Category Archives: Economic Research

Economic Research

PSCE – August 2016

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Overall

Total credit extended to the private sector increased by N$949.4 million or 1.2% in August, taking total credit outstanding to N$83.2 billion. On an annual basis, PSCE growth slowed down further, increasing by 10.8% in August compared to 11.1% in July. A total of N$8.1 billion worth of credit has been approved over the last 12 months with N$4.4 billion worth of credit being approved in 2016 thus far. Of this N$8.1 billion worth of credit issued during the last 12 months, approximately N$3.6 billion was taken up by businesses, while N$4.5 billion was taken up by individuals.

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Credit extension to households

Credit extension to households expanded by 1.4% on a monthly basis and 10.4% on an annual basis in August. Credit extension to households has continued to slow as interest rate hikes change consumer trends. It is worth remembering however that the transmission mechanism between rate hikes and PSCE contractions is relatively slow, particularly when interest rate increases are small.

During the month household mortgage loans expanded by 1.1% month on month and 10.6% year on year, up from 0.6% month on month and slightly up from 10.4% year on year and continue to make up the majority of credit extended to households. Of the N$48.3 billion credit extended to individuals, 67% is mortgage loans.

Instalment credit, the second largest component of loans extended to individuals (15%), grew at 12.3% year on year in August, up from 11.6% in July, however well off the long term average growth for this component of PSCE. On a month on month basis instalment credit grew by 2.4%, down from 1.3% in July. The uptick of instalment credit growth on a yearly basis can be attributed to more credit extension by credit providers due to improved liquidity conditions. The overall liquidity position of commercial banks rose to an average of N$2.9 billion during August 2016, reflecting a month on month increase of N$763.8 million when compared to the preceding month.

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Credit extension to corporates

Credit extension to corporates registered a lower but positive growth of 11.7% from 12.8% on a year-on-year basis. On a monthly basis, credit extensions to corporates increased by 1.2% month-on-month in August, down from 1.3% in July. Credit extended to corporates during August was primarily driven by growth in overdrafts, up 0.7% month on month, however on an annual basis, mortgage loans makes up the largest part of credit extended to corporates and grew at 10.0% year on year. Instalment credit extended to corporates grew at a rate of 3.5% year on year and rose 0.5% on a month on month basis, while other loans and advances grew by 11.1% year on year and 0.6% on a month on month basis. Although corporate credit has been growing at a far quicker rate than credit extended to individuals, the relatively low base from which this growth stems means that the majority of private sector credit still sits with the individual.

Reserves and money supply

Foreign reserves fell 10.1% to N$20.5 billion at the end of August 2016. The decline emanated from net Government payments and net commercial banks’ Rand purchases during the reviewed period.

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Outlook

Private sector credit extension has slowed considerably on a year to date basis as a result of the current interest rate hiking cycle. Interest rates in South Africa and Namibia have been at or near historically low levels since the global financial crisis. Rates bottomed out in 2012 with the Namibia repo rate dropping to 5.5% during the year. Since then, the Bank of Namibia has administered six rate hikes of 25 basis points each. Thus, following a sustained period of expansive monetary policy, the tightening cycle has now come into full effect. The recent hikes in Namibia, however, have been driven by the South African Reserve Bank’s position, rather than by domestic forces. Following extensive rand weakness through 2015, driving expectations of an inflation blowout, the South African Reserve Bank started hiking rates aggressively in early 2016. The Bank of Namibia was required to follow these hikes in order to ensure that the reserve position of the country remained tenable, and that capital outflows did not occur.

Going forward, it appears that we are approaching the top of the interest rate cycle, as a weak regional growth outlook and improving rand and inflation outlooks -largely due to the Brexit vote and resultant lower-for-longer interest rate positions of the UK, US and Eurozone- mean more monetary space exists for interest rate easing.

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Our base case scenario sees interest rates remain flat for the remainder of 2016, as fund flows into South Africa support the Rand, alleviating some of the inflationary pressures, while weak economic growth keeps the SARB on hold. The threat of a ratings downgrade in December is likely prevent the Reserve Bank from cutting rates in 2016 in order to stimulate growth.

