First Capital Holdings delved into the downward trajectory of interest rates, painting a promising picture for private sector growth. The rationale behind the optimism lies in the historical correlation between interest rates, particularly the Average Weighted Prime Lending Rate (AWPLR), and private sector credit expansion.
Last year witnessed the government securities yields hovering between 25 to 30 levels. However, with the finalization of the IMF staff-level agreement and subsequent actions by the Department of Debt Management (DDM), rates have plummeted to the current range of 13 to 15%. Anticipating a further decline with the External Debt Restructuring (EDR) on the horizon, experts foresee yields reaching 10 to 12.5% within the next 12 months until June. This expectation sets the stage for a reduction in the AWPLR, currently holding at approximately 13 levels, projected to decrease to 10-12% by June 2024.
First Capital AVP Research Ranjan Ranatunga said, “We see that every time AWPLR falls below 15% there is a significant pick up in private sector credit growth which boosts economic growth. Given that AWPLR is currently somewhere around 13% and expected to come down further to between 10 to 12% we expecting a significant pick up in credit growth”.
Ranatunga was speaking on 29 November on the ‘Banks, the next big thing’ strategy report webinar by First Capital. The pivotal insight shared during the briefing was a historical analysis spanning the last two decades. The correlation highlighted by the bar graphs illustrated a clear boost in economic activity every time the AWPLR dropped below the 15% mark.
To substantiate this outlook, experts referenced recent months where interest rates peaked around 30%. This period coincided with a continuous contraction in private sector growth. However, since June of this year, with the intervention of the CBSL and a reduction of rates totalling around 650 basis points, there has been a noticeable reversal. Private sector growth has rebounded, prompting expectations of a 1% growth this year, escalating to 7.5% in 2024, and an impressive 10% in 2025.
The experts further supported their predictions with a revealing chart showcasing the volatility in loan growth over the last decade. Loan growth, which historically exhibited significant fluctuations in tandem with AWPLR movements, experienced a dip into negative territory recently. This marked a departure from the average 10-year growth rate of approximately 13.5 levels. The anticipation is that as the economy continues to recover and thrive, loan growth will regain momentum, aligning with the positive trajectory of interest rates.
It was noted that the banking sector had considerable headroom to grow their loan book. With the resumption of imports and dollar liquidity in the banking sector there was expected to be huge booms in the financial performance of banks going forward. (TP)
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