BoT Confirms, Outlines Macro-Economic Risks in 2016

The exchange rate  will be volatile, corporate bodies will shy away from bank borrowing. It confirms Tanzanians have less disposable income  as the debt  to  disposable income ratio  increases from  34.3  percent in September 2015  to  35.0  percent in March 2016.

Digital financial services providers have brought new risks. The Central Bank, in  collaboration  with  other  financial  sector  regulators  will  intensify surveillance.

Bank of Tanzania


By TZ Business News Staff.


The Bank of Tanzania (BoT) has confirmed International Monetary Fund (IMF) fears  macro-economic risks face the Tanzania economy in 2016, pointing a finger at one particular possible cause—the volatile exchange rate which depends on interest rates in the United States of America.

The IMF sounded the warning in a statement issued  a couple of days ago. The banking system is likely to be affected by the exchange rate volatility as corporate bodies shy away from Tanzanian bank loans in favour of other sources of financing, BoT says in its recent Financial Stability Report (FSR) signed by the BoT Governor, Prof. Benno Ndulu. BoT has also confirmed the widely held understanding Tanzanians have less disposable income in 2016.

The debt  to  disposable  income ratio (proxied  by  the  ratio  of  personal  loan  to  employees’ compensation)  increased from  34.3  percent in September 2015  to  35.0  percent in March 2016, the Bank says. But it may level off going forward.  [An increase of the debt to income ratio means a family has less money to spend].

But the central bank  argues in its report the Tanzania debt to disposable income ratio is however  relatively low compared to other countries  in the SADC region (South Africa 78.3 percent, Mauritius 79.0 percent and Namibia 76.2 percent).

Growth in household debt servicing cost ratio remained broadly unchanged.  In the period ending  March,  2016,  the  debt-servicing  ratio  increased  to  10.4  percent  from  10.1  percent  in September,  2015.  The  debt  servicing  costs  increased  in  conjunction  with  the  rising  share  of personal loans in total bank loans and relatively high interest rates.

Nevertheless, BoT says, the  banking  sector  remained  sound  as  reflected  by  financial  soundness  indicators,  but faced risk stemming from declining asset quality. In aggregate terms,  capital and  liquidity ratios  remained above prudential requirements, at 18.0 percent and 36.6  percent  against 12.5 percent and 20.0 percent, respectively  except  for few banks which require  close monitoring.  The risky banks are not identified.

The central bank has also reported that the asset quality declined in the banks during the six months under review as depicted by an increase in Non-Performing Loans (NPLs), which were 8.3 percent of total loans at end March 2016, compared with  6.8 percent in September 2015.

The  NPLs  were  concentrated  in  credit  extended  to  personal,  agriculture  and  trade categories;  all  together  constituted  about  56.2  percent  of  the  total  NPLs  at  end  March  2016 compared to 52.0 percent in September 2015.

Bank of Tanzania Governor, Prof. Benno Ndulu

Bank of Tanzania Governor, Prof. Benno Ndulu

The index measures dispersion of change. When above 50,  although the ratio increased, overall sector’s capital  buffer was  sufficient to cover unexpected losses. The loan to deposit ratio has also increased to 82.7 percent at the end of March 2016 from 78.9 percent  at  end  September  2015  matching  the  rapid  private  sector  credit  growth.

The developments  have  compelled  some  banks  to  pursue  other  funding  options  domestically  and abroad, hence exposing them to interest and foreign exchange volatilities.

“The credit risk from households  in  the  next  six  months  is  expected  to  remain  broadly  unchanged  as  banks  take conservative lending stance to household,” the report says.

Prof. Ndulu says the Financial Stability Report (FSR) published every six months aims to  create  awareness  about  the  vulnerabilities  in  the  financial  system  and  to  inform  the public about  the resilience of the  financial  sector to stress.

The ultimate objective of a stable financial system is to support a vibrant and growing economy and to offer easy access to financial services across the country to all of its population, he says, adding that it is “a useful periodical health check of our financial system and I hope this issue once again provides useful information and guidance to all stakeholders.”

Since the release of the September 2015 FSR, global risks have been elevated with weaker growth prospects than earlier anticipated amid tighter financial conditions and lower commodity prices in the world.

Growth in Sub-Saharan Africa is vulnerable to sustained low commodity prices. Growth in the region is expected to slow-down to 3.0 percent in 2016 from 3.4 percent in 2015.  This is partly  attributable  to  low  demand  for  imported  raw  materials  by  China  which  is  undergoing structural transformation from manufacturing to a more services and high tech oriented economy, the report says.

The regional growth was further worsened by prolonged low global oil prices, mainly affecting oil exporting countries which account for about half of the region’s GDP.  US Federal  Reserve end  of  quantitative  easing  exposes  some  countries  to  capital  flight,  high  cost  of  external borrowing and weakening of their currencies which  may lead to build-up of public  and private sector indebtedness.

The Tanzania economy  was able  to  withstand risks  on account of  the diversified economy and beneficial effects of declining  oil  prices.  Growth of the  economy is  expected to remain strong  at  7.2  percent  in  2016  compared  with  7.0  percent  in  2015,  benefiting  from  its  export diversity,  government’s  commitment  to  invest  further  in  infrastructure  and  industrial development, and increased construction activity.

Inflation is projected to remain at single digits level, underpinned by favourable domestic food supply, subdued oil prices and prudent monetary policy.

Nevertheless,  a weaker external environment and expected increase in interest rate in the USA may have spill-over effects on the economy through  pressure on  exchange rate and rising debt services for dollar denominated debt emanating from the Non-Financial Corporate (NFC) sector moderated due to decrease in foreign  currency  loans  relative  to  equity,  and  increased  use  of  internal financing  as  opposed  to  borrowing  from  the banking  system.

