Haiti – Economy: Note on the monetary policy of the BRH … – Haitilibre.com

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Haiti – Economy: Note on the monetary policy of the BRH (October-December 2014)
03 / 01/2015 8:39:23 The “Note on Monetary Policy” published by the Bank of the Republic of Haiti (BRH), analyzes the recent developments observed in the Haitian economy. Its purpose is to inform the public about the direction of monetary policy, report the latest decisions by the authorities and identify short-term outlook for the national economy.

“ OVERVIEW:

 The first quarter of the 2014-2015 fiscal year [October-December 2014] ended in a national environment of rising inflation and strong pressure on the foreign exchange market. This is mainly dependent on the imbalance observed in the situation of public finances. It wa s followed by a relatively large monetary financing, favoring an increase in the level of liquidity in the banking system at the beginning of the first three months of 2015. Faced with this situation, the Central Bank further tightened monetary conditions by increasing, twice, key interest rates and the increase in bills outstanding BRH. This further tightening of monetary policy was also accompanied by direct intervention in the foreign exchange market to inject dollars into the economy and therefore alleviate pressures on the exchange. These decisions were taken in a favorable international context, a status quo in monetary policy implemented in the partner countries and the continued decline in oil and commodity prices. Similarly, in these countries, the recovery in economic activity has continued. Indeed, the United States and the Dominican Republic had higher growth rate of 3% until September 2014 and the forecast for the end of the year seem to augur a similar trend. T he favorable development of economic activities with our partners has resulted in the continuation of the uptrend private unrequited transfers.

In terms of involvement, the M3 money supply increased due to the increase in claims on the government. Dollar loans continued to increase while those denominated in gourdes decreased, both lesser extent than the previous quarter. With rising interest rates, interbank loans were up 50% at average rates of 6.15% against 2.25% a year earlier. Apart from the dollarization of the relatively high credit and taking into account the currency risk that can cause problems, the banking sector remains healthy and strong in terms of monitoring indicators and international performance.

II. ECONOMIC ENVIRONMENT UNDERLYING THE MONETARY POLICY:

 During the first quarter of 2015, the international economic environment was marked by the strengthening of economic growth in our major trading partners, the moderate evolution of inflation and maintaining the status quo in terms of monetary policy decisions. To this are added the slight decline in the prices of commodities and the accelerated decline in oil prices. The recovery in the US has strengthened with growth of 3.5% in September 2014. This dynamism of the US economy has fostered improved employment situation and November, the unemployment rate reached 5.8%, its lowest level since August 2008. Moreover, the rate of inflation remains contained less than 2% since July 2014. As a result, the Fed decided to keep its key rates unchanged in view of improving the labor market situation and the low overall level of prices.

In the first two months of the first quarter 2015, inflation in the Dominican Republic experienced a slowdown after growing 20 basis points in September 2014. Encrypted 2.53% in September 2014, annual inflation reached 2.44% and 2.30% respectively in October and November. Faced with price stability and the macroeconomic framework, the Dominican Central Bank maintained an expansionary policy by keeping its key rate at 6.25%.

In the international market, the prices of commodities have registered a slight decline. The FAO Food Price Index has averaged 192.6 points in November 2014, virtually unchanged compared to October (192.7 points), but down 6.4% compared to November 2013. In regard to oil prices, the decline started from the month of June 2014 has continued. At December 19, 2014, the price of Brent crude fell to 60.21 against $ 87.27 and 78.44 dollars respectively for the months of October and November. This price decrease results from a combination of lower global demand and increased supply. Indeed, reduce dependence on the United States in relation to the world oil market was recorded with the extraction of nearly 9 million barrels per day of shale gas in the US state of Dakota. Added to this is maintaining unchanged daily production of OPEC members to 30 million barrels, thus promoting the increase in supply.

Internally, the projected data quarterly main indicators of economic conditions and those available on agricultural production show a mixed development of economic activity and aggregate supply in the first quarter of 2015. Indeed, the Industrial Production Index (IPI) and the of Construction Activity (IAC) should know down 0.7% and 1.5% respectively in the first three months of the current fiscal year against positive growth rate of 4.3% and 1% the previous quarter. Similarly, the growth rate of the index of business activity is expected to slow to 2.7 percentage points to 2%. However, the index of Energy Production Electric (IEEP) grew by 6.3% on a quarterly basis and posted its strongest growth rate since the second quarter of fiscal 2013.

