Category Archives: Economic Research

Economic Research

Namibia CPI – March 2017

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Annual inflation declined to 7.0% in March, 0.8% lower than in February, while prices increased by 0.1% on a m/m basis. The decrease in annual inflation was largely as a result of a drop in food prices and a slight decrease in rental payments for dwellings. Neutralising some of the impact of falling food prices was an increase in the price of vehicles and the cost of operating transport equipment due to an increase in fuel prices. Overall, prices in three of the twelve basket categories increased at a faster annual rate than during the preceding month, eight at a slower rate and one grew at a steady pace. Prices for goods increased 6.3% y/y while prices for services grew 8.1% y/y, with slower growth in goods prices supported by a stronger Namibian dollar.

Housing and utilities remains the largest contributor to annual inflation due to its large weighting in the basket and the effect of irregularly high rental increases of 9.7% in January.  Annual inflation in this basket category declined to 9.6% in March as the rental payments subcategory was adjusted downward by 0.1% on a m/m basis. We continue to expect the housing and utilities basket category to underpin overall inflation.

Food and non-alcoholic beverages, the second largest basket item, was the second largest contributor to annual inflation despite a 0.6% decrease in prices on a monthly basis. Food and non-alcoholic beverage prices increased by 7.4% y/y, a significant slowdown compared to the 11.3% increase in February. The slowdown in annual food and non-alcoholic beverage inflation was partly due to base effects of a large monthly increase in March 2016 as well as the decrease in prices on a monthly basis in March 2017. The price cuts in maize and flower seen earlier this year mean that bread and cereal prices are now only 1.5% up from March 2016. While annual growth in coffee, tea, and cocoa prices has slowed slightly, this subcategory has still seen prices increase by 22.7% on a y/y basis, the quickest in the food basket. Fish prices are also still significantly up over last year at 16.7%.

Transport costs were one of the few basket categories to see an increase in annual inflation rate in March. As suggested earlier, this is largely due to an increase in fuel prices during the month and supported by increases in vehicle prices. Growth in the annual increase in vehicle prices has continued to slow at 6.9% in March versus 9.4% in February, while growth in the cost of operating personal transport equipment increased to 8.5% y/y versus 4.5% in February.

The Alcohol and tobacco category displayed increases of 4.4% y/y and 0.4% m/m in March versus 5.4% y/y and 0.3% m/m in February. The main driver in this basket category remains alcohol prices with tobacco prices relatively flat y/y.  The increases in sin taxes should put upwards pressure on alcohol and tobacco prices in April as the increased tariff is passed on to the consumer.

Namibian inflation is decreasing at a faster pace than we anticipated at the start of the year. A strengthening rand on a y/y basis has driven a decrease in goods inflation specifically. Oil process remain relatively stable at around US$55/barrel, and the end of the regional drought has brought some relief to consumers with some food prices actually declining. The recent downgrade of South Africa’s credit rating however, has seen the rand depreciate from R12.3/US$ to R13.50/US$ with further weakness a likelihood. This will flow through to inflation and could cause South African inflation to remain above the 3% to 6% target range for longer than expected. Due to currency effects we expect annual inflation to remain elevated over the short term although possibly dipping below 7% in April.

Building Plans Building Plans – March 2017

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A total of 192 building plans were approved in March with a value of N$103.0 million, while 19 buildings with a value of N$40.7 million were completed. Thus far 2017 is off to a slow start, 423 plans were approved in the first two months while 67 were completed, the lowest number of plans in the last twenty years. The year to date value of approved building plans currently stands at N$529.4 million, 25.8% lower than the corresponding period in 2016. On a twelve-month cumulative basis, 1,740 building plans were approved worth approximately N$1.84 billion, 18.9% less than the preceding twelve-month period.

The largest portion of building plan approvals were made up of additions to properties, from both a number and value perspective. Year to date 340 additions to properties were approved with a value of N$221.1 million, 9.7% more in value terms than the corresponding period in 2016, but 21 less than the number of additions observed in the corresponding period in 2016.

New residential units were the second largest contributor to building plans approved: 74 residential units were approved year to date, 16 more than the corresponding period in 2016. In dollar terms, N$128.9 million worth of residential plans were approved, 20.6% higher than the first quarter of 2016.

The number of commercial units approved in 2017 amounted to 9, valued at N$42.7 million. This compares to 25 units valued at N$220.9 million approved over the same period in 2016. On average over the last 20 years, 14.5 commercial units valued at N$82.1 million were approved in the first quarter of the year.

The 12-month cumulative number of building plans approved has been steadily declining since its peak in September 2013. This figure has halved from the peak to lows last witnessed in 1991. In the last twelve months 1,740 building plans were approved, 22.3% less than the same measure for March 2016.

