Feeling the impact of RBF monetary controls

Dionisia Tabureguci
Money will now cost you more as the local financial market begins to feel the impact of the series of measures put in place by the Reserve Bank of Fiji (RBF).

Reserve Bank of Fiji... putting in place measures to sponge liquidity.

These are measures designed to sponge liquidity and which in turn, have seen a gradual increase in interest rates.  

And while some commercial banks and lending institutions have indicated the measures have added a few more challenges to their core operations, it is expected that consumers would be bearing much of the burden, although the other side of the coin is that things will generally look good for stashers with returns on investments and savings also becoming more attractive.

The increasing rates trend has been on the radar screens of lending institutions for sometime now since the RBF first announced an increase in official interest rates in May 2004, out of niggling worries about the declining state of Fiji's economy. 

Aside from influencing the cost of money borrowed by commercial banks from RBF and from each other, that rate rise has also made investments in RBF's short-term investment instruments more attractive.

It has forced the banks to also put up their deposit rates to match it in order to maintain institutional clients-generally making money more costly.

But where the banks had initially tried to bear the cost of the increase, they were not able to do so for very long as three more official rate hikes followed, contributing to an attractive investment market, especially for institutional investors. 

Treasury Bills with a maturity of 91 days were fetching returns at an average 8.25 percent per annum in July last year compared to 2.37 percent six months earlier, while 15-year government bonds were trading at a 10.28 percent rate compared to 6.61 percent six months earlier.

The banks had to follow suit and offer competitive deposit rates. Lending rates went up as a result of the banks trying to keep their profit margins.

As evident in RBF's figures in its quarterly report for the September 2006 quarter, average lending rates per annum by commercial banks had gone up from around six percent in 2005 to over seven percent throughout last year. 

Average lending rates of other credit institutions also followed the same trend, going up from around 10 percent per annum to over 11 percent. 

Westpac's David Evans and ANZ's Robert Bell... competition for deposits has increased.

There are expectations this situation will linger, if not get worse, as RBF's main worry at the present time is the non-performance of the export sector against the increasing higher costs of imports, a risk to sustainable growth, as highlighted by RBF governor Savenaca Narube at the 2006 National Economic Summit last September.

"This could be a short-term risk if we act now to remove the barriers to exports, look for import substitution where relevant, and put in place policy measures to dampen demand," he had said, echoing many similar statements he had made five years earlier.

To illustrate a worrying point for RBF, the latest publicly available figures from the Fiji Islands Bureau of Statistics showed a decrease in total export revenue between January and July last year, compared to the same period in 2005.  Imports, on the other hand, continued on a steady increase with mineral fuel imports cost alone comprising over 96 percent of total exports.

This scenario, in simplest dollar terms, means that 96 cents out of every dollar that Fiji earns from exports goes to buying fuel alone and although fuel had historically been one of Fiji's biggest costs, the January-July 2006 figure is much higher than in previous years.

With income from sugar and garment exports already flagging, the closure of Emperor Gold Mine in Vatukoula putting gold production out of the running for at least the next two years (gold had been Fiji's fourth largest foreign exchange earner over the years) and with no visible commodity substitute in sight-yet domestic consumption still on an uncomfortably high level-the central bank's worry has translated in to other stiff measures being put in place.

Among them were that the banks put more money with RBF than was normally required by law, the rationalising of commercial banks' lending via a list of high priority and low priority areas, as well as the requirement that they limit the amount of their total lending to the levels of November 2006.

As a precautionary measure in light of the military takeover in December, RBF assumed more control of foreign exchange transactions.

As is often the case, the commercial banks believe these are necessary and sensible measures in light of the country's precarious economic condition. While closely monitoring developments, they have also kept close contact with their customers.

But the prevalent higher cost of money-especially when borrowing from RBF or from other lending institutions-has forced the banks to turn to cheaper deposit funds and this has made more competitive the drive to mobilise savings and investment in time deposits.

"The market remains very competitive for deposit funds both in the retail and wholesale markets," said Westpac Banking Corporation Chief Manager Fiji David Evans.

"This has benefitted customers who have seen higher returns for their deposit funds and savings. Westpac, as with the other banks, has been running retail deposit campaigns to attract new deposit customers." 

It is the same story at the Australia and New Zealand Banking Group. "Competition for deposits has increased over the last six months, depositors are therefore enjoying higher interest rates," said Robert Bell, ANZ's general manager Fiji.

"The downside of this is that it has put pressure on the interest rate for borrowers, with rates rising. Higher interest rates may mean some customers reviewing their lending needs in the short-term." 

Another institution that is also feeling the pinch is the Housing Authority of Fiji, which relies heavily on funds it gets from the issuance of bonds. 

Because of the prevailing attractive deposit and investment rates, bond investors are demanding more returns now than they did six months ago, according to Housing Authority chief executive officer Alipate Naiorosui. 

"An example is the 15-year bond. The last one we borrowed was in November last year and it was for 12 percent. That used to be around 6.5 percent to seven percent six months before that. So the price of money has gone up for everybody." 

And how does this cost affect its customers, most of whom are low-income earners? 

"As from last week (January Week 3, 2007), we have suspended the fixed interest rate component of both our products. We have two home loan packages: the Sapphire Package was on a 3.99 percent fixed for 18 months with a variable rate of 7.99 percent. The Crystal Loan Package offered a 4.45 percent fixed for two years and a variable rate of 7.99 percent.

"We have suspended the fixed term component and now charge only the variable 7.99 percent, not to existing customers but to new customers. So the new customer that walks through our door this week gets the 7.99 percent variable rate."

Because of its mandate to make housing affordable to low income earners, Housing Authority has had to find ways to bear the cost of funds and last year did away with its non-core investment loan product, further delaying plans to move into the retail deposit market. 

"Housing Authority has been able to sustain the monetary policy results of RBF. If you look around, the cost of things have gone up but a good thing that this interim administration has done is that it has removed the proposed VAT increase. Or else, we would have been hit hard, particularly the low income and average income earners.

"And we are contributing to the welfare of majority of the people who are in this bracket by maintaining the interest rate at 7.99 percent, as well as no increase in the cost of service," Naiorosui said.

While the system as such is expected to dish out a few more unpleasant safety measures in light of the weak national economy, the Consumer Council of Fiji has offered consumers, especially home buyers, some useful tips.

"Any hike in interest rates will put many households under increased financial pressure," said Consumer Council chief executive officer Premila Kumar. 

"While costs have gone up, household incomes and purchasing power have declined substantially. 

"Those affected are homeowners with variable mortgages or secured loans who will see increase in their outgoings. There will be more houses going on mortgagee sale, but there are measures consumers can take to limit the impact of the increase."

Here are some tips from the council on how to beat the rate hike:

• Move from the variable rate mortgages to fixed rate mortgage
• Offset your mortgage. If you have any savings, which is going into your current account each month, consider offsetting your mortgage in return for not receiving interest on your savings. It is up to the individual whether they want to lower mortgage payment or interest on their savings. While banks are quick to hike their mortgage rates, they are less hasty with savings rate.
• Cut your home bills; by cutting bills such as gas, electricity, home telephone and broadband, you can check whether you can make savings.
• Check your savings.