Category Archives: Economic Research

Economic Research

PSCE – November 2015

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Overall

Total credit extended to the private sector increased by N$1.486 billion, or 1.9%, in November 2015, taking total credit outstanding to N$78.2 billion. On an annual basis PSCE growth slowed slightly from 14.9% in October to 14.5% in November. A total of N$10 billion worth of credit has been approved over the last 12 months with N$8.8 billion worth of credit being approved in 2015 thus far. Of this N$10 billion worth of credit issued during the last 12 months, approximately N$5.2 billion was taken up by businesses, while N$4.7 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 12.9% on an annual basis in November. 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. We do expect to see further rate hikes going forward and this should lead to a continuation of the slowdown of credit extension to households. On a month on month basis Namibia has experienced two contractions in credit extended to households this year.

Household mortgage loans expanded by 1.5% month on month and 13.0% 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.

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Instalment credit, the second largest component of loans extended to individuals, grew at 14.4% year on year in November, down from 14.7% in October, well off the long term average growth for this component. On a month on month basis instalment credit grew by 1.4%. The lackluster instalment credit growth can be attributed to tighter monetary policy as well as a slowdown in credit extension by credit providers due to less than ideal liquidity conditions. The liquidity issues currently faced by the country are highlighted in these articles: Namibian Economy to Slow and Banking sector liquidity crisis exacerbated by Kwanza agreement.

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Credit extension to corporates

Credit extension to corporates grew by 2.6% on a month on month basis and 16.7% year-on-year in November, once again meaningfully higher than credit extended to households. This expansion was again primarily driven by exceptional growth in mortgage loans, up 25.9% year on year and 1.0% month on month. Instalment credit extended to corporates grew at a rate of 15.5% year on year and 1.1% month on month, while overdraft facilities grew by 9.0% year on year and 6.3% 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.

Foreign Reserves

The stock of foreign reserves increased significantly by the end of October due to the inclusion of the proceeds of the successfully issued second Eurobond. Foreign reserves increased further during November, with the increase that primarily came as a result of Rand purchases by commercial banks for the payment of imported goods and services and investment purposes and pension fund swaps that occurred during the month. International reserves stood at N$24.8 billion at the end of November, up from N$22.7 billion at the end of October. The Eurobond proceeds are a major boost to the reserve position of the country which has been declining in real terms. A concern is that the hard currency raised via the Eurobond will be converted into Namibia Dollars in order to fund Government. The first Eurobond has become relatively more expensive than debt raised locally due to the depreciation of the Rand versus the dollar. There is a risk that history will repeat itself if the money raised via the second Eurobond is converted to Namibia Dollars and used to fund consumptive spending in Government.

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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. 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 is likely to put further pressure on credit extended to individuals in the coming months. Should we see a slowdown in the rate of mortgage loans extended to individuals we could experience contractions in the overall credit extended to individuals. The outlook for credit extended to corporates continues to look good although further rate hikes in 2016 as well as looming drought conditions may put pressure on this measure.

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.

Namibia CPI – November 2015

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The Namibian annual inflation rate decreased slightly to 3.3% in November, down from 3.4% in October. On a month on month basis prices rose by 0.2% again when compared to October. On a year on year basis, the basket categories food and non-alcoholic beverages, health and communication grew at a faster rate in November than in October while the other categories slowed somewhat dragging down overall inflation, with transport and clothing prices contracting. 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. 12 month average inflation reached a new low of 3.5%, and has been coming down steadily since November 2014.

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The three basket categories that experienced accelerated annual inflation were food and non-alcoholic beverages, health and communication. Accelerating price increases in the food and non-alcoholic beverages basket category was largely driven by fruit and vegetables prices rising relatively more quickly, followed by mineral water, soft drinks and juices as well as oils and fats and bread and cereals price inflation accelerating. The food price increases could largely be ascribed to the drought currently experienced in Namibia and South Africa. Health prices experienced a price increase of 5.8% year on year and 0.4% month on month

The only two categories that experienced price contractions on an annual basis were clothing and foot wear and transport, however, transport deflation decreased at a slower pace when compared to October. Price decreases in the clothing and foot wear basket category was spread relatively evenly amongst the components of this category.

