Category Archives: Private Sector Credit Extension

Overall

Total credit extended to the private sector increased by N$113.7 million or 0.13% m/m in April, bringing the cumulative credit outstanding to N$87.36 billion. On a year on year basis, credit extended grew by 8.1%, the slowest growth recorded since mid-2010. On a rolling 12-month basis, N$6.51 billion worth of credit was extended, down significantly from the highs of 2015. This consisted of N$2.49 billion worth of credit extended to corporates and N$4.06 billion to individuals, while the non-resident private sector decreased their borrowings by N$33.7 million.

Credit extension to households

Credit extension to individuals continued to slow in April, expanding by 8.7% y/y and 0.5% m/m. Installment credit contracted by 0.5% m/m bringing the year on year growth to 2.2%. Vehicle sales, which make up a large portion of installment credit, has been in negative territory since the end of 2015 which has decreased the demand for these loans considerably. Similarly, the growth in mortgage loans has been slowing from an average of 12.3% y/y over the previous five years to the current level of 8.9% y/y.

The general slowdown in credit extended to individuals is attributable to tighter lending conditions and banking sector liquidity, as well as a deterioration in the creditworthiness of the average borrower due to an increase in debt to incomes over the last two years. Additionally, overdraft loans to individuals has picked up strongly in 2017, increased by 1.2% m/m and 12.3% y/y in April, which is an indication of the financial stress felt by the consumer.

Credit extension to corporates

Credit extended to corporates contracted by 0.4% m/m in April after contracting 0.3% m/m in March. This has slowed annual growth to 7.4% y/y, the lowest growth rate since December 2011. Instalment credit extended to corporates contracted by 0.8% m/m, the seventh consecutive monthly contraction, which brings the annual growth figure to 0.2% y/y. Mortgage loans extended to corporates also contracted by 0.4% m/m and grew by 6.1% y/y. Mortgage loans extended to corporates have recorded single digit growth figures for the last eight months, a significant slowdown from the 20% plus growth rates seen pre-March 2016. Overdrafts have increased quite strongly, growing by 1.3% m/m and 12.6% y/y.

Banking Sector Liquidity

Although still relatively low, the overall liquidity position of commercial banks improved to an average of N$1.84 billion during April, a N$467.4 million improvement from the preceding month. We expect liquidity to continue improving as the loan from the African Development Bank has relieved some of the pressure on government to fund their deficit though debt issuance. This will allow some of these funds to find its way back to the banking sector, decreasing the cost of funding and opening margins for the banks. An increase in funding would increase the supply of loanable funds and would likely be supportive of credit extension going forward.

Reserves and money supply

Foreign reserves increased by N$3.1 billion to N$25.7 billion at the end of April from N$22.6 billion in March. According to the Bank of Namibia the rise in the level of reserves emanated mainly from SACU inflows. The increase in foreign reserves is estimated to increase our import coverage ratio to 3.1x, up from the 2.7x reported in March and above the best practice of a minimum of three months import cover.

Outlook

The outlook for private sector credit extension has improved slightly. As mentioned, we expect short term money market investments to find their way to the banking sector, increasing the supply of loanable funds and drive down funding costs. Which should incentivize the commercial banks to lend more. However, the demand for credit may remain slightly muted as the economic environment has not yet improved to such an extent as to increase the demand for capital goods such as houses and vehicles. Furthermore, South Africa’s local currency debt rating is still under review by both S&P and Moody’s. A downgrade of this rating may trigger capital outflows resulting in currency depreciation and higher inflation expectations. As the South African Reserve Bank is an inflation targeting bank, an unexpected increase in inflation due to currency weakness could trigger interest rate hikes which will have to be matched by Bank of Namibia, putting pressure on credit extension.

Overall

Total credit extended to the private sector increased by N$34.4 million or 0.04% in March, bringing the cumulative credit outstanding to N$87.25 billion. This is the slowest monthly growth in credit extension since July 2011. On a year on year basis growth in PSCE of 8.5% was recorded, the second slowest rate of growth in PSCE in the last 5 years.  On a rolling 12-month basis N$6.85 billion worth of credit was extended, down significantly from the highs of 2015. Over the last 12-months N$2.8 billion worth of credit was extended to corporates, N$4.1 billion to Individuals, while the non-resident private sector decreased their borrowings by N$27.7 million.

