wide real GDP growth forecast from 6.7% to 6.1%, but this prediction remains far above the forecasts of both BMI and the IMF. We believe that the MPC is still far too optimistic about growth in the zone, and that it is assuming that loose monetary policy will have a significant stimulus effect.

Cut Creates No Optimism

BMI does not believe that this will be the case. Weak transfer mechanisms and a poorly developed financial sector mean that interest rates set by the BEAC have little impact on the real economy within the CEMAC zone. This view is largely shared by local commentators. Thomas Babissakana, a frequently quoted financial analyst based in Yaoundé, recently told the Cameroon Tribune that a lack of financial infrastructure meant that 'even if the BEAC reduced its key rate to 0.0% this would have no substantial impact on ordinary Cameroonians' access to credit'.

No More Cards To Play

There are two key reasons for this: a lack of private lending and key investors' easy access to alternative sources of capital. These two factors reduce the impact of monetary policymaking and will prevent the BEAC's efforts from boosting economic growth.

Most private consumers in the CEMAC countries have no access to the financial system, making interest rate decisions irrelevant to their actual purchasing decisions. Data from the IMF show that loans from commercial banks were equivalent to just 16.8% of GDP in Cameroon in 2012, the most recent year for which comparable figures are available. This compares with almost 45% in Kenya. The situation is even worse in countries such as Chad and the Central African Republic, where the modern financial system hardly exists outside key urban areas.

Banks Have Limited Effect On Real Economy 
Africa - Commercial Banks, % Of GDP 

Poverty is widespread across CEMAC - albeit to a lesser degree in Gabon and Equatorial Guinea - and disposable income is low. The lack of functioning credit reference bureaux discourages banks from lending to poorer consumers, many of whom have irregular incomes and no credit history. In many parts of the zone banks are simply not physically present, making access to credit a purely academic problem.

Wealthier consumers - who are largely concentrated in the cities of Douala, Libreville, and Malabo - face fewer constraints on their access to credit. The free convertibility of CEMAC's XAF franc with the euro, however, encourages more financially literate consumers to bank in Europe, where rates are even lower and banks offer a wider array of financial services.

Interest Rates Are The Least Of Their Problems
Africa - Bank Branches Per 100,000 Adults 

Access to foreign credit is the key reason why investment spending in the CEMAC states is largely unaffected by monetary policy decisions from the BEAC. Most large-scale investment projects undertaken in the CEMAC states are funded either by foreign investors or by government spending, neither of which is dependent on borrowing from local banks. Chinese road builders and French oil firms have no incentive to borrow on the local market, meaning that the rates on that market have no impact on their spending decisions.

Have Another Go?

Our core view is that the BEAC will maintain its current interest rate for the duration of 2014 and 2015. It remains possible, however, that the bank may attempt to cut rates again in an ineffective attempt to stimulate growth.

Such a move will become more likely if the economic crisis in Equatorial Guinea - the home state of BEAC governor Lucas Abacha Nchama - worsens over the coming months. Low inflation in most states will give the bank room to manoeuvre, though we stress that another cut would have little effect on the zone's tepid economic growth.

Monetary Policy (Cameroon 2010-2018)
  2010 2011 2012 2013 2014f 2015f 2016f 2017f 2018f
Consumer price inflation, % y-o-y, ave 1.3 2.9 2.4 2.1 2.8 2.5 2.5 2.5 2.5
M1, XAFbn 1,415.8 1,602.0 1,572.7 1,780.1 1,957.9 2,138.5 2,364.5 2,581.6 2,823.0
M1, % y-o-y 10.6 13.1 -1.8 13.2 10.0 9.2 10.6 9.2 9.3
M2, XAFbn 2,416.0 2,706.9 2,720.5 3,037.8 3,290.8 3,546.8 3,856.8 4,155.7 4,482.8
M2, % y-o-y 13.1 12.0 0.5 11.7 8.3 7.8 8.7 7.8 7.9
Central bank policy rate, % eop 4.00 4.00 4.00 3.25 2.95 2.95 2.95 2.95 2.95
Lending rate, %, eop 13.0 14.0 14.0 14.0 14.0 14.0 14.0 14.0 14.0
Lending rate, %, ave 12.5 13.5 14.0 14.0 14.0 14.0 14.0 14.0 14.0
Real lending rate, %, eop 10.4 11.3 11.5 12.3 11.0 11.5 11.5 11.5 11.5
Real lending rate, %, ave 11.2 10.6 11.6 12.0 11.2 11.5 11.5 11.5 11.5
Source: National sources, BMI

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