Category Archives: Economic Research

Economic Research

PSCE – September 2015

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Overall

Total credit extended to the private sector increased by N$1.392 billion, or 1.9%, in September 2015, taking total credit outstanding to N$75.9 billion. On an annual basis PSCE growth slowed slightly from 15.8% in August to 15.7% in September. A total of N$10.3 billion worth of credit has been approved over the last 12 months with N$6.5 billion worth of credit being approved in 2015 thus far. Of this N$10.3 billion worth of credit issued during the last 12 months, approximately N$4.9 billion was taken up by businesses, while N$5.3 billion was taken up by individuals.

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Credit extension to households

Credit extension to households expanded by 1.1% on a monthly basis and 13.5% on an annual basis in September. Credit extension to households is now growing at a more sedate pace than in the past and may slow further 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.

Household mortgage loans expanded by 0.99% month on month and 13.3% year on year and continue to make up the majority of credit extended to households or individuals. On a year on year basis the rate at which individuals are taking up mortgage loans has been increasing from below the average rate of private sector credit extension to households to well above it. On a year on year basis mortgage loan issuance is thus driving credit extension to individuals.

Instalment credit, the second largest component of loans extended to individuals, grew at 15.7% year on year in September, slightly down from 16.4% in August, although well off the rapid growth we saw in the first half of the year. On a month on month basis instalment credit grew by 1.2%. The lackluster instalment credit growth can be attributed to tighter monetary policy as well as a possible slowdown in credit extension by banks due to less than ideal liquidity positions. We will monitor this figure closely in the coming months as a longer term slowdown in trend growth would confirm the apparent liquidity issues within the country and put pressure on consumers.

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Credit extension to corporates

Credit extension to corporates grew by 3.0% on a month on month basis and 18.8% year-on-year In September, once again meaningfully higher than credit extended to households. This expansion was again primarily driven by exceptional growth in mortgage loans, up 29.6% year on year and 1.7% month on month. Instalment credit extended to corporates grew at a rate of 18.0% year on year and 1.1% month on month, while overdraft facilities grew by 14.3% year on year and decreased 1.4% on a month on month basis. Total credit issued to corporations has, in the past, made up less than 40% of total PSCE but has crossed this threshold, now making up 41.2% of the total figure. 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

The stock of foreign reserves decreased further by the end of September 2015, as can be seen in the below figure. International reserves stood at N$12.8 billion at the end of September, down from N$14.1 billion at the end of August. August and September tends to see a decline in reserves due to the lack of significant inflows during this month. The Namibian reserve position remains a concern as the hard currency value (US$) of reserves continues to decline. The Rand has experienced a 16% decline versus the US Dollar thus far this year, a trend that is expected to continue in the long term. International reserves should appreciate in local currency terms due to the depreciation of the local currency but the fact that reserves are not is cause for concern.

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Outlook

Private sector credit extension continues to grow at a rapid rate, adding approximately N$1 billion to the total outstanding private sector credit each month. While the rate of growth has been slowing slightly in recent months, the base off of which it is calculated has grown significantly. This signifies an economy expanding rapidly. A slowdown in the growth rate of credit extended to individuals since 2014 has been compensated for by the rapid growth of credit extended to corporates. The current rate hiking cycle as well as the inflated base should see future PSCE growth slow somewhat. Current banking sector liquidity conditions should put further pressure on credit extension growth as funding becomes more expensive. While not ideal, negatives to the slowdown in credit extension, especially to individuals, may be outweighed by longer term positives. A slowdown in credit extension growth should lead to a reduction in the amount of money flowing out of the country for consumptive purposes, boosting the international reserve position of Namibia. Higher interest rates should also lead to an increase in saving by individuals which is at low levels at present. A slowdown in credit extension to more natural rates (GDP growth) should be positive for the economy and prevent it from overheating.

