Category Archives: Economic Research

Economic Research

PSCE – October 2016

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Overall

Total credit extended to the private sector increased by N$206.7 million or 0.24% in October, bringing the cumulative credit outstanding figure to N$84.60 billion. Annual growth in PSCE came down slightly, to 10.2%, versus the September figure of 11.1%. Over the last twelve months a net of N$7.85 billion worth of credit was extended, N$3.32 billion to corporates, N$4.34 billion to Individuals and 190.1 million to the nonresident private sector.

Credit extension to households2

Credit extension to households expanded by 0.8% m/m and 9.7% y/y in October. Installment credit to individuals has been steadily decelerating since the start of 2015, down from its peak growth of 23.5% y/y, and is currently running at 9.6% y/y. However, given the 19.5% drop in vehicle sales, this growth is still relatively high and has not seen contracted since 2009. Mortgage loans to individuals have also been slowing, but are still displaying double digit growth of 10.3% y/y. The slowdown in these sections are likely to continue as interest rate increases dampen the demand for new debt and low banking sector liquidity suppresses the supply of loans. Mortgage loans make up the largest portion of credit extended to individuals, currently accounting for 67% of credit, while installment credit makes up nearly 15% of the total figure.

Credit extension to corporates

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Credit extension to corporates contracted by 0.5% m/m in October versus September’s expansion of 2.0% m/m. On a yearly basis extensions slowed to 10.4% y/y from 12.7% y/y in September. This represents a marked slowdown from the 17.5% y/y figure exhibited in October 2015. October saw overdrafts contract by 2.2% m/m and installment credit decrease by 1.1% m/m, while mortgages, the largest portion of corporate credit, remained flat on a monthly basis. On an annual basis growth was largely driven by the other claims section, which grew 26.8% y/y. Mortgage loans grew by 6.7% y/y and overdrafts were up 9.2% y/y. The split of private sector credit between corporates and individuals is still skewed towards individuals who hold 61% of the total credit extend.

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The overall liquidity position of commercial banks decreased to an average of only N$1.1 billion during October 2016, reflecting a decrease of N$2.0 billion when compared to the preceding month. These low levels of liquidity are causing the banks to make use of the Bank of Namibia’s repo facility more often, average repos amounted to N$588 million over the month of October.

Reserves and money supply

Foreign reserves decreased by N$1.4 billion (-5.2% m/m) to N$25.1 billion at the end of October. The decrease emanated mainly from net government payments and net foreign currency purchases by commercial banks during the reviewed period.

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Outlook

Private sector credit extension growth continues to slow as a result of lower demand and supply. 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. This, in conjunction with amendments in the credit affordably act, has undoubtedly dampened down conventional credit demand.

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Since the start of the rate hiking cycle in 2014, the Bank of Namibia has increased the repo rate six times in 25 basis point increments, from 5.5% to the current 7.0%. Future increases are likely to follow moves made by the South African Reserve Bank, as has been the case over the last couple of years, guarding against capital outflows and protecting the currency peg.

The SARB, however, seem very uncertain of the direction of monetary policy as they face several unknowns in the near future. Firstly, all three ratings agencies are on a negative outlook and South Africa (narrowly) avoided a downgrade by S&P early in December. If there is no clear indication of an upswing in the growth trajectory by June, it is completely conceivable that South Africa will be downgraded to a “junk” rating. The political landscape also continues to be a headache as the ANC failed to pass a vote of no confidence in president Jacob Zuma who responded by launching a challenge to the public prosecutors State of Capture report.

Secondly, the SARB faces a storm of global uncertainties. Economic policy uncertainty has arisen following the US presidential election, as speculation is for president Donald Trump to usher in a new era of fiscal expansion. In Europe, Brexit has sparked a new wave of “-xit” possibilities, including Frexit and Italexit. Italy’s referendum on constitutional reform that took place early in December is poised to set the political and economic stage for the foreseeable future. The “no” vote dealt a blow to investor confidence as it could be significantly detrimental to Italy’s banking sector and may have serious contagion effects on the rest of the Europe.

Lastly, South Africa faces a combination of low growth and high inflation making monetary policy a tight balancing act. Given these factors our base case remains for South African interest rates to remain flat for the remainder of this and next year.

Our second scenario is built around a disorderly reaction to a ratings downgrade which may take place in the second half of 2017. Large outflows, currency depreciation and the resultant inflationary pressures will warrant a reaction from the SARB. Rate hikes of 50 basis points can be expected as an immediate reaction, possibly followed by further rate hikes as the reserve bank deems necessary.

A third scenario, fueled by a breakdown in the European Union, leads to worldwide economic weakness and monetary easing from the major central banks. Looser monetary policy leads to fund flows into EM nations including South Africa lending support to the Rand and allowing the SARB to focus on stimulating the South African economy. The SARB will likely cut by 50 basis points in late 2017 in this scenario.

Whichever outcome materializes for South Africa, the Bank of Namibia is likely to follow the SARB relatively closely. Any further increases in rates will put further pressure on the consumer which will in turn affect corporates. However, the last round of increases is still filtering its way through the system and thus we expect PSCE growth to continue to slow recovering only mid-2017.

