Category Archives: Private Sector Credit Extension

Overall

Private sector credit extension (PSCE) rose by N$751 million or 0.8% m/m in November, compared to the N$585 million or 0.6% m/m increase recorded in October. Year-on-Year, PSCE grew by almost 8.0% in November compared to 7.8% y/y in October. November has also been the fourth consecutive month in which PSCE growth has kept rising on a year-on-year basis. Cumulative private sector credit outstanding as at the end of November amounted to N$96.645 billion. On an annual basis, households were taking up much of the credit extended to the private sector in 2018, accounting for almost two-thirds of the uptake. However, that wide disproportion between credit extended to households and corporations began to narrow in August. On a rolling 12-month basis N$7.126 billion worth of credit was extended to the private sector with N$3.26 billion being taken up by households. Corporations very nearly equaled that which was extended to households by taking up N$3.21 billion worth of the credit over the last 12-months, while claims on non-residents totaled N$663.2 million.

Credit extension to individuals

Credit extended to individuals increased by 6.1% y/y in November, moderating from the 7.0% y/y increase recorded in October. The year-on-year slowdown in household credit extension was due to moderating growth in mortgages, overdrafts, installment credit and other claims. Mortgage loans increased by 6.9% compared to 8.0% a year ago, while overdrafts increased by just 0.9% versus 8.5% in the prior year. Installment credit contracted by 6.8%, worse than the 2.6% contraction registered during the corresponding period in 2017. On a monthly basis, household credit growth printed flat following a modest increase of 0.7% m/m recorded in October. Mortgage credit contracted by 0.3% m/m along with a 0.9% contraction in installment credit. Other loans and advances increased by 2.1% m/m followed by a 0.4% m/m increase in overdrafts. Leasing transactions increased the most in the household’s category, 14% m/m, although significantly slower than the 70.3% m/m growth registered in October.

Credit extension to corporates

Credit extension to corporates increased by 8.9% y/y compared to October’s 7.1% y/y increase. The November increase in corporate credit has been the highest since March 2017 and the fifth consecutive month in which corporate credit has been increasing at a faster pace on a year-on-year basis. Shorter-term credit facilities continue to be driving the increase in corporate credit extension. Other loans and advances increased by 28.2% y/y and overdrafts increased by 18.5% y/y. Mortgage loans to businesses increased by 5.6% y/y in November, slowing from the 8.5% y/y increased recorded the corresponding period in 2017. On a monthly basis credit extended to businesses was the main reason for the overall increase in PSCE. Corporates made use of overdraft facilities in November, increasing overdraft loans by 8.9% m/m, followed by corporate mortgage lending which increased by 4.9% m/m.

Banking Sector Liquidity

The overall liquidity position of commercial banks declined by N$1.1 billion to reach an average of N$2.3 billion during November from N$3.4 billion in October. Bank of Namibia attributes the decline in liquidity to foreign currency outflows as a result of trade-related payments.

Reserves and money supply

As per BoN latest money statistics release, broad money supply increased by N$7.24 billion or 7.4% y/y in November but decreasing 1.7% m/m by N$1.87 billion. Foreign reserve balances declined by N$1.56 billion to N$29.5 billion in November from N$31.1 billion in October, representing a 5.0% m/m fall in reserves. BoN attributes the decline in reserves to net capital outflows from commercial banks to fund foreign currency purchases, in addition to an interest payment for the US$500 million Eurobond. A stronger Namibian dollar versus the US dollar during the period under review further contributed to the decline in foreign reserves.

Outlook

Overall PSCE growth in November maintained its upward momentum on a year-on-year basis for a fourth consecutive month, increasing by 7.96% y/y. The highest rate of growth in the last 18 months. The year 2018, with the omission of pending December PSCE data, has seen very little deleveraging from both consumers and businesses. In the midst of recessionary economic growth short-term and unsecured loans have grown at a quicker rate than that of mortgage and instalment credit. From a 12-month rolling perspective household demand for credit underpinned growth in PSCE and only until recently have businesses started borrowing more. The increase in corporate credit, however, has been more profound in short-term borrowings.

The Bank of Namibia (BoN) has been accommodative in terms of monetary policy by keeping the repo rate steady at 6.75% since cutting by 25bps in August 2017. How long BoN manages to keep interest rates steady will depend largely on developments in South Africa. The SARB will closely monitor inflation, which ticked up to 5.2% y/y and is expected to moderate on the back of falling oil prices and moderating transport inflation. Furthermore, the SA economy broke out of a recession and the outlook for possible rate hikes is now pushed towards the latter part of 2019. Domestically, BoN will be weary of worsening economic conditions, projecting weaker growth in its December Economic Update. BoN expects the Namibia economy to contract by 0.2% in 2018 followed by growth of 1.5% in 2019, a downward revision from its 1.9% estimation in July 2018 and more than half of the 3.1% it estimated in December 2017.

