Category Archives: Economic Research

Economic Research

Moody’s Downgrade 11 August 2017

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Moody’s Downgrades Namibia to Sub-Investment Grade

On Friday 11 August Moody’s Investors Service downgraded Namibia from Baa3 to Ba1, sub-investment grade. While the timing was unexpected, the downgrade was not. At the start of the year we voiced our concern that Namibia would lose its investment grade rating. We thus concur with the reasoning behind the ratings downgrade. The points raised are reflective of the facts and we trust that Namibians will view this through a constructive lens.

Moody’s statement can be found here: https://www.moodys.com/research/Moodys-Downgrades-Namibias-rating-to-Ba1-maintains-negative-outlook–PR_370993

Factors contributing to the downgrade:

1. Erosion of Namibia’s fiscal strength due to sizeable fiscal imbalances and an increasing debt burden

We agree with this point. Debt issuance over the past two years has been substantial. Debt to GDP has gone from just over 26% in June 2015 to 41.9% at present (MoF numbers). Add in the portion of the African Development Bank loan received already and this goes up further. This debt was raised partially to fund government expenditure and partially to support the external position of the country. Effectively government’s leveraged balance sheet makes it more difficult to secure further financing should it be needed in the event of any shock to the economy.

2. Limited institutional capacity to manage shocks and address long-term structural fiscal rigidities

Agree. The argument posted by Moody’s is very clear here. Examples of the erosion of fiscal strength are provided and spot on. Budget deficits in 2015/16 and 2016/17 were larger than expected due to overoptimistic revenue forecasts which did not materialise. The consumptive, recurrent portion of the budget continued to grow during these years, while the development budget shrunk. The wage bill is given as an example of this recurrent expenditure. This recurrent expenditure is very difficult to reduce in many cases and thus limits discretionary expenditure such as infrastructure projects when revenue collection is under pressure as it is now. Limited spending on necessary infrastructure projects acts as a drag on growth as pointed out by the ratings agency.

3. Risk of renewed government liquidity pressures in the coming years

Agree. Should revenue again disappoint and debt issuance increase in order to fund larger than expected deficits, we could see liquidity dry up in the same way as it did in 2016.

Thus we agree with the points made by Moody’s. Structural changes need to be made to government’s expenditure profile in order to return the public budget to a sustainable path. The minister of finance made a good point that this process will take time and that government has started and is committed to making the necessary changes.

Moody’s has to provide accurate and timely information to its clients (holders of debt – government and corporate – this includes almost everyone with a pension in Namibia) and thus has to act on what is happening in the present with a view on how this will affect the financial stability of the country and government’s ability to honour its debt obligations. The downgrade was therefore inevitable as initial efforts to drive structural changes have not been immediately evident. Indeed, the opposite has been witnessed as government has struggled to pay outstanding invoices to the private sector. The inability to pay invoices is what would have been most concerning to Moody’s as it brings into question the ability of government to honour its debt obligations. Much of these invoices have been settled as government has pointed out, but there was a substantial delay in satisfying many of these obligations, which is concerning.

We are cognisant of the fiscal measures implemented by government thus far and expect to see further commitment to these in the mid-term budget review scheduled for October. The Moody’s downgrade should not be seen as a failure of government but rather a warning to correct course after slowly straying from a sustainable path for the better part of a decade. For the man on the street the Moody’s downgrade should have little impact if the correct policy decisions are made going forward. Structural changes to the fiscal budget will not be easy to effect but are vital if Namibia is to return to a path where sustainable social and economic progress is made.

PSCE – June 2017

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Overall

Total credit extended to the private sector increased by N$180.6 million or 0.2% m/m in June, bringing the cumulative credit outstanding to N$88.13 billion. On a year on year basis, credit extended grew by 7.96% in June, compared to 8.24% recorded in May. Growth in private sector credit extension has been slowing since 2015, on a rolling 12-month basis N$6.49 billion worth of credit was extended. N$2.51 billion worth of credit has been extended to corporates and N$4.01 billion to individuals on a 12-month cumulative basis, while the non-resident private sector has decreased their borrowings by N$36.03 million.

Credit extension to households

Growth in credit extension to individuals moderated to 8.47% y/y and 0.7% m/m, compared to 8.55% y/y growth recorded in May. Installment credit contracted by 0.6% m/m bringing year on year growth to 1.5%. New vehicle sales, which make up a large portion of installment credit, have been under pressure since mid-2015. Amendments to the Credit Agreement Act which now obligate shorter repayment periods, abolishment of balloon payment options and zero deposit financing have further added to the slowdown in vehicle sales. Growth in mortgage loans showed some improvement in June, recording growth of 0.9% m/m and 8.7% y/y. Overdraft facilities remains the fastest growing form of credit extended to individuals, growing by 15.5% y/y and 0.20% m/m. Other loans and advances recorded growth of 1.00% m/m, with an increase of 18.9% y/y.