Total credit extended to the private sector increased by N$34.4 million or 0.04% in March, bringing the cumulative credit outstanding to N$87.25 billion. This is the slowest monthly growth in credit extension since July 2011. On a year on year basis growth in PSCE of 8.5% was recorded, the second slowest rate of growth in PSCE in the last 5 years.  On a rolling 12-month basis N$6.85 billion worth of credit was extended, down significantly from the highs of 2015. Over the last 12-months N$2.8 billion worth of credit was extended to corporates, N$4.1 billion to Individuals, while the non-resident private sector decreased their borrowings by N$27.7 million.

Credit extension to households

Credit extension to individuals slowed markedly in March, increasing by 0.2% m/m and expanding by 8.8% y/y. On a month on month basis mortgage loans extended to individuals expanded by 0.6% versus 0.3% in the previous month, while on a y/y basis the rate of growth of mortgage loans extended to individuals continued to slow, growing at 9.0%. Overdrafts extended to individuals spiked last month, recording growth of 3.7%, compared to a contraction of 0.7% in March. Instalment credit extended to individuals continued to contract on a m/m basis, recording negative 0.7% m/m, and growing at 4.0% y/y. The general slowdown in credit extended to individuals is attributable to tighter lending conditions and banking sector liquidity, as well as a deterioration in the creditworthiness of the average borrower due to an increase in debt to incomes over the last two years.

Credit extension to corporates

Credit extended to corporates contracted by 0.3% m/m and grew at 8.4% y/y in March, a slowdown compared to the previous month in both cases. Overdrafts extended to corporates increased by 14.9% y/y due to base effects, but contracted by 1.0% m/m. Instalment credit extended to corporates contracted by 0.6% m/m, the sixth consecutive monthly contraction, while also contracting by 0.5% y/y. Mortgage loans extended to corporates grew by 0.9% m/m and 6.8% y/y. Mortgage loans extended to corporates have recorded single digit growth figures for the last 7 months, a significant slowdown from the 20% plus growth rates seen pre-March 2016.

Banking Sector Liquidity

The overall liquidity position of commercial banks deteriorated to an average of N$1.37 billion during March, a decrease of N$738 million compared to the preceding month. The figure above illustrates the challenges faced by the banking sector. Low liquidity and high cost of funding has squeezed interest margins for banks, leading to less aggressive credit extension strategies than in the past. We would expect the established banks to be selective when extending loans to the private sector and employ less aggressive strategies to increase the size of their loan books.

Reserves and money supply

Foreign reserves decreased by N$134.3 million or 0.6% to N$22.58 billion at the end of March. According to the Bank of Namibia the decline in the level of reserves for the month under review stemmed from a decrease in net purchases of rand by commercial banks. The US dollar value of reserves has declined to below the 2013 average despite large inflows in the form of the second Eurobond as well as asset swap agreements. Thus in hard currency terms, merchandise trade imbalances continue to result in a natural flow of funds out of Namibia.

Outlook

The outlook for private sector credit extension remains muted. The recent downgrade of South Africa to junk status increased the risk of interest rate hikes just when the outlook was turning decidedly positive. While the currency has not depreciated as rapidly as might have been expected, and thus the inflation outlook in South Africa remains largely intact at present, the general search for yield and fund flows into emerging markets in all likelihood masked the effects of the downgrade to some extent and future currency depreciation is likely. As the South African Reserve Bank is an inflation targeting bank, an unexpected increase in inflation due to currency weakness could trigger interest rate hikes which will have to be matched by Bank of Namibia, putting pressure on credit extension.

