Category Archives: Private Sector Credit Extension

Overall

Total credit extended to the private sector increased by N$623.4 million or 0.71% m/m in August, bringing the cumulative credit outstanding to N$88.5 billion. On a year on year basis, credit extended to the private sector rose by 6.35% in August, compared to growth of 6.82% in July. Growth in total credit extended to the private sector continued to fall on a rolling 12-month basis as N$5.2 billion worth of credit has been extended over the last 12 months, down from N$8.1 billion in the prior 12-month period. N$2.08 billion of this cumulative issuance was issued to corporates and N$3.08 billion to individuals, while claims on non-resident private sector credit increased by N$120.50 million.

Credit extension to households

Credit extended to individuals slowed down dramatically in August, growing by only 6.38% y/y compared to 8.35% in July, while registering a contraction of 0.48% m/m. Which is also the biggest decrease in credit extension on a month-on-month basis, since a 1.57% contraction in January 2010. Installment credit contracted by 0.03% m/m and 2.0% y/y. Given that vehicle purchases are largely financed through installment credit, the subdued level of growth in vehicle sales further highlights waning consumer confidence and serves as testament to the decelerated growth in installment credit. The effects of the amendments to the Credit Agreement Act are still being felt 5 months after implementation. The value of mortgage loans extended to individuals contracted 0.9% m/m while increasing 6.5% y/y. Overdraft facilities extended to individuals slowed by 2.1% m/m and registered an increase of 13.2% y/y. Other loans and advances recorded growth of 2.6% m/m and 18% y/y.

Credit extension to corporates

Credit extension to corporates increased 2.1% m/m in August compared to the 0.4% rise registered in July. Year on year credit extension rose 6.0%, up from the 5.0% growth recorded in July. Instalment credit extended to corporates was unchanged for August. Year on year installment credit extended to corporates has contracted by 4.6%. Mortgage loans extended to corporates increased by 11.8% y/y and 4.6% m/m. Overdraft facilities extended to corporates rose 1.2% m/m and 18.2% y/y.

Banking Sector Liquidity

The average monthly liquidity position of commercial banks improved to N$3.9 billion in August after averaging above N$2.9 billion during July. The overall liquidity position has improved markedly with the last 3 months averaging an overall position of over N$3 billion. This follows government confirming the settlement of all outstanding invoices by the end of August.

Reserves and money supply

Foreign reserves contracted by N$3.05 billion to N$30.6 billion at the end of August from N$33.6 billion in July. According to the Bank of Namibia the decrease in the level of reserves emanated from net commercial purchases of foreign currency and exchange rate valuation. In addition to government payments, considering that government has likely settled all outstanding invoices through drawing down on the loan facility afforded by the African Development Bank (AfDB).

Outlook

Private sector credit extension continues its downward trend with persistent subdued growth. A bit of reprieve was expected when the South African Reserve Bank (SARB) sat for its September MPC meeting, with many anticipating a rate cut. However, to the markets surprise, this was not to be as the SARB kept rates unchanged, citing long-term risks to the inflation, which is currently within the SARB’s target band at 4.6%. The Bank of Namibia, as a result of its mandate to maintain the currency peg with the South African rand, is set to follow suit and leave rates unchanged as well. Further rate cuts were expected to ease the pressures faced by the consumer, this ever so evident in the contraction on all spheres of lending on a m/m basis for individuals.

Overall

Total credit extended to the private sector increased by N$387.7 million or 0.44% m/m in July, bringing the cumulative credit outstanding to N$87.9 billion. On a year on year basis, credit extended grew by 6.82% in July, compared to a revised 7.21% recorded in June. Growth in total private sector credit extension continues to fall in 2017, on a rolling 12-month basis N$5.6 billion worth of credit was extended. N$1.71 billion in credit has been extended to corporates and N$3.97 billion to individuals on a 12-month cumulative basis, while the non-resident private sector has decreased their borrowings by N$31.15 million.

Credit extension to households

Growth in credit extension to individuals ticked up slightly to 8.35% y/y and 0.5% m/m, compared to 8.27% y/y growth recorded in June. Installment credit rose by 0.24% m/m while year on year growth marginally rose 0.4%. The decline in new vehicle sales of 12.8% year on year is reflected in the subdued growth in installment credit, with new vehicle sales making up a large portion thereof. Furthermore, the contraction in new vehicle sales are attributable to a slowing economy and the amendments to the Credit Agreement Act. These amendments now obligate shorter repayment periods, the abolishment of balloon payment options and zero deposit financing. Growth in mortgage loans showed relative improvement in July, recording growth of 0.6% m/m and 8.7% y/y. Overdraft facilities extended to individuals slowed by 0.2% m/m but rose by 18% y/y, the highest it has been since December 2014. Other loans and advances recorded growth of 1.2% m/m and 16.5% y/y.

Credit extension to corporates

Credit extension to corporates rose 0.4% m/m in July from contracting 1.6% in June. Year on year credit extension rose 5.0%, falling from year on year growth of 5.6% in June. Installment credit extended to corporates grew 0.8% m/m, rising for the first time following nine consecutive months of contraction. Year on year installment credit extended to corporates has contracted by 4.1%. Mortgage loans extended to corporates in July showed improvement, rising 3.2% m/m and 7.0% y/y. Mortgage loans extension growth to corporates has been slowing down since the start of the year with. Growth in overdraft facilities extended to corporates contracted 2.6% on a m/m basis and rose 17.6% y/y.