Our second scenario is built around a ratings downgrade by at least two of the ratings agencies. This immediately leads to fund flows out of South Africa leading to a violent depreciation in the Rand. Inflationary pressures driven by a spiraling currency force the hand of the SARB, which immediately hikes rates by 50 basis points followed by further hiking through the year. Should we see such a reaction to a ratings downgrade, we may see much more aggressive hiking than we currently predict.

A third scenario, fueled by the British exit from the European Union leads to worldwide economic weakness and monetary easing in the UK and Japan. 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 cuts rates on two occasions during 2017.

Should we see further rate hikes in the SA market, we will see further rate hikes from the Bank of Namibia as well. This will put further pressure on the consumer which will in turn affect corporates. Further impacting the current economic climate is the drought experienced in the central region. Water restrictions may limit business activities and deter further investment, all of which has a negative impact on credit extension. We thus expect PSCE to continue to slow down, possibly topping out in the not too distant future.

Namibia New Vehicle Sales – August 2016

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A total of 1,369 vehicles were sold in August, 12.8% less than the number of vehicles sold in July and 14.1% down compared to the number of vehicles sold in August 2015. Since January this year, 11,806 vehicles have been sold, down 18.7% from the number of vehicles sold over the comparable period last year. Vehicles sales is currently trending down a year-on-year basis. This suggests that this trend is likely to continue going forward.

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For the past 12 months, the number of vehicles sold on a cumulative basis in Namibia has been declining, posting negative since December 2015. On a 12-month cumulative basis, 18,523 vehicles were sold up to the end of August 2016, 17.1% less than the number of vehicles sold over the same period last year and 1.2% less than the cumulative number of vehicles sold in the 12 months to July this year.

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On a monthly basis, total passenger vehicle sales fell by 17.8% to 537 in August, the lowest number of passenger vehicles sold since January 2013. Year to date, total sales of passenger vehicles declined 21.2% to 5,062 from 6,423 sold in the same period last year. The number of commercial vehicles sold decreased on a year-to-date and year-on-year basis, down 16.8% and 11.3% respectively. Year to date, 6,744 commercial vehicles have been sold, down from 8,106 sold in the same period in 2015. The decrease in the number of commercial vehicles sold was mainly driven by a contraction in light and medium commercial vehicle sales. On a month-on-month basis, the number of commercial vehicles sold declined by 9.3% in August to 832, down from 917 in the preceding month.

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Toyota and Volkswagen dominated the passenger market, selling the most vehicles in August, with the two brands claiming 29.2% and 28.7% respectively.  Toyota once again was the market leader in light commercial vehicles, having the lion’s share of sales at 45.2% of the market, followed by Nissan at 16.6%, and Isuzu in 3rd place.

The Bottom Line

Throughout the period of 2014 all the way to mid-2015, we have seen robust growth in vehicle sales, which was driven by a strong consumer base supported by expansionary fiscal and monetary policy and real wage growth in those periods. However, recent data indicates that this is no longer the case as vehicles sales contractions have been seen. Strong growth in vehicle sales over the last couple of years has significantly increased the base on which vehicle sales growth is calculated and this has contributed to the contractions seen in vehicle sales on a 12-month cumulative basis and year-to-date basis. That said the number of vehicles sold on an annual basis is still fairly strong.

The slowdown in the number of vehicles sold has been driven by a number of factors. For instance, higher interest rates and inflation levels, reduction in government spending (directly on vehicles and otherwise), and a weaker economic climate at large have adversely impacted the demand for vehicles. In addition, the amendment to the Credit Agreement Act made on 20 July, enforcing a mandatory 10% deposit on all passenger vehicles and reducing the maximum repayment period to 54 months will further drive down vehicle sales and growth thereof going forward.

Namibia CPI – August 2016

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The Namibian annual inflation rate slowed down to 6.8% in August, down from 7.0% in July. On a month on month basis, prices continued to rise, up 0.2% after the 0.6% uptick seen last month. On a year on year basis, five of the basket categories increased at a faster pace in this month than in July, which were offset by a slowdown in prices of the remaining categories. The biggest contributor to inflation on an annual basis was housing, water, electricity, gas and other fuels, while food and non-alcoholic beverages was the biggest contributor on a monthly basis.