Overall,  the NFC  Sector  Survey conducted in December 2015 revealed that firms’ foreign currency denominated debt relative to equity declined while  borrowing in  local  currency relative to equity increased.  The  outlook for NFC  sector  performance  in  the  next  12  months  is  optimistic  due  to  expected  increased profitability and general business performance. This is confirmed by the increase in the overall performance sentiment index to 61.8 percent in 2015 from 46.6 percent in 2014.

Since firms are expected to enhance usage of internal financing as a result of expected increased  profitability, potential risks to the banking sector from NFC borrowing will be lowered.

The risk emanating from global environment increased during the six months to March 2016,  while  risks  arising from  the domestic economy remained moderate. The global economy is exposed to uncertainties surrounding normalization of monetary policy in the US, and China rebalancing together with slowdown in growth.

As a result, global economic recovery remained sluggish, with volatile financial markets elevating potential risks to domestic financial system  through  exchange  rate  volatility  and  rising  debt  services  on  external  borrowing.

Risks arising from the global financial environment are expected to increase on account of further  tightening of the US monetary policy.  This may trigger strengthening of US dollar against other currencies and create domestic financial markets volatility.

But the domestic  economy is expected to remain strong despite persistent low commodity prices. The positive outlook is  underpinned  by diverse export  base,  declining oil prices and favourable macroeconomic environment.

Non-Performing Loans  are expected to level off. This is based on the expectation that banks will enhance prudential risk management thus reducing the level of Non-Performing Loans in the banking sector. Risks  arising  from  the corporate  sector  are  expected  to  decline,  as  reflected  by  overall performance  sentiment  index.  Total  corporate  leverage  is  expected  to  decrease  in  terms  of domestic and foreign denominated debts.

Based  on this  outlook,  the domestic  financial  system  is  expected  to  remain  resilient  in  the  next  six months.

The banking sector was exposed to increased Non-Performing Loans mainly contributed by personal loans and loans to agricultural sector and trade.  On the other hand, credit risks arising from the corporate sector were moderate.  The identified risks are presented in the financial stability risk map below:


Risk Map

To  minimize  potential  risks  to  the  stability  of  the  financial  systems,  the  following recommendations are proposed. 1)  Overall, NPLs to personal, agriculture and trade remained high, calling for close monitoring going forward. 2)  Remain vigilant and take appropriate  macro-prudential  policy instruments mix to  mitigate spill over effects of tight global financial conditions.

The Dar es Salaam Stock Exchange trading activity slowed down while share price indices recorded a decline.  Total turnover for the quarter ending March 2016 was  TZS 123.0  billion compared to  TZS 220.0  billion recorded in September 2015. The decline is partly associated with normalization  of  markets  after  a  period  of  high  volumes  traded  following  removal  of  capital controls to non-residents in May 2014.

In addition, All Shares Index declined by 3.9 percent on account of decline in profitability of some listed  companies, leading to a fall  in total market capitalization by 4.0 percent despite new listings.  However, both the index and volume traded remained within long-term trend and do not signal any significant risk.

Insurance  sector  remained  healthy  as  reflected  by  financial  soundness  indicators  albeit declining  profitability.  The  sector  remained  solvent  with  adequate  liquidity  and  diversified investment portfolio. While  investments  in  government securities and term  deposits increased, investments in real estate declined in 2015 relative to 2014, implying a reduced risk exposure to the sector currently facing declining rental prices.

The change in the investment mix contributed to improvement in general and  life insurers’ liquidity ratios which increased to 112.9 percent and 58.3  percent  as  at  end  December  2015  compared  to  109.3  percent  and  57.2  percent  in  the preceding year, respectively and both were within the prudential requirements.

Social  Security  Sector  remained  diversified,  with  increased  membership  albeit  with  a decline in  Return on Investment.  Generally, the sector complied with Investment Guidelines in  terms  of  portfolio  diversification.  In  addition,  the  sector  attracted  new  membership  from informal sector supported mobile  money platform contributed to increase in new membership which grew by 9.0 percent to  2,345,869 in  December 2015 from June 2015 Return  on Investment declined to 2.1 percent from 4.8 percent in the same period.

The payment systems continued to operate with  minimum disruptions and settlement risks. The volume and value transacted through Tanzania Interbank Settlement System (TISS) grew on account  of  increased  usage  by  government  agencies,  financial  institutions  and  individuals.

Despite increase in transactions the system maintained its server and database uptime availability of 100 percent and 98.3 percent, respectively. Meanwhile, during the period the Bank issued the Payment  Systems  Licensing  and  Approval  Regulations,  2015  to  allow  for  licencing  and supervision of all payments services providers. This is expected to enhance regulatory oversight and mitigation of potential risks in the payments systems.

This gives explicit mandate to the Bank for licensing and supervision of all payment services providers, a major development in the financial system regulatory infrastructure considering the growing role of mobile money and other digital platforms in financial services delivery in the country.  Going forward increased role of non-bank financial intermediaries and interaction between the financial  system  and  the  rest  of  the  world  may  pose  risk  to  the  domestic  financial  system.

Accordingly,  the  Bank  in  collaboration  with  other  financial  sector  regulators  will  intensify surveillance and  expand macro-prudential toolkit in order to  preserve the stability of the financial system.

The  main  risks  to  the  stability  of  the  domestic  financial  system  in  the  next  six  months  to September 2016  are  summarized  in the  risk map. The risks are analysed  and rated from low to high basing  on their probability of occurrence, and the potential impact to domestic financial stability, should the risk build-up and materialize. Risks to Financial Stability in the Next Six Months:

Risk Map 3