In the agricultural sector, the information in the CNSA show a contraction of agricultural production in the first quarter 2015 due to poor distribution of rainfall and the cold front that passed through the country during the month of November. This situation affected the supply of local food products, which have a relatively large weight in the consumer basket of food (bananas, rice, etc.). Meanwhile, demand for these products and those of other goods and services generally increase during the festive time of year end.

The contrasting trends in supply and demand global s is reflected in the continuing rise of inflation started from the month of June 2014, amplified by the effect of the revision of product prices at the pump in the early quarter of 2015. Indeed, annual inflation s ‘was 6.2% in November, a higher level of 0.9 and 2.8 percentage points compared to the inflation rate in the previous quarter, respectively, and in November 2013.

In the external sector, the data available in October 2014 indicate a deterioration of 9.2% from September to October 2014 trade balance deficit balance was $ 246.5 million of US dollars. This is due to a more pronounced increase in imports relative to exports. Indeed, imports, with a value of $ 339 million, increased 6.6% compared to September 2014, while exports were relatively flat in October 2014 to $ 92 million dollars. However, private unrequited transfers increased by 8.1% compared to the same period of the previous year, totaling US $ 231.1 million for the first two months of 2015.

The deterioration in the trade balance deficit characterized by increased imports combined with the liquidity created by the rise of monetary financing in October 2014, has contributed to an increase in the demand for foreign exchange and generated strong tensions on the foreign exchange market in the first quarter of 2015. Consequently, the exchange rate has maintained a relatively high positive variation. Indeed, it increased from 45.5577 gourdes in September 2014 to 46.7517 gourdes per dollar to 23 December, resulting in a 2.6% depreciation of the local currency for the quarter under review. It should be noted that the pressure on the exchange were higher during the period from the last week of November and the first week of December, when the gourd has depreciated by more than 1.7%. Faced with this accelerated loss of value of the gourd, the monetary authorities have carried out interventions on the foreign exchange market, which resulted in net sales of foreign curre ncy to 35.35 million dollars height. This allowed to absorb an amount of more than 1.66 billion gourdes in terms of excess liquidity. Despite these market interventions, the BRH was able to keep a comfortable cushion international reserves, estimated 999,850,000 dollars to 24 December 2014, slightly lower compared to the previous quarter.

The imbalance observed between the pace of implementation of expenditure and the revenue growth rate over the previous quarter resulted in a higher monetary financing in early fiscal 2015, 6 459 460 000 gourdes in October 2014.

In this situation, the Ministry of Economy and Finance has implemented a series of measures in order to increase revenue and reduce the level of spending in the first quarter of 2015. These past consisted of the issuance of new license plates, the strengthening of the declaration of income tax, reduction of the subsidy of petroleum products and certain operating expenses of the public administration. Accordingly, revenues totaled 017.12 MG 12 to 17 December 2014, up 4.8% qoq while expenses were down over 33% from the previous quarter to 12 514.7 MG . It showed a current budget deficit of 497.6 million gourdes against 7.42 billion gourdes a quarter earlier, thus promoting a reduction of monetary financing in the quarter over 64%. Indeed, the monetary financing increased from 5.3 billion to 3.23 billion gourdes December 17, 2014

III – MONETARY POLICY DECISIONS IN FIRST QUARTER 2015.

 The main objective of monetary policy to the Bank of the Republic of Haiti is to preserve price stability in order to safeguard internal and external value of the national currency. During the first quarter of the 2014-2015 fiscal year, the national economy was marked by the continued rise in inflation and strong pressure on the foreign exchange market. These changes reflect, among other things, the existence of excess liquidity in the banking system in conjunction with a major expansion of monetary financing by the end of the year. This swelling of monetary financing resulted in the clearance of arrears to service providers by the end of fiscal year 2014. Thus, the Treasury has made an exceptional issuance of commercial paper to raise the necessary funds achieving this goal. It follows that the majority of the firms have swelled the demand for currencies against an offer a little sluggis h on the local foreign exchange market.

In view of this situation, the main concern of monetary authorities During the first quarter was to drain excess liquidity from the banking system because of its inflationary implications. It was necessary at the same time calm tensions on the foreign exchange market characterized by high volatility of the exchange rate, which has created uncertainty detrimental to macroeconomic stability by undermining the business climate. Finally, it was also necessary to mitigate or neutralize the undesirable consequences of the positive change in the exchange rate on the evolution of consumer prices. Therefore, the monetary authorities have implemented a series of measures to tighten monetary conditions in accordance with their objective of preserving price stability.