This decline is worrying as construction has been a major driver of growth in the last couple of years, and our overall GDP growth figures are likely to slow. Between 2010 and 2015 construction took centre stage in the Namibian economy and created a substantial base off which continued growth was always going to be a challenge, but the abrupt slowdown is likely to cause ripple effects in the economy.

As a leading indicator for economic activity in the country this implies that the whole economy could remain under pressure for the foreseeable future. With government spending on infrastructure slowing and the current economic environment making it increasingly difficult for banks to extend credit, we expect further contractions in the construction sector in 2017 and possibly beyond. This is cause for concern as the sector provides a substantial amount of jobs, on which many households depend.

PSCE – February 2017

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Overall

Total credit extended to the private sector increased by N$937.1 million or 1.1% in February, bringing the cumulative credit outstanding to N$87.21 billion. This is a slight uptick in the annual growth rate which has increased to 9.0% from 8.5% in January. The increase was driven by increases in overdrafts and other loans. Over the last twelve months a net of N$7.23 billion worth of credit was extended, N$3.03 billion to corporates, N$4.24 billion to Individuals, while the non-resident private sector decreased their borrowings by N$43.6 million.

Credit extension to households

Credit extension to households pick up slightly in February, increasing 0.8% m/m and expanding by 9.2% y/y. The monthly increase was largely as a result of a spike in overdrafts and other loans which increased by 3.7% m/m and 4.2% m/m respectively, bringing the annual increases to 15.4% y/y and 21.8% y/y respectively. The sharp increases in these categories may be an indication of a very stretched consumer. Growth in mortgage loans on the other hand, was flat at 0.3% m/m and slowed to 9.2% y/y.

The slowdown in household credit is likely to continue as the demand for new debt remains low and low banking sector liquidity suppresses the supply of loans. Furthermore, there is an increased possibility of higher interest rates in the near future, which would deter long term borrowing. Installment credit has been the hardest hit by this squeeze as the demand for capital good such as vehicles has faded. Cumulative 12-month vehicle sales have declined by 21.3% y/y. Installment sales decreased by 0.2% m/m and grew by 5.3% y/y.

Credit extension to corporates increased by 1.5% m/m in February after increasing by 1.3% in January. On an annual basis credit extension accelerated to 9.1% y/y from 8.2% y/y in January. This was also due to strong growth in overdrafts and other loans, which grew by 4.8% m/m and 8.8% m/m respectively. Mortgage loans and installment credit growth was muted, mortgage loans grew by 0.3% m/m while installment credit declined by 1.8% m/m. This brings the annual extension figures for mortgages, overdrafts and installment credit to 7.1% y/y, 12.3% y/y and -0.2% y/y respectively. As with credit extended to individuals, the drop off in installment credit has been the most pronounced, and is now in negative territory on an annual basis. This means that, on average, corporates are repaying these loans, and is an indication that businesses are not expanding as they are not spending on equipment and vehicle fleets at the same rate as in the past.

The overall liquidity position of commercial banks improved to an average of N$2.11 billion during February. This is an increase of N$748.9 million when compared to the preceding month, which is usually a challenging month for the banking sector in terms of liquidity. Average repos decreased to N$880.8 million from N$1.29 billion in January. The continued use of the repo facility indicates that the banks are still facing challenges in terms of liquidity, although it seems to be improving.

Reserves and money supply

Foreign reserves decreased by N$231.3 million (-1.0% m/m) to N$22.71 billion at the end of February. According to the Bank of Namibia the decline in the level of reserves for the month under review emanated from the exchange rate appreciation effect.

Outlook

Despite the uptick in overdrafts, the overall trend for slower PSCE growth remains intact. Higher interest rates have dampened demand while a low liquidity environment constrains the supply of new loans. The gradual interest rate increases have reduced the discretionary disposable income of Namibian households while banks face increasingly expensive funding as a result of an increase in market rates due to excessive government borrowing. However, we see rising interest rates as the biggest obstacle facing private sector credit growth going forward.

Following the developments in South Africa, where president Zuma decided to fire his finance minister and stack his Cabinet with loyalists, we have altered our outlook to reflect the heightened risk of South Africa losing its investment grade rating. The South African president’s actions led to an immediate downgrade of the nation’s credit rating by S&P Global Ratings and we believe that either Moody’s or Fitch are likely to follow suite. Moody’s Investors Service, which rates South Africa’s debt at two levels above junk with a negative outlook, has already put the nation on review for a downgrade.

A ratings downgrade in South Africa is likely to lead to a downgrade of the Namibian credit rating as well. This would mean that both countries would have increased borrowing costs, a weaker currency and possibly higher inflation. This would likely trigger a move by the South African reserve bank to increase rates in which case Namibia would be forced to follow. Our downgrade scenario called for an immediate reaction of 50 basis points, with more to possibly follow. Higher interest rates and a weaker growth environment will put further pressure on private sector credit extension which is already waning.