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Prices in the food and non-alcoholic beverages basket category decreased 0.2% in August, after an increase of 1.0% was recorded over the preceding month. On a year-on-year basis, inflation in this category also slowed to 11.5%, down from 12.2% when compared to July. The slowdown of food and non-alcoholic beverages inflation was driven by easing of price increases across the majority of the sub-components, with only sugar, jam & honey and coffee, tea & cocoa rising relatively more quickly. Despite the slowdown in price increases, prices of almost all the sub-components are increasing at double digits, which can largely be ascribed to the drought currently experienced in Namibia and South Africa as is reflected by price increases of fruit, vegetables and grain products such as bread & cereals.

Transport, as the third largest basket category by weight, made the second largest contribution to monthly inflation. On a monthly basis transport saw an increase in prices of 0.5% compared to a 1.6% increase in July.  On annual basis price inflation of the transport category increased to 3.4%, up from 3.3% in July, significant above last year’s average of -2.1%.

The annual inflation rate for the category housing, water, electricity, gas and other fuels eased to 8.0% in August, down from 8.2% in July, however, up from 2.3% recorded in August last year. On a monthly basis this category has seen an increase of 0.2% in August when compared to 0.9% in July. Rapid price increases have been seen in this basket category mainly as a result of increases in inflation for water supply, sewage services and refuse collection after the City of Windhoek increased water tariffs in July. Price increases for rentals and other dwellings have been extremely low for a number of years, as reported by the National Statistics Agency (NSA), and the sudden spike at the beginning of the year has largely resulted in the elevated level of annual inflation we are currently seeing.

Alcoholic beverages and tobacco as the fourth largest category recorded a slowdown in annual inflation of 1.0% from July to 5.6% in August 2016. On a month on month basis, prices in this category decreased slightly, down 0.1%. Alcoholic beverages and tobacco inflation has been consistently above the average inflation figure for most of the last five years when looked at on an annual basis, more consistently so than almost any other basket category.

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Inflation expectations for the upcoming fiscal year are notably higher than was the case in 2015. There are a number of reasons for this. Firstly, major rand weakens through 2015 has driven up the cost of imports into the Common Monetary Area in rand terms; secondly, oil prices, which fell dramatically through 2014 and 2015 now appear to be stabilising, and the pass-through of base effects is likely to see an upward rebasing in inflation; third, rand weakness and other factors have driven up costs for many services in the country, including many critical utilities such as electricity and water; fourth, drought and poor harvests in the region mean that food prices are likely to increase, particularly if basic grain imports are required; and fifth, increasing interest rates are likely to see some pass-through of increased borrowing costs to consumers, and reduce consumer disposable income.

The first half of 2016 saw notably higher inflation than was the case through 2015, primarily for the aforementioned reasons, as well as a notable increase in rental inflation rates. The same inflation pickup was seen in both Namibia and South Africa, with South Africa’s inflation moving out of the target 3-6% band for the first time in over 18 months, prompting interest rate tightening from the South African Reserve Bank.

Contrary to popular belief, we are of the view that inflation will remain relatively high for the rest of the year, and into 2017. This view is primarily driven by the enormous administered price increases we have seen for services over recent months. Municipal services, water and electricity have all seen at least high-teen percentage increases in prices over the past few months. These increases will remain for the next 12 months, until the base is reset with their inclusion. These increases are likely to more than offset the improvement in transport inflation due to a stronger rand, and the expected slowing of increases in food prices due to more favourable grain prices.

Due to the aforementioned factors, we have revised our inflation expectations for 2016 up to 6.5% (6.3% in the first half of the year) from our previous expectation of 5.8%. The main reason for the major increase comes from the increase seen in administered prices, but also the large step-up in rental inflation seen since January 2016. As this is recorded once a year, the current high inflation for rental payments, at 7%, up from 1.5% in 2015, will provide buoyancy to the overall inflation number for the rest of the year.