Overall

Private sector credit extension (PSCE) rose by N$585 million or 0.6% m/m in October, compared to the N$524 million or 0.6% m/m increase recorded in September. Year-on-Year, PSCE growth edged up to 7.8% in October compared to 7.3% y/y in September. Cumulative private sector credit outstanding as at the end of October amounted to N$95.893 billion. On an annual basis household appetite for credit continues to outweigh that of businesses. However, the gap between credit extended to households and to corporates has narrowed slightly, owing to an increase in the uptake of credit by corporates observed over the past three months. On a rolling 12-month basis N$6.897 billion worth of credit was extended to the private sector with N$3.7 billion being taken up by households. Corporations took up N$2.53 billion worth of credit over the last 12-months, and claims on non-residents totaled N$662.7 million.

Credit extension to individuals

Credit extended to individuals increased by 7.0% y/y in October, growing at a slightly slower pace than the 8.0% y/y increase recorded in September. On a monthly basis household credit increased by 0.7%, marginally quicker than the 0.5% m/m growth registered in September. The monthly increase in household credit extension was driven by increases in the mortgage loans and other loans and advances categories which increased by 0.8% and 1.3%, respectively. Compared to October 2017, mortgage loans increased by 8.2% y/y while other loans and advances rose by 18.7% y/y. The effects of the amendments to the national credit act have proven to be long-lasting and have resulted in installment credit realizing negative growth rates since August 2017. Household installment credit contracted by 6.0% y/y in October following a 4.9% y/y contraction in September.

Credit extension to corporates

Credit extension to corporates increased at a quicker pace in October than in September, increasing by 7.1% y/y compared to September’s 4.5% y/y increase. The year-on-year uptick in overall credit extended to corporates has been due to an increase in the use of short-term credit facilities, in particular other loans and advances, picking up from low growth rates in the corresponding period a year ago. Other loans and advances extended to businesses increased by 30.1% y/y and 4.6% m/m. Overdrafts recorded the second highest increase in credit extension to corporates, increasing by 9.8% y/y due to base effects. On a month-on-month basis overdraft credit declined by 0.8% as businesses repaid outstanding overdrawn accounts on net.

Banking Sector Liquidity

The overall liquidity position of commercial banks experienced a substantial decline of N$1.3 billion to reach an average of N$3.4 billion during October from N$4.7 billion in September. Bank of Namibia attributes the decline in liquidity to investors withdrawing idle funds in search of higher yielding assets as well as for facilitating cross-border payments. During the month of October, overall short-term money market rates in SA have trended higher than those in Namibia, which explains the Namibian exodus to some extent. Furthermore, there has been an increase in use of BoN’s repo facility by commercial banks, with the outstanding balance of repo’s increasing from N$147 million at the start of October to N$434 million by month end.

Reserves and money supply

As per BoN latest money statistics release, broad money supply rose by N$13.32 billion or 14.2% y/y in October following a 12.5% y/y increase in September. Foreign reserve balances declined by N$1.41 billion to N$31.1 billion in October from N$32.5 billion in September, representing a 4.3% m/m fall in reserves. BoN attributes the decrease in reserves to commercial banks facilitating foreign currency payments which resulted in net capital outflows, in addition to an interest payment for the US$750 million Eurobond. The governor noted, during the MPC press briefing, that BoN has observed further declines in reserves for the month of November. The governor pointed out that businesses are busy stockpiling in a bid to ensure they meet the seasonal uptick in demand expected around year-end.  Foreign balances are likely to pick up over the next couple of months with the pending release of the delayed N$3 billion disbursement due from the African Development Bank’s loan facility.

Outlook

PSCE ticked up for a third consecutive month, reaching a 17-month high growth rate of 7.3% on a year-on-year basis. PSCE has failed to increase by double digit figures for the past two years. The last time it did so was in October 2017 when PSCE increased by 10.2% y/y. Corporate demand for credit has been ticking up modestly. However, for the majority of 2018 household demand for credit has been driving PSCE growth. Household driven PSCE growth is unsustainable in the long-run, especially when borrowing has been used for consumptive purposes. Growth is likely to become constricted in an environment where the consumer is heavily indebted and the refinancing, and approval of new loans becomes more difficult due to eligibility. The recent increase in credit extended to corporates has been a welcome sight. However, the current economic downturn has led to corporates taking on more short-term credit which does point to businesses borrowing simply to stay afloat.

The near-term outlook for PSCE will hinge very much on how quickly, or slowly, consumer and business confidence recovers, and to a larger extent the impact monetary policy will have. Consumer confidence feeds through to business confidence. Increased consumer demand triggers more business production that must meet this demand, thus incentivising businesses to borrow in order to fund capital projects. Borrowing has been predominantly short-term however, and short-term borrowing satisfies short-term needs which is unlikely to drive much meaningful expansion of productive capacity.

