banking and finance

The banking sector has experienced continued solid lending growth, with loans and advances growing by 16.8% over the year to September 2005.

Most bank loans are for personal services (39.1%), hotels ands motels (31.5%) and wholesale and retail trade (12.0%), and these three industries were responsible for just about all of the growth in lending over the year to September.

The volume of lending has been boosted to some extent by cyclone-related activity. Some loans were restructured following the cyclones and some businesses have upgraded following damage from the cyclones. It is expected that lending will continue to grow but that it will moderate somewhat in the period ahead.

Official data suggests that deposits grew strongly in the three months to September 2005, but remained around 2.8% lower than a year earlier. Discussions with the banks indicate that deposits are broadly stable. The level of deposits can fluctuate significantly in the short term as a number of businesses build up significant cash balances over a period of four to six weeks and then use it to purchase imports.

As noted in previous updates, the banking sector has had a negative net foreign asset position since December 2003. With loans increasing faster than deposits, the banks have been required to borrow on foreign financial markets to fund their domestic loan portfolios. Interest rates have also increased reflecting the higher costs of borrowing offshore.

The willingness of the banks to borrow offshore to fund domestic loans indicates their confidence in the Cook Islands economy as well as the absence of exchange rate risk because of the use of the NZ$.

Complete report: MFEM, Half Year Economic and Fiscal Update


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