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Economic Research

PSCE – December 2016

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Overall

Total credit extended to the private sector increased by N$173.3 million or 0.20% in December, bringing the cumulative credit outstanding figure to N$85.80 billion. Annual growth in PSCE continued to decelerate, coming down to 8.9% compared to the November figure of 9.4%. Over the last twelve months a net of N$6.97 billion worth of credit was extended, N$2.56 billion to corporates, N$4.24 billion to Individuals, while the nonresident private sector decreased their borrowings by N$28.8 million.

Credit extension to households

Credit extension to households remains relatively robust, having expanded by 1.2% m/m and 9.3% y/y in December, however the longer-term trend of slowdown remains intact. The month on month increase in credit was largely due to a 1.1% m/m increase in mortgage loans and a 3.2% m/m increase in overdrafts, amounting to loans of N$374.1 million and N$91.4 million respectively. Installment credit to individuals also increased by 0.9% m/m or N$69.8 million. On an annual basis mortgage loans have grown 9.5% y/y, overdrafts have accelerated to 11.1% y/y, and installment credit has slowed to 8.1% y/y.

The slowdown in household credit is likely to continue as interest rate increases dampen the demand for new debt and low banking sector liquidity suppresses the supply of loans. 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 21.6% y/y.

Credit extension to corporates

The slowdown in extensions is much more pronounced in the corporate space as opposed to individuals. Credit extension to corporates declined by 0.6% m/m in December. On an annual basis extensions slowed to 8.5% y/y from 9.4% y/y in November. This represents quite a severe slowdown from the 14.9% y/y growth exhibited in December 2015. December saw mortgage loans grow by 0.4% m/m while overdrafts decreased by 1.3% m/m and installment credit decreased by 0.9% m/m. This brings the annual figures for mortgage, overdrafts and installment credit to 6.3% y/y, 6.1% y/y and 0.7% y/y respectively. As with credit extended to individuals, the drop off in installment credit has been quite pronounced. The split of private sector credit between corporates and individuals is still skewed towards individuals who hold 58.3% of the total credit extend.

The overall liquidity position of commercial banks increased to an average of N$2.6 billion during December 2016, reflecting an increase of N$778.8 million when compared to the preceding month. Although liquidity increased in December, average repos increased to N$376 million over the month of December from N$326m in November, which indicates that the banks are still feeling some stress in terms of liquidity. The use of the repo facility has indeed been more pronounced over the last 6-months that we have seen in prior years.

Reserves and money supply

Foreign reserves decreased by N$850 million (-3.3% m/m) to N$25.0 billion at the end of December. 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

Private sector credit extension growth continues to slow as a result of lower demand and lower 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 for capital goods such as vehicles. The new minimum deposit requirements on mortgages should have a similar effect on housing demand.

 

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. 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 unsteady as the ANC succession battle starts to gain momentum.

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. However, the new president has been making questionable decisions regarding foreign policy, which bring with it even more uncertainty about global growth. Policy in the UK is also very unclear, as prime Minister T(h)eresa May’s speech points to a “hard Brexit”. Furthermore, there are a few European elections coming up, in which populist and euro sceptic parties are expected to make some inroads.

Lastly, South Africa faces a combination of low growth and high inflation making monetary policy a tight balancing act. The SARB have already lowered their growth expectations for 2017 in the January MPC meeting to 1.1%, while their inflation outlook has deteriorated to an average of 5.9%. 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 in the short term, possibly recovering mid-2017.

Namibia New Vehicle Sales – December 2016

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A total of 1,066 vehicles were sold in December, a 19.1% m/m drop from the 1,317 vehicles sold in November, and 32.7% lower than December 2015 when 1,583 vehicles were sold. For the calendar year of 2016, 16,598 new vehicles were sold, down 21.9% from the 21,246 vehicles sold over the previous calendar year. Vehicle sales have been lower than both 2015 and 2014, but still slightly ahead of 2013 levels.