Overall

Total credit extended to the private sector increased by N$937.1 million or 1.1% in February, bringing the cumulative credit outstanding to N$87.21 billion. This is a slight uptick in the annual growth rate which has increased to 9.0% from 8.5% in January. The increase was driven by increases in overdrafts and other loans. Over the last twelve months a net of N$7.23 billion worth of credit was extended, N$3.03 billion to corporates, N$4.24 billion to Individuals, while the non-resident private sector decreased their borrowings by N$43.6 million.

Credit extension to households

Credit extension to households pick up slightly in February, increasing 0.8% m/m and expanding by 9.2% y/y. The monthly increase was largely as a result of a spike in overdrafts and other loans which increased by 3.7% m/m and 4.2% m/m respectively, bringing the annual increases to 15.4% y/y and 21.8% y/y respectively. The sharp increases in these categories may be an indication of a very stretched consumer. Growth in mortgage loans on the other hand, was flat at 0.3% m/m and slowed to 9.2% y/y.

The slowdown in household credit is likely to continue as the demand for new debt remains low and low banking sector liquidity suppresses the supply of loans. Furthermore, there is an increased possibility of higher interest rates in the near future, which would deter long term borrowing. Installment credit has been the hardest hit by this squeeze as the demand for capital good such as vehicles has faded. Cumulative 12-month vehicle sales have declined by 21.3% y/y. Installment sales decreased by 0.2% m/m and grew by 5.3% y/y.

Credit extension to corporates increased by 1.5% m/m in February after increasing by 1.3% in January. On an annual basis credit extension accelerated to 9.1% y/y from 8.2% y/y in January. This was also due to strong growth in overdrafts and other loans, which grew by 4.8% m/m and 8.8% m/m respectively. Mortgage loans and installment credit growth was muted, mortgage loans grew by 0.3% m/m while installment credit declined by 1.8% m/m. This brings the annual extension figures for mortgages, overdrafts and installment credit to 7.1% y/y, 12.3% y/y and -0.2% y/y respectively. As with credit extended to individuals, the drop off in installment credit has been the most pronounced, and is now in negative territory on an annual basis. This means that, on average, corporates are repaying these loans, and is an indication that businesses are not expanding as they are not spending on equipment and vehicle fleets at the same rate as in the past.

The overall liquidity position of commercial banks improved to an average of N$2.11 billion during February. This is an increase of N$748.9 million when compared to the preceding month, which is usually a challenging month for the banking sector in terms of liquidity. Average repos decreased to N$880.8 million from N$1.29 billion in January. The continued use of the repo facility indicates that the banks are still facing challenges in terms of liquidity, although it seems to be improving.

Reserves and money supply

Foreign reserves decreased by N$231.3 million (-1.0% m/m) to N$22.71 billion at the end of February. According to the Bank of Namibia the decline in the level of reserves for the month under review emanated from the exchange rate appreciation effect.

Outlook

Despite the uptick in overdrafts, the overall trend for slower PSCE growth remains intact. Higher interest rates have dampened demand while a low liquidity environment constrains the supply of new loans. The gradual interest rate increases have reduced the discretionary disposable income of Namibian households while banks face increasingly expensive funding as a result of an increase in market rates due to excessive government borrowing. However, we see rising interest rates as the biggest obstacle facing private sector credit growth going forward.

Following the developments in South Africa, where president Zuma decided to fire his finance minister and stack his Cabinet with loyalists, we have altered our outlook to reflect the heightened risk of South Africa losing its investment grade rating. The South African president’s actions led to an immediate downgrade of the nation’s credit rating by S&P Global Ratings and we believe that either Moody’s or Fitch are likely to follow suite. Moody’s Investors Service, which rates South Africa’s debt at two levels above junk with a negative outlook, has already put the nation on review for a downgrade.

A ratings downgrade in South Africa is likely to lead to a downgrade of the Namibian credit rating as well. This would mean that both countries would have increased borrowing costs, a weaker currency and possibly higher inflation. This would likely trigger a move by the South African reserve bank to increase rates in which case Namibia would be forced to follow. Our downgrade scenario called for an immediate reaction of 50 basis points, with more to possibly follow. Higher interest rates and a weaker growth environment will put further pressure on private sector credit extension which is already waning.