Category Archives: Economic Research

Economic Research

Namibia CPI – January 2017

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The Namibian annual inflation rate shot up to 8.2% y/y in January, 0.9% higher than the 7.3% y/y recoded in December. Prices increased by 3.2% m/m, the largest monthly increase in the 14-year history of our data set. Annual inflation was mainly driven by housing, water, electricity and other fuel category which increased at a rate of 9.3% y/y and the food and non-alcoholic beverages category which increased by 13.2%. Overall prices in eight of the twelve basket categories increased at a faster rate than during the preceding month, three at a slower rate and one grew at a steady rate. At the end of January service inflation was notably higher than during the preceding month due to once off yearly increases. Prices for goods increased 8.1% y/y while services were 8.3% more expensive on a y/y basis.

Housing and utilities was the largest contributor to annual inflation, due to its large weighting in the basket and the seasonal effect of rental increases. Overall the housing category increased 7.6% m/m and 9.3% y/y. This resulted in a contribution of 2.7% to the annual inflation figure. The high monthly figure was largely due to rental payments which increased by 9.7% m/m, the largest monthly increase to date. Most of the other subcategories remained relatively unchanged m/m, but water supply, sewerage service and refuse collection is still increasing by 12.4% y/y while electricity is 6.7% more expensive than last January.

Food and non-alcoholic beverages, the second largest basket item, was the second largest contributor to annual inflation. Food inflation is currently running at 13.2% y/y, up from the 12.5% y/y figure seen in December. The sub-categories of food generally showed very high monthly increases of between 1.0% and 2.5%, while fruit and vegetable prices were up 3.6% m/m and 2.7% m/m respectively. On an annual basis, fish prices have increased by 23.3% y/y while confectionaries are 19.7% more expensive. The upwards pressure on food prices is mainly a result of the drought in Southern Africa which could ease as the rainy season reduces some the dependence on expensive imports.

Transport prices increased by 1.0% m/m and 5.2% y/y in January, as pump prices have increased by 20c for petrol and 30c for diesel. Given that oil prices are on an upward trajectory, we may see further increases in fuel prices and further rises in transport inflation. The Alcohol and tobacco category displayed increases of 5.8% y/y and 0.5% m/m. Tobacco prices increased by 1.3% y/y, while alcohol increased at a much quicker pace at 6.9% y/y. Furnishings was another contributor to overall annual inflation, increasing 2.5% m/m and 9.5% y/y.

Namibian inflation is now much higher than that of South Africa, and expectations are for high inflation rates to continue in both countries. South African inflation is expected to average 6.2% in 2017, according to the SARB’s January MPC forecast. These expectations are largely driven by a weaker real effective exchange rate and the pass though effect of higher Import prices. The effect of higher food inflation due to the drought, and the pass-through effect of South African food prices on Namibia will likely cause the double digit increases in food prices to continue in the short term, although likely to ease around April/May of 2017.

Due to expectations of high SA inflation, which remain outside of the target band for most of 2017, we will monitor the March MPC statement closely for a more hawkish SARB. However, given the low level of growth, which has been revised downwards to 1.1% in January, we do not anticipate repo rate increases in response to inflationary pressures in South Africa.

Annual inflation in Namibia averaged 6.7% in 2016, however given the surprisingly high monthly increases witnessed in January, inflation can be expected to accelerate sharply in 2017. The large monthly increase was driven mainly by rental increases of 9.7% m/m, the largest increase in the last 14 years. Thus, we have revised our inflation expectation for 2017 to average 7.9%, significantly higher than the 6.4% previously expected.

Namibia New Vehicle Sales – January 2017

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A total of 910 vehicles were sold in January, a 14.6% m/m drop from the 1,066 vehicles sold in December, and 34.0% lower than January 2016 when 1,379 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. 2017 is thus off to a slow start as illustrated by the lowest monthly sales number since December 2012.

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 26.4% y/y and commercial vehicle sales down 39.0%. Within the commercial vehicle segments the light commercial category, which makes up the bulk of sales, has decreased by 39.4% y/y, while medium commercial vehicles sales have decreased by 25% y/y and heavy commercial vehicle sales have decreased by 37.5% y/y.

Passenger vehicle sales decreased by 8.6% m/m to 402 vehicles in January, while commercial vehicles sales decreased by 18.8% m/m to 508. Of the 508 commercial automobiles sold, 478 were classified as light, 15 as medium and 15 as heavy commercial. The total number of passenger and commercial vehicles sold in 2016 were 7,006 and 9,592 respectively and we are likely to see even lower numbers this calendar year.

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%, while the rest of the passenger vehicle market was shared by several competitors. The start of this year points to this trend continuing, and Toyota and Volkswagen have again taken the lead in terms of number of vehicles sold.

Toyota also remains the leader in light commercial vehicle sales with 49% of the market, followed by Nissan at 16%. Isuzu and Ford claimed 13% and 11% of the number of light commercial vehicles sold in January, very much in line with the market share observed in 2016. In the heavy category, Hino and Mercedes started off the year by selling 4 heavy or extra heavy vehicles each, or roughly 27% of the number of heavy commercial vehicles sold over the month. Heavy commercial vehicle sales have dropped to multi-year lows which can be seen as a drop in investor or business confidence.

The Bottom Line

From mid-2015, the new vehicle market in Namibia has been in a state of decline and this trend seems to be continuing as we enter 2017. 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 and this is clearly visible in the data.

Furthermore, 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 in new vehicle sales to continue into 2017 as the full effect of interest rate increases and cuts in public spending filter through to all areas of the economy.

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.