The transport basket category continues to be a drag on overall inflation, exhibiting year on year inflation of -1.6% and month on month inflation of 0.02%. 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 becoming less expensive. Prolonged lower fuel prices due to the oil rout have provided consumers with some respite worldwide and to a large extent in Namibia. The effects of cheap transportation flow through to many other basket categories and in this way contributes to lower overall inflation.

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We expect inflation to remain low for the rest of the year as oil prices fell further during December. However, we expect inflation to pick up in the first half of 2016 as the full benefit of cheap oil is reached and the weak currency causes import prices to rise. Looming drought conditions as well as increasing utilities costs should further see inflation pick up in basket categories such as food and non-alcoholic beverages, and alcoholic beverages and tobacco.

 

Namibian public debt – up, up and away.

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Following major debt issuance and the depreciation of the rand on unhedged Government debt, Namibia’s debt to GDP ratio looks set to reach and possibly surpass 35% by the end of 2015.

2015 will be a year for the books as far as Namibia’s debt is concerned. In the space of just 12 months, it is estimated that public debt (that taken out by the Government) has increased by over 65%, and over N$20 billion, to a total of N$55 billion. A number of reasons for this exist, however the three major reasons are:

  1. Government has ambitious spending plans for the year, which it expected to fund through normal revenue channels and through some fairly sizable debt issuance (approximately N$9 billion in 2015/16). However, revenue has been disappointing, both due to very ambitious forecasts, as well as due to a general economic slowdown in the country, weak commodity prices, and less regional trade. As such, many revenue lines of the Government are under pressure, and likely to remain so for the next few years. As revenue is lower than expected, and expenditure remains relatively high, a lot of debt has had to be issued to fund the activities of Government, and the deficit is likely to be notably larger than expected, probably between N$9 and N$12 billion.
  2. The Government was forced to issue hard currency debt in order to protect the crumbling external position of the country, after an extended period of fiscal and monetary stimulus that drove strong growth in consumption activity, and strong demand for imports. As the external position weakened, the risk of a rating downgrade increased to the point that the Ministry of Finance stepped in and borrowed a large chunk of funds on the international market, massively increasing the country’s hard currency debt, but thankfully staving off a rating downgrade.
  3. Hard currency debt, of which Namibia now has a lot, has re-priced against Government as the currency has weakened. Over the past year, the Rand (and thus Namibia Dollar) has depreciated in value by over 30%, making the stock of Namibian hard currency debt, which was left unhedged despite the repeated warnings of local experts, significantly larger than it was a year ago.

What this means, however, is that Namibia’s public debt to GDP ratio is likely to approach 35% by the end of the year, with the stock of debt up just under 70% in the space of just 12 months – very frightening numbers. Moreover, hard currency debt is set to make up more than 50% of total debt, and once again, this remains unhedged, a situation that most find unimaginable, but the Ministry of Finance persists with. The vast cost of this decision is, after all, carried by the tax payer.

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At the same time, the bank balance of the central government has improved significantly after the recent issuance of the country’s second Eurobond. These funds, however, have been at least partially earmarked to protect the external position, and the remainder will hopefully not be spent on recurrent activities, but saved for infrastructure development.

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The bottom line is that the fiscal position of Government remains weak at the current point in time, with revenue expected to remain under pressure for the next few years (not to mention SACU repayments), and debt reaching concerningly high levels, partially due to a decision not to hedge hard currency debt, which is being proved again and again to have been a very bad decision. In addition, efforts to slow spending, while admirable, are falling well short of the required mark. While the Minister of Finance desperately tries to rein in spending, less financially savvy members of the administration appear adamant to continue to spend money we simply no longer have.

Desperately needed is a reprioritisation of Government spending, away from non-core and non-priority issues, towards real priorities such as housing, water, energy and poverty reduction. However, to date efforts to reprioritise have been wholly inadequate, and haven’t seen any meaningful movement of funds to these priorities. Instead, ambitious project after ambitious project is announced by the country’s policy makers, leaving us with the ever more pressing question – “with what funds?!”

We are increasingly concerned that the debt situation of the country is becoming precarious to say the least, and that sustainability may become a serious issue should hard currency bonds remain unhedged, debt issuance continue at current rates, should the economy slow or should commodity prices remain low for an extended period of time.

We desperately need to reduce spending (and hedge our hard currency debt, all of it!) at this time, there are no two ways about it.