Credit off-take: up but for how long?

In a rather surprising development, credit flow in the first two month of current fiscal year has been positive. About Rs7 billion were loaned on net basis in 2MFY19 as against a net retirement of nearly Rs68 billion in the year-ago period. This is unusual since the first two months of the fiscal year is historically a period of net retirement because the cyclical nature of the cotton-yarn spinning season.

This year there is no different for the textile sector, as the sector’s loan retirements remained in line with recent trends. The drivers of 2M credit off-take to businesses is rise in borrowing by ‘coke & petroleum’ producers and businesses involved in ‘electricity, gas and water’. Both can be at least partially attributable to the rise in global fuel prices that jacks up the working capital requirements.

Be that as it may, it is difficult to expect for private sector off-take to continue sharply north in the rest of the fiscal year. At the one end, the economy is in a slow growth phase. The government has slashed PSDP in its recent mini-budget, the first phase of CPEC has already been rolled out, and private sector businesses – for instance in textile, food & beverages, cement and power - that were thinking of capacity expansion have already done so in recent years.

At the other end, interest rates have moved north, and are expected to remain there in the foreseeable future. With Kibor edging up, the government going after the tax evaders, which are a huge lot, business expansion plans will likely stay put. This somewhat echoed in the last State Bank of Pakistan’s Bank Lending Survey (BLS).

The findings of that survey at the end of FY18 were this: overall demand for loans is expected to increase in the next quarter. However, as compared to SBP’s previous survey in 3QFY18, the number of people having positive views about both current and future credit conditions is significantly lower in the survey during 4QFY18.

Here one could quote the recent findings of the State Bank of Pakistan’s Business Confidence Survey (BSC). According to that survey the ‘current business confidence’ index was poor and in fact worsened between Jun and August 2018. However, the ‘expected business confidence index’ that tracks the expectations for the next six months reveals that the share of firms having positive views on economic and business environment and business conditions was significantly higher in August 2018 compared to June 2018 (Jun 2018 index reading 64 vs. 54 in August 2018).

Considering that the BSC survey was done before the recent rate hike, when going to the IMF was on the cards but wasn’t as inevitable as it’s today, the BSC index can be expected to taper off in its next wave in October 2018 – implying slow growth in business activity. And while, higher fuel prices may inflate borrowing in petroleum or electricity sectors, cotton prices (that have a relatively bigger impact on textile credit off-take) are a seen weak to neutral on account of higher global ending stock, which in turn implies lower growth in credit off this year.