2023-09-01 02:55:39
After the Central Bank of Paraguay (BCP) has decided to start lowering the reference rate, the banking market and economic analysts expect that with this measure, the demand for loans will increase in the following months, as long as the Committee of Monetary Policy (CPM) continue lowering the reference interest rate based on the results of inflation.
From the banking system they indicated that the reductions would be seen first in passive rates, that is, the interest that financial institutions pay to their savers for their deposits and gradually would also be seen in interest for credits.
Evolutionary monetary policy
It is important to contextualize the path that the BCP’s monetary policy had in recent years, from 2021 to 2023, to understand the impact on the financial sector in general.
Precisely in August 2022 it was one year in which the BCP was raising its TPM to contain inflation that reached historical levels, since in this same month but in 2021, the parent bank had begun to raise the TPM from 0, 75%
Subsequently, the regulator kept the monetary policy rate at 8.5% for 11 months, waiting for inflation to show a convergence towards the target range that is between 2% and 6%, with 4% as the center, but this is not only not only had effects on inflation, but also on the financial market, making the returns on bank and stock market instruments more attractive to savers and investors.
The result of this contractive policy was reflected in that the thresholds for the active rate reached a ceiling of 15.55% while the passive rate reached 5.45%.
But once the macroeconomic conditions have shown a return towards normalized inflation, economic agents and various sectors of the economy have reported the need to establish lower interest rates for access to credit.
This had been observed in the General Credit Situation report in which the economic agents responded that among the actions to promote credit in the economy, the active rate would have to be reduced, in addition to that, the supermarket union had also ruled in this regard through a statement, expressing the need to establish lower rates.
Similarly, the loan portfolio in banks continued to grow at an average rate of 10% during the first half of the year and reached an amount of G.128.6 trillion (USD 17,874 million), of which the portfolio consumption is the one that has had the greatest preponderance since they accumulate a value of G.17.5 trillion, an amount that represents a growth of 18.5% compared to the same month but last year.
But if the performance of credits during the first seven months of the year is taken into account, it can be seen that an interannual variation of 12.4% had been registered in January, 12.3% in the second month, and in March it did so 10.6%.
Already in the month of April they registered a growth of 11.2%, then at the end of the semester at 10.1% and the last month at 10.4%.
Behavior of deposits
Meanwhile, the deposit portfolio expanded 11.8% in July, reaching an amount of G.139 trillion (USD 19,317 million).
When analyzing the behavior shown by the deposits, it is also observed that the dynamics was improving, since in January of this year they grew only 1%; in February, at 2%; in March they did so at 5% and in April they acquired a rate of 9%, always in the interannual calculation.
Already in the fifth month it showed a variation of 10.5%, in June it grew again by 10.5% and in July it extended to 11.8%.
When disaggregating the deposit portfolio by instrument, checking accounts have a 28% share, sight deposits concentrate 30% of the resources; fixed term, 1.32%, while Certificates of Savings Deposits (CDA) have an impact of 38.8%, this being the main instrument for funding new loans.
It is important to mention that, according to the Financial Indicators report, the yield of the CDAs up to 180 days is 6.20%; up to one year is 7.49% and 8.9% for terms greater than one year, these rates correspond to the month of July.
Banks perspective
In communication with MarketData, Beltrán Macchi, president of the Association of Banks of Paraguay (ASOBAN) mentioned that in August, local inflation has continued with a downward trajectory based on the different trend measures of the Central Bank that reflected a behavior consistent with convergence expected inflation towards the target, for which the Monetary Policy Committee decided to reduce the Monetary Policy Rate by 25 bp, from 8.50% to 8.25% per year.
The estimated effects that this decision will have, according to the executive, will be reflected in a reduction in deposit rates, mainly in fixed-term savings such as CDA’s, in the coming months, likewise, he commented that a reduction in active rates is expected, although less immediately, due to the default component.
“The limits of maximum effective rates were slightly reduced for September by 0.05% (guaraníes) and 0.02% (US dollars),” he said.
Beltran Macchi pointed out that it is possible to continue reducing the rate since it is considered that inflation will continue this trajectory to the extent that domestic prices are adjusted downwards, mainly fuel and food goods.