Vehicle sales have been contracting on a year on year basis since mid-2015. The slowdown has been felt in both passenger and commercial vehicles, with passenger vehicle sales down 28.3% y/y and commercial vehicle sales down 35.4%. Within the commercial vehicle segments the light commercial category, which makes up the bulk of sales, has decreased by 32.2% y/y, while medium commercial vehicles sales have decreased by 28% y/y and heavy commercial vehicle sales have decreased by 76.4% y/y.

Passenger vehicle sales decreased by 17.8% m/m to 440 vehicles in December, while commercial vehicles sales decreased by 19.9% m/m to 626. This brings the total number of passenger and commercial vehicles sold in 2016 to 7,006 and 9,592 respectively. Of the 9,592 commercial automobiles sold, 8,838 were classified as light, 277 as medium and 477 as heavy commercial.

In 2016 Toyota and Volkswagen dominated the passenger vehicle market based on the number of new vehicles sold. Toyota and Volkswagen claimed 29% and 28% of the market respectively. They were followed by Ford at 7% and Mercedes at 5%. The rest of the passenger vehicle market remains very fragmented.

Toyota also remains the leader in light commercial vehicle sales with 48% of the market, followed by Nissan at 16%. Ford and Isuzu each claimed 11% of the number of light commercial vehicles sold in 2016. In the heavy category, Scania is the largest seller, commanding 43% of the market share.

The Bottom Line

Throughout the period of 2014 all the way to mid-2015, we saw robust growth in vehicle sales, which was driven by a strong consumer base supported by expansionary fiscal and monetary policy and real wage growth. However, 2016 was not a particularly good year for new vehicles as December numbers brought the year to a disappointing close. The slowdown was driven by two main factors. Firstly, the reduction in government spending had a direct and indirect effect on the demand for new vehicles. Both direct orders from government and the weaker economic environment have reduced the demand for capital goods. Secondly, higher interest rates and amendments to the Credit Agreement Act (which requires a deposit of 10% on all vehicle loans and limits repayment periods to 54 months) have reduced the availability of credit used to purchase these capital goods.

We expect the slowdown to continue into 2017. The full effect of interest rate increases normally takes 18 to 24 months to filter through to all areas of the economy. Additionally, lower government spending on capital expenditure should also put pressure on vehicle sales for the foreseeable future.

Building Plans – December 2016

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A total of 131 building plans were approved in December with a value of N$108.2 million. For the 2016 calendar year the City of Windhoek approved 1,872 building plans, well below the 2,467 plans approved in 2015. Cumulatively 2016 witnessed the approval of N$1.95 billion worth of plans, also well below the 2015 figure of N$2.20 billion.

The largest portion of building plan approvals were made up of additions to properties, from both a number and value perspective. Cumulatively 1,452 additions to properties have been approved with a value of N$ 926.8 million, 15.2% less in value terms compared to 2015 and 497 less than the number of additions observed in the previous calendar year.

New residential units were the second largest contributor to building plans approved. 286 residential units were approved in 2016, 96 less than 2015 when 382 units were approved. In dollar terms, N$553.3 million worth of residential plans were approved, 18.6% higher than the previous calendar year.

The number of commercial units approved in 2016 amounted to 84, valued at N$460.0 million. This compares to 136 units valued at N$636.9 million for the calendar year of 2015. On average over the last 10 years, 81 commercial units valued at N$496.6 million were approved annually.

The 12-month cumulative number of building plans approved ticked up slightly at the end of 2016. On a 12-month cumulative basis, 1,872 building plans were approved, 24.1% less than the same measure for December 2015. This figure has nearly halved from the peak in September 2013 to lows last seen in 1997. As a leading indicator for economic activity in the country this reinforces our view that we will see negative economic growth for the 2016 reporting period.

A lack of serviceable land has often been cited as the reason for the slowdown in building plans. The Municipality has indicated that there is a high demand for land, but little land left around Windhoek that can be developed. As a result, additions to existing property have exceeded new construction fourfold. However, the slowdown in additions point to less potential value in additions or possibly saturation of the available space.

At the beginning of 2016, the outlook for construction was relatively positive due to several large government projects expected to commence within the year. We revised this view several times during 2016, 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 a material N$1.5 billion in this financial year alone 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 continue to forecast a contraction in the construction industry for 2017.