Saturday, July 2, 2022

Household debt accounts for 17 percent of Botswana’s GDP

The level of Botswana’s household debt accounts for 17 percent of the country’s Gross Domestic Product (GDP). Household borrowing from financial institutions stood at P23 billion as at September 2012.┬á┬á

In his economic review for the fourth quarter of 2012, renowned independent economist Dr Keith Jefferis notes that the burden of household borrowing has been rising, with the ratio of debt to disposable income increasing from 24 percent in 1999 to 33 percent in 2012.

The ratio also increased to 17 percent of the country’s GDP in the same period ÔÇô that is, from eight percent in 1999 to 17 percent in 2012.

“Although the level of household debt is increasing relative to income and GDP, this is not of any great concern ÔÇô indeed it is to be expected as an economy develops and the financial sector deepens. In developed economies the ratio of consumer borrowing to disposable income is typically well over 100 percent, and in some countries (such as the Netherlands) over 200 percent. In South Africa it is around 75 percent. So a ratio of 33 percent in Botswana is not of any immediate macroeconomic concern,” said Dr Jefferis.

The economist observes that what is striking though is that household debt in Botswana is very short term and in contrast with more developed countries (South Africa) where the majority of consumer borrowing is for mortgages.

He observed that household borrowing from banks has been increasing steadily although little is known about what has been happening to overall household debt levels on account of lack of data on non-bank lending.

However, it is likely that the banks account for the vast majority of household credit from financial institutions ÔÇô probably 80 percent of the total, with Letshego accounting for nearly 10 percent and remainder spread between BSB, BBS and NDB. While there are many microlenders with many borrowers, the amounts they lend are very small and do not add to a great deal in aggregate. Total estimated household borrowing from financial institutions as at September 2012 was approximately P23 billion, equivalent to P11 200 for each person in the country.

The level of household borrowing also exceeds the level of household deposits. In September 2012, households borrowing stood at P18.5 billion from banks compared to P10.2 billion in deposits. The scenario represents a net debt of P8.3 billion.

“As at September 2012, only 23 percent of bank lending to household was for mortgages, and the vast majority ÔÇô 71 percent was short-term unsecured personal borrowing and credit card debt. Over the past decade, mortgage lending has grown slowly, but the real change has been the drop in asset financing for purchase of vehicles ÔÇô down from 33 percent of bank lending in 2002 to only six percent in 2012 ÔÇô although of course consumers may be using short-term loans for vehicles instead”, said Dr Jefferis in his bulletin.

He however noted that this could be problematic for two reasons. First, short-term unsecured loans tend to have higher interest rates than longer-term secured loans (for vehicles and property), and hence cost consumer more (but are profitable for the banks).

Short-term loans are also more likely to be used for financing consumption ÔÇô perhaps unsustainably financing expenditures that are in excess of incomes.

On the level of housing loans, Dr Jefferis points out the potential dangers to the economy is that it seems Botswana’s problem is not that there is too much housing finance. Access to housing is a crucial component of rising living standards, and for most people this requires borrowing. An increase in the size of mortgage lending relative to GDP almost always accompanies economic growth although there are limits.

He explained that the size of mortgage lending relative to GDP is often taken as an indicator of the general level of financial sector development. “While this figure can vary a great deal across economies, it would typically be above 70 percent or more in a “mortgage friendly” developed country such as the UK, USA, or Australia. Data for Africa shows a wide variation, ranging from over 30 percent in South Africa and Namibia, to less than one percent in Nigeria and Tanzania)”, said Dr Jefferis.

In Botswana, mortgage finance (provided by the banks and BBS) amounted to approximately P6.4 billion, or just under six percent of GDP in 2012. Although this is reasonable by African standards, it is much lower in relative comparator nations. Hence the concern that Batswana are borrowing too little from banks for housing purposes ÔÇô which most likely reflects a range of factors including consumer preferences and the nature of housing and land markets, rather than specifically financial sector issues.

He argues that lower interest rates in Botswana have probably helped households to increase borrowing even with stagnant real incomes in recent years. Many households are, as a result, vulnerable to an increase in interest rates, which could in turn cause problems for the banking system.

More generally according to the economist, there is need for a national system of credit information, with a central record of borrowing, repayments and bad debts. “This would help financial institutions better assess credit risks and make it more difficult for households to become over-indebted”, he said.

On a different level, Dr Jefferis explains that while household debt is high and savings low in banks, the information would be incorrect because households have savings in other forms and in particular large holdings of pension fund assets which totalled P45.5 billion in September 2012.

“So these assets ÔÇô which form part of household savings ÔÇô far exceed households’ net borrowing from the banks. In financial terms, households as a whole are substantial net savers”, said Dr Jefferis who decried that the usual measure of household debt relative to disposable income cannot be calculated because GDP data by income is not produced in Botswana.

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