Credit extension to corporates

Credit extended to corporates contracted by 0.2% m/m in June after ticking up 0.7% m/m in May. Annual growth fell from 8.4% y/y recorded in May to 7.5% in June. Instalment credit extended to corporates contracted by 0.1% m/m, continuing into its ninth consecutive month of contraction. Year on year installment credit extended to corporates has contracted by 3.8%. Mortgage loans extended to corporates in June remained relatively flat compared to loans extended in May, contracting by 0.4% m/m and growing only by 4.5% y/y. Mortgage loans extended to corporates have recorded single digit growth for the past nine months Overdrafts extended to corporates recorded growth of 2.0% on a m/m basis and 17.5% y/y.

Banking Sector Liquidity

The average monthly liquidity position of commercial banks has remained well over N$3 billion in June, closing at a monthly average of N$3.17 billion. A significant improvement from the N$1.83 billion seen just two months before. This position was to a large extend boosted by funding secured through the African Development Bank (AfDB), with the Ministry of Finance affirming that these funds were received in June. How the proceeds of this loan will be utilized remains to be seen. The liquidity position of the commercial banks has been ticking up following a sustained period of pressure, suggesting that commercial banks now have more loanable funds at their disposal for extension to consumers. However, banks behavior towards extending credit may take a new turn with impending IFRS 9 regulations, with preliminary analysis indicating that banks will be required to change their provisioning models from a loss incurred basis to future potential loss basis. This means that banks will be required to provide for loans extended as potentially irrecoverable, and this may have a significant bearing on bank profits and credit extension as a result.

Reserves and money supply

Foreign reserves rose by N$3.096 billion to N$28.5 billion at the end of June from N$25.4 billion in May. According to the Bank of Namibia the increase in the level of reserves emanated mainly due to an inflow of international loans received from the African Development Bank (AfDB).

Outlook

Our expectation is for private sector credit extension to remain under pressure. As the South African Reserve Bank (SARB) has cut rates for the first time in five years, all eyes are on the Bank of Namibia (BoN), poised to make its decision on policy rates next week. All signs point to BoN starting a cycle of monetary easing given that economic growth has been sluggish and inflation moderating. Easing monetary rates will be followed by banks applying symmetric cuts to lending rates, this will provide some relief to an already ailing consumer. However, a projected rate cut of only 25 basis point will do little to alleviate the current slowdown, especially in the short-term. Further rate cuts are projected towards the end of the year. However, changes to banks reporting regulation pose immediate risks as to how banks will react towards these new developments. One reaction may be that banks become more reluctant towards extending more credit into an economy currently in a recession, or it may react by making credit more expensive.

 

NCPI – June 2017

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Annual inflation declined to 6.1% y/y in June, 0.2% y/y lower than in May, while prices increased by 0.1% m/m, similar to the price level increase witnessed in May. The slowdown in annual inflation was caused mainly by moderation in the price inflation levels of transport and alcoholic beverages and tobacco. Of the twelve basket items, four saw a higher annual inflation rate than the previous month, three remained relatively unchanged, while five categories saw lower rates of price increases. Prices for goods increased by 4.5% y/y while prices for services grew by 8.2% y/y.

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. This category increased by 9.8% y/y but remained approximately unchanged month on month. Annual inflation for rental payments for dwelling remained at 9.6% in June and will likely remain this high for the rest of the year. Furthermore, the City of Windhoek has put into effect a 13% tariff increase on water consumption, effective the 1st of June, with a request for a 10% electricity tariff increase submitted to the Electricity Control Board (ECB) pending approval. With the increases in utilities now passed on to the consumer, we believe that this will most likely put upward pressure on this basket category going forward. We continue to expect the housing and utilities basket category to underpin overall inflation.

Food and non-alcoholic beverages, the second largest basket item in weighting, was the second largest contributor to annual inflation, accounting for 0.8% of the total inflation figure. Food and non-alcoholic beverage prices increased by 4.6% y/y, ticking up from the 3.6% recorded in May, still considerably below the peak of 13.2% witnessed in January. Bread and cereal prices have decreased by 2.8% y/y, while the price of vegetables decreased by 2.1% y/y and fruits now 6.3% more expensive on an annual basis.

Transport was the third largest contributor to annual inflation, accounting for 0.7% of the total 6.1% inflation figure. Transport prices increased by 5.0% y/y but remained flat month on month, with the yearly increase driven largely by the 5.8% y/y increase in the cost of operating personal transport equipment.

The alcohol and tobacco category displayed increases of 3.0% y/y with a decrease of 0.3% m/m in June versus 3.3% y/y and 0.1% m/m in May. The main driver in this basket category remains alcohol prices which increased by 3.2% y/y while tobacco was up 2.3% y/y. Inflation in this category remains very subdued despite the announcement of increased sin taxes in March.

Namibian inflation continues to decrease at a faster pace than was anticipated at the start of the year. A strengthening rand and a strong decline in food prices has seen inflation moderating substantially. Increased utilities consumption tariffs imposed by the City of Windhoek this month should change the dynamic towards a slight uptick in inflation going forward, this happening within the basket that is the largest contributor towards inflation.