Banking Sector Liquidity

The average monthly liquidity position of commercial banks closed at N$2.97 billion in July after averaging above N$3.1 billion during May and June. This would suggest that this was the start of the flow of funds received from the AfDB loan to entities owed as was assured by the Ministry of Finance. With all invoices set to have been settled by the end of August. The overall liquidity position still looks positive and bodes well for commercial banks having increased levels of loanable funds available. However, it remains to be seen exactly how commercial banks will put into effect imminent changes to IFRS9. These changes could have potentially significant bearing towards how banks, going forwards grant credit facilities, the term and effective cost thereof to be carried by the consumer.

Reserves and money supply

Foreign reserves rose by N$5.163 billion to N$33.6 billion at the end of July from N$28.5 billion in June. According to the Bank of Namibia the increase in the level of reserves emanated mainly due to the repatriation of funds by financial institutions, the African Development Bank (AfDB) loan inflow and the repayments by the National Bank of Angola.

Outlook

Private sector credit extension remains very subdued continuing to slowdown as the year progresses. The South African Reserve Bank (SARB) cut its repo rate by 25 basis points in July, this however did little to avoid an unexpected slowdown in South Africa’s private sector growth that moderated to 5.71% in July from 6.16% in June. Bank of Namibia (BoN) followed suit in effecting a rate cut of 25 basis points as well, citing the need to support an ailing economy and maintaining the currency peg between the Namibian Dollar and the SA Rand. The improvement in foreign currency reserves does bode well in achieving the its goal of maintaining the peg. Further rate cuts are expecting at MPC meeting in August and September for the SARB and BoN respectively. Should that hold to be true, we might see an increase in private credit extension, since a single reduction of 25 basis points was going to do little to spur on demand for credit. The current slowdown in private credit extension is testament to an already stressed consumer. A scenario that speaks of low consumer and business confidence. A consumer that is already overburdened and may soon face further tightening of credit qualifying criterion, should our expectations of the effects of IFRS9 come to fruition.

Overall

Total credit extended to the private sector increased by N$180.6 million or 0.2% m/m in June, bringing the cumulative credit outstanding to N$88.13 billion. On a year on year basis, credit extended grew by 7.96% in June, compared to 8.24% recorded in May. Growth in private sector credit extension has been slowing since 2015, on a rolling 12-month basis N$6.49 billion worth of credit was extended. N$2.51 billion worth of credit has been extended to corporates and N$4.01 billion to individuals on a 12-month cumulative basis, while the non-resident private sector has decreased their borrowings by N$36.03 million.

Credit extension to households

Growth in credit extension to individuals moderated to 8.47% y/y and 0.7% m/m, compared to 8.55% y/y growth recorded in May. Installment credit contracted by 0.6% m/m bringing year on year growth to 1.5%. New vehicle sales, which make up a large portion of installment credit, have been under pressure since mid-2015. Amendments to the Credit Agreement Act which now obligate shorter repayment periods, abolishment of balloon payment options and zero deposit financing have further added to the slowdown in vehicle sales. Growth in mortgage loans showed some improvement in June, recording growth of 0.9% m/m and 8.7% y/y. Overdraft facilities remains the fastest growing form of credit extended to individuals, growing by 15.5% y/y and 0.20% m/m. Other loans and advances recorded growth of 1.00% m/m, with an increase of 18.9% y/y.

Credit extension to corporates

Credit extended to corporates contracted by 0.2% m/m in June after ticking up 0.7% m/m in May. Annual growth fell from 8.4% y/y recorded in May to 7.5% in June. Instalment credit extended to corporates contracted by 0.1% m/m, continuing into its ninth consecutive month of contraction. Year on year installment credit extended to corporates has contracted by 3.8%. Mortgage loans extended to corporates in June remained relatively flat compared to loans extended in May, contracting by 0.4% m/m and growing only by 4.5% y/y. Mortgage loans extended to corporates have recorded single digit growth for the past nine months Overdrafts extended to corporates recorded growth of 2.0% on a m/m basis and 17.5% y/y.

Banking Sector Liquidity

The average monthly liquidity position of commercial banks has remained well over N$3 billion in June, closing at a monthly average of N$3.17 billion. A significant improvement from the N$1.83 billion seen just two months before. This position was to a large extend boosted by funding secured through the African Development Bank (AfDB), with the Ministry of Finance affirming that these funds were received in June. How the proceeds of this loan will be utilized remains to be seen. The liquidity position of the commercial banks has been ticking up following a sustained period of pressure, suggesting that commercial banks now have more loanable funds at their disposal for extension to consumers. However, banks behavior towards extending credit may take a new turn with impending IFRS 9 regulations, with preliminary analysis indicating that banks will be required to change their provisioning models from a loss incurred basis to future potential loss basis. This means that banks will be required to provide for loans extended as potentially irrecoverable, and this may have a significant bearing on bank profits and credit extension as a result.

Reserves and money supply

Foreign reserves rose by N$3.096 billion to N$28.5 billion at the end of June from N$25.4 billion in May. According to the Bank of Namibia the increase in the level of reserves emanated mainly due to an inflow of international loans received from the African Development Bank (AfDB).

Outlook

Our expectation is for private sector credit extension to remain under pressure. As the South African Reserve Bank (SARB) has cut rates for the first time in five years, all eyes are on the Bank of Namibia (BoN), poised to make its decision on policy rates next week. All signs point to BoN starting a cycle of monetary easing given that economic growth has been sluggish and inflation moderating. Easing monetary rates will be followed by banks applying symmetric cuts to lending rates, this will provide some relief to an already ailing consumer. However, a projected rate cut of only 25 basis point will do little to alleviate the current slowdown, especially in the short-term. Further rate cuts are projected towards the end of the year. However, changes to banks reporting regulation pose immediate risks as to how banks will react towards these new developments. One reaction may be that banks become more reluctant towards extending more credit into an economy currently in a recession, or it may react by making credit more expensive.