Category Archives: Private Sector Credit Extension

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.

Overall

Private sector credit extension (PSCE) recorded it biggest monthly increase since November 2015, rising by N$1.37 billion or 1.5% m/m in August. Cumulative credit outstanding currently amounts to N$94.8 billion. PSCE growth accelerated to 7.1% y/y in August from 6.3% y/y in July. On an annual basis the growth in PSCE was driven largely by credit extended to households which increased at a quicker rate of 8.1% y/y in August compared to 6.7% y/y in July. Credit extended to corporates grew marginally quicker at 3.6% y/y in August versus the 3.4% y/y in July. On a rolling 12-month basis N$6.3 billion worth of credit was extended to the private sector with N$4.2 billion being taken up by individuals. Corporations took up only N$1.3 billion worth of credit while claims on non-residents totaled N$748 million.

Credit extension to individuals

Household appetite for credit remains high judging by credit extended to individuals over the past 12 months. Credit extended to individuals increased by 8.1% y/y in August, a sharp acceleration from the 6.7% y/y growth recorded in July. Base effects saw mortgage loans extended to individual grow by 10% y/y in August compared to the 7.7% y/y increase recorded in July, resulting in the overall acceleration mentioned above. Individuals once again made very little use of overdraft facilities in August, with this increasing by 0.8% y/y following a 1.7% y/y contraction recorded in July. Household appetite for instalment credit remains subdued as reflected in the contractions of 5.6% y/y and 0.6% m/m in August. Other loans and advances grew by 17.2% y/y and 3.5% m/m in August.

Credit extension to corporates

Credit extension to corporates grew by 3.6% y/y and 2.4% m/m. On a rolling 12-month basis N$1.3 billion was extended to corporates as at the end of August compared to N$1.2 billion as at the end of July. Instalment credit extended to corporates contracted by 7.5% y/y but increased marginally by 0.5% m/m in August. Leasing transactions to corporations also contracted in August, by 3.6% y/y and 3.1% m/m. The contraction in instalment credit and lease transactions points towards declining corporate investments of a capital nature. However, the uptick in loans and overdrafts of 22.1% y/y and 1.5% y/y, respectively, could suggest that businesses are lending simply to stay afloat.

Banking Sector Liquidity

The overall liquidity position of commercial banks decreased by N$229.7 million to an average of N$4.5 billion during August from N$4.7 billion in July. The overall liquidity position continued to boast a healthy average monthly balance of above N$4 billion since June. The excess liquidity seems to have found some parking space with Bank of Namibia (BoN) attributing the decrease in overall liquidity to an uptick in the purchases of BoN bills over the month of August. At the same time commercial banks have continued to utilize BoN’s repo facility, with the balance of repo’s outstanding increasing from N$341 million at the start of August to N$386 million as at the end of August.

Reserves and money supply

Foreign reserve balances decreased by N$345 million to N$32.2 billion in August from N$32.5 billion in July. BoN had previously noted that the July balance of foreign reserves was N$30.8 billion, citing errors to March reserve figures. This has since been corrected along with the balances of the preceding three months. The N$345 million decline in reserves, however, BoN attributes to government disbursements over the month under review.

Outlook

Credit extension to individuals continues to outpace extension to corporates by most measures. However, the monthly uptick in PSCE registered in August was largely due to credit extension to corporates, which was almost double credit extension to individuals. The outlook for PSCE growth, for the time being, is rested on interest rate expectations with the SARB MPC keeping policy rates unchanged in September, with expectations for BoN’s MPC to follow suit. Rising oil prices and a weaker rand has seen a rampant increase to fuel pump prices, which will feed into the SARB’s inflation forecast. These factors will weigh on future interest rate decisions which in turn influences the rate of PSCE growth. Interest rates remain broadly accommodative at present but risks remain to the upside.

Notwithstanding global developments, local government fiscal shortages bear further risk to the outlook for PSCE. Local news media has reported that the Ministry of Finance (MoF) has engaged in consultations to discuss proposed increases to tax rates for individuals and various taxes affecting businesses. With individuals accounting for almost 70% of the credit issued from a 12-month cumulative perspective, any increase in tax impacts the ability of credit uptake by an already stretched consumer. This would mean less demand for consumer credit, and less disposable income to service debt. This will further supress consumer spending that in turn affects capital investment by local business, which at present is already heavily suppressed. An increase in corporate taxes (dividend withholding tax) further disincentivises credit uptake by corporates which could delay expansion of operations which further dampens the outlook for PSCE going forward.