The Namibian economy is starting to slow, driven by collapsing liquidity.
By: Rowland Brown
Globally, liquidity challenges have become a major talking point, as fund flows reverse out of EM back to advanced economies on the expectation of impending rate rises in the US, particularly. In this, Namibia is no exception, and the country currently faces a liquidity crisis.
While this crisis may appear fairly inconsequential, it should not be underestimated, as already we see its impact on credit extension, with vehicle sales starting to slow as credit extension contracted month on month in June, for the first time since 2011. This liquidity crunch is being driven by two primary factors, namely low interest rates and high government spending.
On the Government spending side, Government has run an expansive budget since 2011, and has ramped up spending to an average of N$5.3 billion per month (close to N$200 million per day on average) in the current financial year. Much of this expenditure is ultimately recurrent and consumptive expenditure, which goes to buy consumables that are not manufactured in Namibia. This results in a net-outflow of funds from Namibia, resulting in, not only a drawdown in international reserves (now at critically low levels), but also a major drying up of liquidity. The reason for this is simply that as cash money leaves the economy, the money multiplier effect on that cash money is also lost. Usually, the money multiplier effect is 12-15x in the Namibian economy, (MB to M2), which means a net outflow of N$1 billion, can have a N$12+ billion effect on local money supply.
On the interest rate side, low interest rates have incentivised borrowing and disincentivised saving (as is their intention). This has meant that commercial banks have lent extensively over the past few years. At the same time, deposit growth at commercial banks has been relatively slow, largely due to extremely low deposit rates. Government spending, and the drawdown of Government deposits with the central bank and commercial banks, has also had a notable impact on deposits received by commercial banks. As bank lending has outstripped their funding growth, liquidity has dried up. Added to this, low liquidity and high interest costs for Government debt (the “risk free” rate) have driven up the cost of raising funding through issuing debt securities, the other key funding source for commercial banks. As lending is heavily focused on housing and imported consumables, much of the credit issued has left the country, also resulting in a drawdown in reserves and domestic liquidity. Moreover, anecdotal evidence suggests that the credit issuance for mortgage loans has outstripped the value of new homes built, meaning that credit issuance is helping to drive an increase in property prices.
The implication of all of this is that liquidity has declined dramatically, and banks, particularly, have little surplus cash available to continue to issue loans at their previous rate. This is already being seen in vehicle sales figures, which are starting to come off, admittedly from a high base. However, the implications of this liquidity crunch is fairly wide spread. Not only will consumables bought on credit likely decline, but consumer spending in general may see a pinch. This implies lower revenues for retailers, but also lower VAT receipts for Government. It also presents a risk to the domestic housing market, as should banks reduce or stop lending for mortgages, house prices may see a correction. Finally, Government, historically reliant at least in part on the banks for its funding, is struggling to raise the funding it needs to operate its current expansive budget. Given that the Government has less than one month of cash reserves (the lowest level since 2005) at the central bank, the need to raise debt each month is critical.
This slowdown in credit issuance, and the possible slowdown in Government spending as a result of struggling to raise debt to fund the budget (as well as lower VAT, SACU and mining royalties/taxes), would drive a major slowdown in the domestic economy, and may even throw the economy into recession. This would partly be driven by the high base set over the past few years, but will be heavily exacerbated by structural issues, such as the impending water and power crises in the country. Global commodity prices and the impact on Namibia’s key exports (and thus our terms of trade) are likely to drench further salt in the developing wound, both reducing growth and employment, but also reducing export earnings and further weakening the balance of payments.
Thus, the pro-cyclical policy, both fiscal and monetary, implemented in a booming economy and without materially changing the productive capacity of the country, may well soon come back to haunt us. Not only has this policy driven these imbalances, but it also means that few tools remain at our disposal to fend off the current and impending crises. Short term, foreign debt will have to be raised to prop up the external position of the country, and to fund the Government deficit, however, the only long term solution is to reign in Government spending, and to reprioritise this spending to ensure that spending results in a change in the country’s productive capacity.
Circling rumours of poor solutions to the current liquidity, Government funding and international reserve crises are enormously concerning, as they may well drive the country towards an international rating downgrade that could massively hamper its ability to address long-term structural (particularly infrastructure) challenges. As almost all of the country’s development plans and needs require funding, this potential funding crisis should be receiving all of the attention of key policy makers, from the Ministry of Finance to the Office of the President. Let’s hope, it is.