 

 

Banking sector liquidity crisis exacerbated by Kwanza agreement

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By Rowland Brown

The Bank of Namibia recently released figures showing that it currently has approximately N$2.8 billion worth of Kwanza’s in their bank account, following the agreement between the Banco Nacional De Angola and the Bank of Namibia, which allowed for the direct exchange between the Kwanza and Namibia Dollar at banks and bureau de changes’ in Namibia. This agreement came into force in late June, and resulted in way more activity than anyone anticipated, particularly in Oshikango. The idea behind the agreement was that it would enable Angolans to come over the border and buy goods in Namibia, using their Kwanza, which they could convert at the local banks and bureau de changes. The idea here was simple – Namibia converts Kwanza in to Namibia Dollars, those Namibia Dollars are spent in Oshikango (and elsewhere) in exchange for goods and services, meaning the Namibia Dollars remain in the country, as do the Kwanza. Thus, Namibia keeps the Namibia Dollars and gets the Kwanza, in exchange for the aforementioned goods and services. Later, the Kwanza is exchanged back into US Dollars by the the Banco Nacional De Angola.

However, while some of this activity was seen, eyewitness accounts talk of Angolans crossing the border with, quite literally, bakkie loads of cash, which they then exchanged into Namibia Dollars. Rather than spending this money in Namibia, much of it was taken back into Angola. The reason for this – simple – Angolan’s trust the value of the Namibia Dollar, more than the Kwanza. The flurry of currency exchanging activity at the border during the first few weeks of trading was so extreme that many of the local banks had to close their branches, as they simply couldn’t deal with the demand for Namibia Dollars from Angolans with Kwanza.

At the same time, the price of oil, Angola’s primary (almost only) source of hard currency earnings, fell through the floor, declining by approximately 50% between June 2014 and June 2015. This has meant that the Banco Nacional De Angola is unlikely to have sufficient hard currency (US Dollars) to exchange for the N$2.8 billion worth of Kwanza currently sitting in Namibia.

Assuming little trade in Kwanza for goods or services in Namibia, the numbers recently released by BON suggest that there is close to N$2.8 billion worth of Namibia Dollar notes are currently in Angola. While the number is unlikely to be quite this high (as some of the Namibia Dollars received , it appears that a huge amount of Namibia’s actual cash money is sitting in Angola. As of August end, Namibia has hard currency in circulation of N$4.26 billion, meaning that the N$2.8 billion would represent 66% of all of Namibia’s cash! Given that the multiplier effect on this cash money, to base money, is usually 12-24x, this net outflow is absolutely vast in terms of the effective base money withdrawal (consider how many times a N$10 dollar note changes hands in a year and how much that note buys, to get an idea of the multiplier. Now remove that note from circulation and put it in Angola, and you get a simple illustration of the problem).

Not only will this have a devastating impact on the hard currency (external) position of the country until the Kwanza is exchanged into US Dollars (which could be anytime, and unfortunately, Kwanza is no hard currency!), but it is also very likely to be the proximate cause of the current banking sector liquidity crisis in Namibia. We must note, of course, that there is a distinction between banking sector liquidity and prudent asset allocation decisions by pension fund asset managers (as is their legal, fiduciary, duty). The former and latter have little to do with one another, other than the fact that they both have an impact on demand for Government debt securities, used to fund the budget deficit.

Interestingly, this Kwanza development (release of information) comes at the same time as Namibia is scrambling to raise a hard-currency Eurobond to protect the country’s external position. While there is no doubt a great need for this, it must be said that it was avoidable. Namibia, as part of the common monetary area must meet a clause that stipulates that Namibia must hold sufficient hard currency reserves to cover currency in circulation. The logic – to ensure that if all (or a lot) of the Namibia Dollar cash money ends up in the vault of the South African Reserve Bank (SARB), Namibia will be able to “buy” the Namibia Dollars back, by giving the SARB a currency they can use (the Namibia Dollar has no value in South Africa, as the Kwanza has no value in Namibia). It should be noted, in addition, that the focus exclusively on currency in circulation relative to international reserves, is fatally flawed. Covering currency in circulation is just one of many uses or needs for hard currency. There are a vast number of others, which is the primary reason that the IMF advocates three months of import coverage of reserves, more than twice as much as Namibia currently has.

Further, despite claims to the contrary, the repatriation of the Kwanza will do little to bolster the external position unless the money is kept in hard currency. This may happen, however it keeps the funds out of the banking sector (unless BON prints more money, which will be inflationary), which will simply exacerbate the liquidity crisis.

Peculiar, perhaps, is that while the primary mandate of the Bank of Namibia is to protect he country’s external position, it has pursued a policy of historically low interest rates through a period of abnormally high growth. This certainly helped to drive growth in consumer credit demand, which resulted in major increases in imports funded by domestic money (thus a net outflow of Namibian money, and a decline in reserves). Now, the bank is hiking into economic weakness, while the Ministry of Finance fights to protect the external position with external bond issuances.