First, the central bank raised to twice the rate of interest of its principal liquidity regulation instrument (BRH Bonds). Indeed, 10 November 2014, rates increased from 3% to 4% for the right to 7 days, from 4% to 5% for good 28 days and 5% to 6% for 91-day bills . Similarly, to November 26, nominal rates were 100, 150 and 200 basis points respectively to stand at 5%, 6.5% and 8% respectively for the good maturity of 7 days, 28 days and 91 days. On the other hand, the repo rate was kept unchanged at 12%.

At the same time, given the abundance of liquidity in the banking system, the Central Bank has used the operations weekly open market to sterilize excess liquidity via auctions of BRH Warrants. Thus, in the first quarter, it paid off a liquidity equivalent to 3.3 billion gourdes. Indeed, bills outstanding BRH almost doubled (+ 88%) over the period from October to December 2014 stood at 8.13 billion gourdes to 17 December 2014 against 4.8 billion at September 30, 2014 .

For cons, the reserve requirement ratio were kept unchanged from their level of July 2014. For liabilities in gourdes, they are 37% for commercial banks and non-banking subsidiaries and 25.5% for savings and housing banks. For liabilities denominated in dollars, they are 40% for commercial banks and non-banking subsidiaries and 28.5% for the savings banks and housing.

In order to smooth strong fluctuations in the exchange rate observed in the first quarter, the central bank has conducted interventions for sale in the foreign exchange market. These interventions have aimed to supply the market of foreign currency exchange rates to strengthen the currency has faced a very strong demand. Sales of foreign exchange by the central bank in the first quarter totaled 35.4 million US dollars. These currency sales helped to drain an additional amount of liquidity equivalent to 1.6 billion gourdes banking system. In made, this decision has, among others, to reduce the volatility of the reference exchange rate stood around 46.75 gourdes to the US dollar from the end of November until December 2014.

In terms of results, preliminary data for December (1) show a decrease of 1.65% of the monetary base as defined in the Extended Credit Facility (ECF). (2) During the same period, the monetary base in the broad sense, by cons, up 1.13%. This is explained by the continued decline in net foreign assets recorded during fiscal 2014 (-3.57%), while claims on the central government maintained their increase (+ 34.62%). Just as in the previous fiscal year, this behavior reflects the continued withdrawals at debt forgiveness while the monetary financing of the fiscal deficit remains at a level consistent.

[(1) Data available on 10 December 2014. (2) The monetary base as defined in the FEC takes into account the currency in circulation and bank reserves in gourdes, while the monetary base at large also in Alstom BRH bonds and bank reserves trade to BRH.]

On the liabilities of the central bank, currency in circulation grew 2.02% and this growth should normally be higher by the end month taking into account the generally upward trend by fiat currency during the New Year celebrations. As for the deposits of banks at the BRH, they show a downward trend both in gourdes (-10.84%) in dollars (-3.89%). However, the outstanding BRH bonds posted strong growth (+ 78.48%) in favor of monetary policy measures to contain pressures on the foreign exchange market. The trend at the BRH bonds thus marks a fundamental break with the evolution of the stock of such securities during the year 2014, where they had posted a decline of 21.93%.

With respect to the money supply, the data available for September 2014 point to stronger growth in monetary aggregates in 2014 compared to 2013. The M3 money supply has increased by 9, 76% against 5.45% in 2013. This behavior is mainly explained by the tenfold increase in credit to the state. The decline in foreign assets reflecting a greater reduction of these assets at commercial banks (-11.44%) than at the Central Bank (-5.76%). As for private sector credit, its deceleration that began in fiscal 2013, continues with a decline in growth of more than 5 percentage points.

Since most components of M3 showed largest increase in 2014 compared to 2013, so it is worth noting a marked slowdown in the growth of time deposits in gourdes, which rose 9.77% against 35.41% in the previous year.

Analysis of the level of dollarization shows that the share of dollar deposits in total deposits of the system remained relatively stable at 56.92% against 56% in September 2013. In lending, a moderate increase in share of dollar claims in total claims was recorded, going from 40.28% in September 2013 to 43.32% in September 2014.