Indebted consumers got some form of relief when the BoN left the repo rate unchanged at 6.75% during its December MPC meeting. A decision the MPC deemed appropriate to maintain the one-to-one link between the Namibian dollar and the SA rand. This follows a month after the South African Reserve Bank (SARB) raised its repo rate by 25bps. BoN chose a more accommodative response, having kept a 25bp buffer between its rate and that of the SARB since March 2018. The current interest rate environment is relatively more relaxed compared to historical rates observed over the last eighteen years. Our expectations are for interest rates to remain accommodative in the near-term. However, BoN will be mindful of possible increases in SA rates and move to adjust local rates accordingly. Higher interest rates in SA will very likely lead to capital outflows from Namibia, which in turn jeopardises foreign reserve levels, and therefore the currency peg.

Overall

Private sector credit extension (PSCE) rose by N$524.4 million or 0.6% m/m, compared to the N$1.375 billion or 1.5% m/m increase recorded in August. PSCE growth ticked up marginally to 7.3% y/y in September from 7.1% y/y in August. Cumulative credit outstanding currently amounts to N$95.3 billion. Similar to what transpired in August, the monthly increase in PSCE for September was driven by corporates rather than households. On an annual basis PSCE growth was largely driven by household demand for credit. Growth in credit extended to households however, did slow marginally to 8.0% y/y in September compared to 8.1% y/y in August. Credit extended to corporates increased by 4.5% y/y in September following a 3.6% y/y rise in August. On a rolling 12-month basis N$6.49 billion worth of credit was extended to the private sector with N$4.15 billion being taken up by households. Corporations took up N$1.64 billion worth of credit while claims on non-residents totaled N$705.8 million.

Credit extension to individuals

Credit extended to individuals increased by 8.0% y/y in September, almost unchanged from the 8.1% y/y growth recorded in August. Mortgage loans extended to individual increased by 9.5% y/y in September compared to the 10.0% y/y increase recorded in August.  Other loans and advances grew by 18.0% y/y and 1.6% m/m in September. Growth in installment credit remained in negative territory, contracting by 4.6% y/y and 0.2% m/m in September. Household demand for overdraft facilities remained subdued in September, increasing by 0.8% y/y and unchanged on a month-on-month basis.

Credit extension to corporates

Credit extension to corporates grew by 4.5% y/y and 0.8% m/m in September. On a rolling 12-month basis N$1.64 billion was extended to corporates as at the end of September compared to N$1.34 billion as at the end of August. The uptick in the general demand for credit by corporates does provide for some optimism, possibly showing signs of increased business confidence. However, the biggest driver of the increase in credit extended to corporates was a 22.4% y/y increase in loans and other advances, followed by overdraft facilities increasing by 3.6% y/y. The continued contractions in installment credit and leasing transactions of 8.0% y/y and 1.6% y/y respectively, is a sign of declining capital investment. When viewed in conjunction with in the increased use of short-term credit such as overdraft facilities, this points to businesses borrowing to manage cash flows rather than expanding operations.

Banking Sector Liquidity

The overall liquidity position of commercial banks increased by N$303.1 million to an average of N$4.8 billion during September from N$4.5 billion in August. Bank of Namibia attributed the strong liquidity in September to an increase in Diamond sales. Furthermore, commercial banks made less use of BoN’s repo facility, with the outstanding balance of repo’s decreasing from N$386 million at the start of September to N$147 million by month end. The balance of BoN bills remained unchanged at N$1.7 billion as at the end of September.

Reserves and money supply

Foreign reserve balances increased by N$321 million to N$32.52 billion in September from N$32.20 billion in August. BoN attributes the increase in reserves to inflows from foreign currency deposits by the commercial banks. A portion of the foreign currency deposits are attributable to diamonds sales which also led to the increased liquidity position as noted above.

Outlook

PSCE accelerated moderately for a second consecutive month, reaching a 16-month high growth rate of 7.3% y/y. Much of the rise in PSCE was household driven over the last year. One would expect for the increase in household demand to translate into an increase in business credit to meet that demand. However, corporates have scaled down in their uptake of mortgage financing and installment credit, which finances capital projects. This becomes concerning when viewed in conjunction with loans, advances and overdrafts that have been on the rise and does point to businesses operating under difficult financial conditions. October and November PSCE releases may record increases in short-term credit extended to corporates, as businesses prepare for the seasonal uptick in retail spending expected over the last two months of the year.

Key monetary policy decisions are scheduled between now and December that will have an impact on PSCE growth in the near-term. The SARB Monetary Policy Committee (MPC) will meet in November to re-evaluate interest rates, with present expectations of a 25bp hike in rates. A SARB rate hike will put SA’s repo rate on par with that of Namibia. BoN’s MPC, scheduled to meet in December, would be likely to seriously consider maintaining the 25bp interest rate spread over South Africa which would see a similar rate hike in Namibia. At present, South African money market rates are marginally higher than those in Namibia, and if BoN keeps its repo rate on par with that of SA, it may lead to an outflow of capital from Namibia. A rate hike by BoN would mitigate the risk of capital outflows and protect foreign reserve levels, but will make debt service costs more expensive for an already indebted consumer.