While on the side of external prices, he maintained that the risks of an increase in inflation in the United States and Europe have decreased at the margin, so they do not expect it to affect the convergence of local inflation to its target.
On the other hand, he stated that one of the necessary actions to continue promoting loans in the local economy would be to continue reducing interest rates, since this could positively stimulate credit in the economy, although he specified that it is not the only variable, due to that an incentive is also needed from the recovery of the different economic sectors such as agriculture, livestock, services, commerce, consumption, manufacturing and construction.
“For this second semester, we expect the economy to generate greater dynamism and reach the expected growth of 4.5%, driven by the growth of the agricultural sector and bank leverage,” he said.
On the other hand, he also opined that it will be important for the government to resolve in the short term the payment of debts with suppliers, due to the impact this has on fiscal accounts and economic activity.
For his part, Rodrigo Ortiz, director of Banco Continental, told MarketData that a moderate growth in loans continues to be observed at the beginning of the second semester. The total loan portfolio of the system grew between June and July 2023 by 0.70%, and 10.42% in interannual terms.
In addition, he specified that there is a greater demand for credits in US dollars, mainly from the productive sector, either for working capital or for investment projects, due to the outstanding recovery of the primary sector compared to the performance of the previous year and the good prospects for the 2023-2024 agricultural season.
With the lowering of the TPM, Ortiz pointed out that although the cut was only made in August, the market had already been discounting this position many months before, reflecting in the rate curve of the monetary regulation bills, for What many surprises in terms of its impact on the main economic and financial variables should not be.
Regarding the effects on credits, Ortiz considers that economic agents can be expected to channel their credit needs in local currency as these become more competitive. While in relation to deposits, it is expected along the same line that they follow a growing path, but perhaps lessened by the lower rates in local currency.
“However, the growth of economic activity, which is expected to consolidate in the remainder of 2023, will allow a greater flow of money in circulation that necessarily translates into greater deposits in the system,” he argued.
When asked about the need to continue lowering the rate, he indicated that this is based on inflation levels, since in the BCP’s opinion there are still risks, especially in the international arena, that could affect its convergence to the target established. “However, the recent expectations of the agents suggest that the conditions are right to continue with the gradual adjustments of the TPM,” said the bank executive.
For his part, financial analyst Amilcar Ferreria agrees that local conditions are ripe for the regulator to lower the benchmark interest rate, since inflation has returned to normal levels.
Along the same lines, he commented that the reduction that occurred this month after 11 months is a good sign that the BCP issues to the entire economy, however, he considers that the market and the local economy need to do so at a higher speed since that it still has a significant contractive differential left.
It is important to mention that the monetary policy rate is currently at 8.25% while 12-month inflation is at 3.5%, which leaves a real rate of 4.75%, but in terms of macroeconomic fundamentals, It is recommended that in order to establish a neutral rate, the TPM must be located at two percentage points above inflation.
With this we could understand that, taking into account that inflation closes the year at 4%, the real rate should close around 6% this year.
So far, in the EVE Survey of Economic Variables, the agents estimate that the TPM will close 2023 at 7.25% and that it will only drop to 6% in 2024, an estimate that for the financial analyst could be below 7.25 %, as inflation conditions improve.
Ferreira also indicated that it is expected that from now on more reductions will be made in the following meetings of the Monetary Policy Committee, which would generate greater dynamism in the financial system, lowering the cost of credit and access for the various sectors of the economy .
He himself commented that the rate reduction would apply to the passive rates of the financial system, but that he does not consider that there would be a disincentive in bank instruments, in the same way he affirmed that savers could see other options that are negotiated on the stock market such as investment funds, mutuals and other products.
“Generally in the local market the saver gets higher rates than in the overseas context and I don’t think because there is a rate break , the saver seeks to exit, in any case, but to a lesser extent they would go for instruments in exchange,” he pointed out . . . .
Amilcar Ferreira also considers that the rate reduction will not only benefit banking entities, but could also have an impact on economic activity, taking into account that there are several sectors that still require financing, mainly from companies related to services.
“This can also mean a breather for the economy since the economic actors are quite hit by interest rates so high that they consume the profits in the results and a further reduction in rates could be very useful, taking into account that inflation is at normal levels,” he concluded.
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