The data for October 2014 to financial indicators reflect the strength and resilience of the banking system despite the tightening of monetary conditions. Despite a relative stagnation of the active system 194.2 billion gourdes from the previous quarter, net income was an increase of 26.4% to 228 million bottles, which s is especially evident at the two components of net banking income (17.4%), ie net interest income (18.7%) and other revenue (15.9%). Similarly, the financial structure of the system has increased notably through the ratio of “Shareholders’ equity as% of Assets”, which stood at 7.73% in October 2014, against 7.58% in September 2014 and 7.62% a year earlier. Deposits as% of assets have declined somewhat during the month of October 2014 compared to the same month of last year, a sign that the assets of the system grew much faster than deposits. Taken together in their evolution, these two ratios indicate that the banking system more jobs we re funded by shareholders’ equity by deposits of economic agents.

As for profitability ratios ROA and ROE, they have improved by 17 basis points to 1.92% annually to reach respectively 1.41% and 18.38% in October 2014. This increase is attributable largely to the increase over marked as net income compared to the asset and shareholders’ equity of the system. In addition, the level achieved for these two ratios for the banking system is clearly consistent with the required international standards.

However, the rate of non-performing stood at 3.41% in the first month of fiscal year 2015, up 20 basis points year on year, indicating a slight deterioration in portfolio quality. This is mainly due to the more than proportional increase in gross non-performing loans relative to gross loans. Faced with this situation, banks have provisioned more. Hence an increase in provisions for doubtful accounts as a percentage of gross non-performing loans, which were set at 64.79% in October 2014, against 56.11% a year earlier.

The available data also report a decrease in the interest margin on gourds operations, while the dollar has expanded operations. In view of these results, the impact of past monetary policy decisions are mixed on changes in interest rates, including the rate on dollar operations. Indeed, the rates on DAT and gourds loans were both charged with an increase of respectively 24 and 7 basis points to 2.45% and 18.87%. However, rising more than pushing rates on DAT compared to rates on loans decreased the interest margin by passing from 16.58% in September 2014 to 16.42% a month later. Concerning the rates on savings deposits, taken as a monthly average, they remained unchanged at 0.09% since June 2014.

In addition, the intermediation margin on dollar transactions increased 1st month of the fiscal year 2015 reached 10.11%, a deterioration of 0.19% month on month. This trend is mainly due to a much higher growth rates on loans compared to the DAT. Thus, banks have benefited from a rise in demand for dollar loans and prudential measures in April and July 2014 to vary the lending rates to an extent greater than that of DAT in dollars. So they reached 10.81% against 10.59% in October, a month ago.

Also, did the rate of pay on DAT bull had the same behavior than those on loans but at a slower pace. Therefore, they are set at 0.70%, gaining 4 basis points in monthly variation. With respect to rates on savings deposits, they rose by 0.01 percentage points compared to September 2014, to stand at 0.14% in October.

IV- OUTLOOK:

 The inflation forecasts made from the changing fundamentals of the economy in the context of improving the situation of public finances, expect a moderate increase in inflation for December 2014, January and February 2015 with an average of 6.4%. Based on these forecasts, the inflation rate should reach 6.3% in December 2014 and 6.6% in January, down from 6.2% in February 2015. The favorable factors for price developments and the economic activity in Haiti, refer to the prosecution, worldwide, maintaining the dynamism of economic activity including our trading partners, the stability of commodity prices. Taking into account the continued decline in unemployment linked to the strength of economic activity in the United States in particular, one should expect a continuation of the increase in the diaspora funds shipments in Haiti and Haitian exports. Stable prices of commodities in international markets should also be conducive to the dev elopment of Haiti’s trade balance as well as that of consumer prices, which will be enhanced by the relatively stable evolution of the exchange rate.

However, in the agricultural sector, a decline in food availability is expected considering the fact that the winter crop will be affected by the cold front that occurred in November. Similarly, the continued decline in oil prices on the international market should lead to a decline in oil revenues and the flow of resources from the Petrocaribe program for Public Administration. In addition, a deterioration of the Venezuelan economy liquidity problem could result, as with the Dominican Republic on a revision of the terms of Petrocaribe agreement with Haiti and therefore lead to a reduction in capital expenditure of the government.

The Central Bank is committed to remain cautious and attentive to future developments in the national and international situation and take appropriate decisions and in line with the objective of maintaining price stability and that the macroeconomic framework. Moreover, in view of a prospective monetary policy and also in order to improve the transmission mechanism of interest rates, the central bank plans to expand the range of monetary policy instruments. Also, the BRH she continues with the implementation of the national strategy for financial inclusion and actions to the relaunch of production credit and efforts to modernize the payment system. “

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