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Credit extension to the domestic private sector (households, businesses) has been exceptionally weak for the last few years.Business credit growth, in particular, has been poor – with total business debt largely flat since mid-2022, says Cirrus Capital economist Robert McGregor.
Total public debt, on the other hand, has increased materially over the past decade as the government has been running sizable deficits to fund its sticky operational expenditure.
The large deficits, both relative to government’s expenditure and the size of the economy, resulted in crowding out.
Given the weak macroeconomic prospects, better risk-adjusted returns could be achieved by funding the deficit (theoretically ‘risk-free’), rather than extending credit to the private sector, where growth prospects were weak, consumers under strain, business struggling with profitability, and disposable incomes being eroded.
Economic growth has picked up over the last few quarters, with the country’s economic prospects improving dramatically.
However, this early-stage recovery has not yet resulted in increased lending to the private sector.
Affordability and credit appetite remain as constraints, but these should ease over the next 12 months should household incomes improve (from income tax amendments, for example) and the anticipated easing of monetary policy rates.