I hate to say it, but I told you so
Two weeks ago, I made the following prediction and explained why that would be the case:
Even maintaining the bank rate at 25 percent (by Reserve Bank of Malawi)—despite all fundamentals dictating an upward adjustment—will not stabilise the kwacha, let alone leave interest rates intact.
In fact, with or without the RBM increasing its benchmark rate, financial institutions will act independently and hike interest rates.
First, there isn’t enough money in the financial system (the liquidity squeeze is still with us). Thus, the little that is there can only go to the highest and least risky bidder.
With government’s borrowing appetite on the rise and desperate enough to borrow at any price to finance additional civil servants’ salaries, State House adventures and the miscalculated price of free market policies to the national budget (currency depreciation, higher than expected inflation, fuel prices, high cost of domestic borrowing etc), lending rates can only rise.
The latest RBM Monetary Policy Committee (MPC) minutes report that all-type Treasury-bill (TB) yields leaped to 35.44 percent in February—slightly over 10 percentage points from 24.39 percent in January.
With these TB rates, it is unreasonable to expect that base lending rates can remain lower. Already, inter-banking lending rates jumped 300 basis points to 25.23 percent in February.
Factor in the high credit risk—MPC reports that non-performing loans edged up to a record 10.7 percent—and you have a situation where banks ignore the private sector in favour of the almost risk-free government, thereby worsening the crowding out effects that will further depress the economy.
I am sad to report that my nasty habit of correctly predicting economic trends in Malawi through this space has once again held steady.
Standard Bank has raised its base lending rate to 40 percent from around 35 percent. I have it on good authority that another fast-growing bank is set to put its base lending rate at 42 percent from around 36 percent.
I understand that other banks’ boards of directors are running helter-skelter to meet and approve base lending rates for their own financial institutions.
A flood of announcements could start as early as this weekend or soon after the Easter break. Some of my colleagues in the newsroom have now started calling me ‘Dr. Doom’. Well, I am flattered.
But to accept this flattery is to insult the real ‘Dr. Doom’—Nouriel Roubini—an economics professor at New York University who, according to the New York Times, on September 7 2006, stood before an audience of economists at the International Monetary Fund (whew!) and announced that a crisis was brewing.
Roubin warned that in the coming months and years, the United States was likely to face an once-in-a-lifetime housing bust, an oil shock, sharply declining consumer confidence and, ultimately, a deep recession.
According to the New York Times, Roubin even went further and laid out a bleak sequence of events: homeowners defaulting on mortgages, trillions of dollars of mortgage-backed securities unravelling worldwide and the global financial system shuddering to a halt.
These developments, he told the gathering, could cripple or destroy hedge funds, investment banks and other major financial institutions such as Fannie Mae and Freddie Mac.
His audience thought he was a mad man. Moreover, one economist argued later, Roubini was not using any mathematical models to arrive at his doomsday scenario. He was relying on his hunch.
“But Roubini was soon vindicated. In the year that followed, subprime lenders began entering bankruptcy, hedge funds began going under and the stock market plunged. There was declining employment, a deteriorating dollar, ever-increasing evidence of a huge housing bust and a growing air of panic in financial markets as the credit crisis deepened. By late summer, the Federal Reserve was rushing to the rescue, making the first of many unorthodox interventions in the economy, including cutting the lending rate by 50 basis points and buying up tens of billions of dollars in mortgage-backed securities,” narrates the New York Times.
This is the same guy who correctly predicted the collapse of Bear Stearns, the New York City investment firm that for decades was one of the most important symbols of capitalism on Wall Street.
No, I will not accept this flattery and the honour to share his distinguished accolade of ‘Dr Doom’. But I will say this: My record as the seer who saw it first is almost 100 percent to date. Just continue to watch this space.