Building Plans – October 2016

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Building Plans – October 2016

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A total of 191 building plans were approved in October with a value of N$138.6 million. On a year-to-date basis, the City of Windhoek has approved 1,550 building plans, way below the 2,176 plans approved over the same period in 2015. The year to date value of building plans approved is currently N$1.70 billion, below the year to date figure of N$1.79 seen in October 2015.

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The largest portion of building plans passes were made up of additions to properties, from both a number and value perspective. Cumulatively 1,228 additions to properties have been approved with a value of N$ 815.3 million, a 4.1% increase in value from the corresponding period in 2015.however, the number of additions decreases by 479 approved plans.

Year to date 227 residential units were approved, this is 125 less than the 2015 figure of 352 and 136 less than the ten-year average of 363.  In dollar terms, N$442.7 million worth of residential plans were approved year to date, in line with the N$422.2 million over the same period in 2015 and the N$405 million average figure over the last ten years.

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The number of commercial units approved in 2016 so far amounted to 73, valued at N$438.0 million. This compares to 108 units, valued at N$449.2 million over the same period last year. On average over the last 10 years, 64 commercial units, valued at N$392.8 million were approved year to date.

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The 12-month cumulative value of building plans approved declined slightly in October.  The cumulative value of plans approved in October was N$2.10 billion, 2.9% lower than the value approved over the same period last year.

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The 12-month cumulative number of building plans approved continued its trend of decline. On a 12-month cumulative basis, 1,841 building plans were approved in October, 27.6% less than the same measure for October last year. This figure has nearly halved from the peak in September 2013 to a low last seen in 1997. As a leading indicator for economic activity in the country this reinforces our view that we will see economic growth slow in 2016 and possibly beyond.

The slowdown in the number of building plans approved has been largely driven by a lack of serviceable land in Windhoek. The Municipality has indicated that, there is a high demand for land, but little land left around Windhoek that can be developed. It follows that this bottleneck in the availability of serviceable land has been a factor in the high number of additions relative to new developments. People have little choice but to make better use of the available space they already have. However, the fact that the number of additions is slowing points to less potential value in additions or possibly saturation of the available space.

At the beginning of the year, we believed that some growth could be expected in the construction sector. This was largely owing to several large government projects expected to commence within the year. We have revised this view earlier this year, and our suspicions were confirmed at the most recent midterm budget. Government has cut both the development and operational budgets quite aggressively. Spending on construction was cut by an immense N$1.5 billion for the remainander of this financial year and a moratorium has been placed on all government construction projects going forward. This should have a negative effect on economic activity in general, but the construction sector in particular. Thus, we forecast a contraction in the construction industry of 4.5% over the next year.

Namibia New Vehicle Sales – October 2016

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New Vehicle Sales – October 2016

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A total of 1,157 vehicles were sold in October, the lowest monthly figure since February 2013. This represents a 7.6% decrease in the number of vehicles sold in September 2016 and 34.5% decline from the number of vehicles sold in October 2015. Since January this year, 14,215 vehicles have been sold, down 20.8% from the number of vehicles sold over the comparable period last year. Year to date vehicle sales have been slower than both 2015 and 2014, but is still ahead of 2013 levels.

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Vehicle sales have been contracting on a year on year basis since the end of 2015. The slowdown has been felt by passenger and commercial vehicles alike, with passenger sales down 36.7% y/y and commercial vehicles down 33.0%. Within the commercial vehicle segments the medium and heavy segments displayed the largest slowdown, decreasing 65.1% y/y and 45.5% y/y respectively.

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Passenger vehicles declined by 9.6% m/m to only 460 vehicles in October. Commercial vehicles sales decreased 6.2% m/m to 697. This brings the total number of passenger and commercial vehicles sold in 2016 to 6,031 and 8,184 respectively. Of the 8,184 commercial automobiles, 7,545 were classified as light, 229 as medium and 410 as heavy commercial.

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On a year to date basis, Toyota and Volkswagen dominated the passenger vehicle market based on the number of vehicles sold. Toyota and Volkswagen each claimed 27% of the market. They were followed by ford at 7% and Mercedes at 5%. The rest of the passenger market is very fragmented.

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Toyota was also the leader in light commercial vehicle sales with 44% of the market, followed by Nissan at 15%. Ford and Isuzu each claimed 10% of the number of light commercial vehicles sold in 2016. In the heavy category, Scania is the largest seller, commanding 41% of the market share.

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The Bottom Line

Vehicle sales have seen serious contraction in 2016 for several reasons. Firstly, higher interest rates have decreased spending on capital goods, which are normally financed by credit. Secondly amendments to the credit act were enacted with the specific aim of discouraging spending on unproductive goods by requiring a 10% deposit. Lastly and most importantly, government spending on both salaries and capital goods have been cut to the bone in the most recent medium term budget review.

Going forward we expect the slowdown to continue. Interest rates may rise further should a credit rating downgrade in South Africa or Namibia materialise. The adverse effects of lower government spending on capital expenditure should also put pressure on vehicle sales for the foreseeable future.