Category Archives: Economic Research

Economic Research

New Vehicle Sales – October 2015

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A total of 1,767 new vehicles were sold in Namibia during October. New vehicle sales decreased by 15.5% year on year, but increased 7.4% month on month. At this point of the year, 17,942 vehicles have been sold so far in 2015, down 1% on the comparable period of 2014.  Thus Namibia is no longer on track for a record year of new vehicle sales, the declining rate of growth of new vehicle sales suggests that we may see a contraction. The 12-month cumulative measure of new vehicles sold decreased further to 21,765 in October from a high of 22,664 in April, largely due to an elevated base and strong vehicle sales in 2014.

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Passenger vehicle sales rose by 6.4% month on month, from 683 in September to 727 in October, down from a high of 910 in March this year. On a year to date basis, sales of passenger vehicles slowed further by 2.6% to 7,833, while year on year sales fell by 13.8% off a high base. 2014 saw exceptional growth in passenger vehicle sales, setting a high base, which has proven to be unsustainable as the year to date percentage change in vehicle sales has shown.

Commercial vehicle sales increased by 8.0% month on month as 1,040 vehicles sold. On a year on year basis commercial vehicle sales decreased by 16.7%, and is now only marginally higher than for the same period last year. Thus while the year to date figure is still above last year’s, the growth rate in commercial vehicle sales is declining steadily, although off a high base. Light commercial vehicle sales increased by 9.9% month on month but once again fell 18.9% year on year. Medium commercial vehicle sales rose 22.9% month on month and 95.5% year on year, largely due to the low number of vehicles sold in this category. Heavy commercial vehicle sales fell by 18.5% month on month and 16.5% year on year. Medium and Heavy commercial vehicle sales figures fluctuate greatly due to the low numbers of these vehicles that are sold on a monthly basis. On a year to date basis both medium and heavy commercial vehicle sales are still on track for a record year while light commercial sales figures have declined to below last year’s level.

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Toyota once again topped the number of vehicles sold per brand for the month at 616, a market share of 34.9%. 250 or 34.4% of the 727 passenger vehicles sold during the month were Toyotas, as well as 365 or 39.2% of the 931 light commercial vehicles sold. Volkswagen moved 144 passenger vehicles or 19.8% of the total sold during the month. Volkswagen’s market share was 11.3% of the total. Nissan gained market share this month with 9.6% of the total vehicle sales while Ford managed a steady 7.5% market share for the month.

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The Bottom Line

We have seen exceptionally strong vehicle sales growth through 2014, fuelled by a strong consumer base supported by expansionary fiscal policy and real wage growth, but the latest figures show that this trend is losing momentum. Strong vehicle sales in 2014 have elevated the base substantially which has led to lower percentage growth figures, although the number of vehicles sold as a whole is still strong. We expect to see vehicle sales normalising somewhat at the levels seen this year. Downside risks to this are rising interest rates which may limit marginal lenders from qualifying for financing as well as banking sector liquidity which may limit the amount of loans available to finance vehicle purchases.

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.