With regards to the funding position of Government, much of the current liquidity crisis, has been driven by loose monetary and fiscal policy. However, the major withdrawal in hard currency from the Namibian economy is likely to be the primary and underlying cause of the current liquidity crisis, and lack of demand by banks for Government securities at recent debt auctions. It is also likely to be the underlying reason for the slowdown in credit extension to household by many of the commercial banks.

Namibia Inflation – September 2015

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CPI Sept 1

According to the Namibia Statistics Agency, the Namibian annual inflation rate unexpectedly fell to 3.3% in September, down from 3.4% in August. On a month on month basis, prices rose by 0.1% compared to 0.3% in August. On a year on year basis, only a third of the basket categories prices grew at a faster rate in September than in August, while the other two thirds saw price pressures slowing, bringing down overall inflation. Year on year inflation is again well below average, largely due to a drop in the price of oil over the past year, and the knock on effects this has on prices in the heaviest weighted basket item (housing, water and electricity, and gas and other fuels), which is experiencing prolonged inflation of well below the basket average. 12 month average inflation reached a fresh low of 3.7% in September, and has been coming down steadily since November 2014.

CPI Sept 2

The four basket categories that experienced accelerated annual inflation were food and non-alcoholic beverages, alcoholic beverages and tobacco, communications, as well as miscellaneous goods and services. Accelerating price increases in the food and non-alcoholic beverages basket category was spread relatively evenly amongst the components of this category, with bread and cereal prices rising relatively more quickly than the rest. Both alcoholic beverages and tobacco prices increased marginally, dragging up average inflation somewhat. Communications prices experienced a relatively large price increase of 1.9% year on year and 1.6% month on month making it the basket category exhibiting the highest inflation for the month.

The transport basket category remains below overall inflation, thus dragging down the average rate, exhibiting year on year inflation of -2.2% and month on month inflation of -1.0%. Transport is the third largest basket category by weighting and as such has a large impact on overall inflation. The deflation experienced by this basket category is largely due to the operation of personal transportation equipment, which is becoming less expensive as fuel prices decline. Prolonged lower fuel prices due to the oil rout have provided consumers with some respite worldwide and in this Namibia is no exception. The effects of cheap transportation flow through to many other basket categories, as second and third round effects, and in thus may contribute to lower overall inflation longer term.

Inflation on the healthcare, and hotels, cafes and restaurants, has slowed on a year on year basis and deflation was experienced on a month on month basis. On a year on year basis the medical products, appliances and equipment subcategory of the health basket was responsible for the decline in the rate of inflation. In the hotels, cafes and restaurants segment of the basket, the contributor to negative monthly inflation and the slowdown in annual inflation was the accommodation services sub-category. This is a result of off peak season price reductions by accommodation providers.

The slowdown in annual inflation came as a surprise to us as a weak rand and fuel prices off their lows, as well as the pass-through of base effects, suggest that annual inflation should be picking up and not slowing. An explanation for this decline in annual inflation could be that transportation service providers are slow to adapt to declines in fuel prices. Prolonged cheap fuel is priced into costs over an extended period of time due to the customer’s dependency on the service. This results in prolonged periods of deflation in the transportation basket category which drags on overall inflation due to weak inflation in the rest of the basket categories, especially inflation on housing costs. Despite this we continue to expect inflation to rise as we enter the last quarter of the year.

It is worth mentioning that the price pressures experienced by Namibian, and particularly urban, consumers in Namibia has decoupled from the numbers reported by the NSA with regards to inflation. Moreover, wage settlements in the country, including those of the NSA itself, are unlikely to reflect the reported NCPI numbers, but be significantly higher than such. However, providing a single inflation figure that is reconcilable to the (undefinable) average Namibian is all but impossible, given the vastly different consumer patterns in the country, largely due to the income inequality of the populous.

Nevertheless, major anomalies, such as low housing inflation levels stand out as examples of areas in which the current survey methodology may not be adequately capturing price pressures. Anecdotal evidence suggests that rental prices rise by 8% – 10% per year, and finance costs have risen by approximately 7.5% this year. The official number for rent price inflation (owners and renters) is just 1.5% over the last year.

CPI Sept 3