Category Archives: Private Sector 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.

Overall

Total credit extended to the private sector increased by N$471.8 million or 0.6% in January, bringing the cumulative credit outstanding figure to N$86.3 billion. Annual growth in PSCE continued to decelerate, coming down to 8.5% compared to the January figure of 8.9%. Over the last twelve months a net of N$6.7 billion worth of credit was extended, N$2.7 billion to corporates, N$4.0 billion to Individuals, while the nonresident private sector decreased their borrowings by N$33.1 million.

Credit extension to households

Credit extension to households continues to show signs of stress, having remained flat m/m and expanding only 8.8% y/y in January. The unchanged month on month figure was largely as a result of the contraction in installment credit outstanding, which decreased by 1.7% m/m or N$ 128.1 million. Other categories which exhibited low growth figures include mortgage loans which increased by 0.3% m/m or N$100.0 million, and overdrafts grew by only 0.6% or N$17.2m m/m. On an annual basis mortgage loans have grown 9.7% y/y, overdrafts by 7.3% y/y, and installment credit extension has slowed to 5.6% y/y.

The slowdown in household credit is likely to continue as higher interest rates dampen the demand for new debt and low banking sector liquidity suppresses the supply of loans. 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 22.6% y/y.

Credit extension to corporates

Credit extension to corporates increased by 1.3% m/m in January after declining by 0.6% m/m in December. On an annual basis extensions slowed to 8.2% y/y from 8.5% y/y in December. This represents quite a severe slowdown from the 14.2% y/y growth exhibited in January 2016. January saw corporate mortgage loans grow by 1.3% m/m while overdrafts increased by 4.7% m/m and installment credit decreased by 0.9% m/m. This brings the annual extension figures for mortgages, overdrafts and installment credit to 7.4% y/y, 4.2% y/y and 2.1% y/y respectively. As with credit extended to individuals, the drop off in installment credit has been the most pronounced. The split of private sector credit between corporates and individuals is still skewed towards individuals who hold 58.0% of the total credit extend.

The overall liquidity position of commercial banks dipped to an average of N$1.4 billion during January, which is usually a challenging month for the banking sector in terms of liquidity. This is a decrease of N$ 1.2 billion when compared to the preceding month. Average repos increased to N$1.1 billion from N$376.2 million in December. This indicates that the banks are still facing challenges in terms of liquidity. The use of the repo facility has indeed been more pronounced over the last 6-months than we have seen in prior years, and the last month indicates the highest use on record.

Reserves and money supply

Foreign reserves decreased by N$2.06 billion (-8.3% m/m) to N$22.9 billion at the end of January. 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. However, during the month of January, the Namibian dollar strengthened by 0.8% against the US dollar and weakened by 0.8% against the Euro.

Private sector credit extension growth continues to slow as a result of lower demand and lower supply. 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. This, in conjunction with amendments in the credit affordably act, has undoubtedly dampened down conventional credit demand for capital goods such as vehicles. The new minimum deposit requirements on mortgages should have a similar effect on housing demand.

Since the start of the rate hiking cycle in 2014, the Bank of Namibia has increased the repo rate six times in 25 basis point increments, from 5.5% to the current 7.0%. Future changes are likely to mirror moves made by the South African Reserve Bank, as has been the case over the last couple of years, guarding against capital outflows and protecting the currency peg.

Our base case scenario is for the SARB to keep interest rates unchanged in 2017. This is due to a low growth and high inflation environment: the SARB have lowered their growth expectations for 2017 in the January MPC meeting to 1.1%, while their inflation outlook has deteriorated to an average of 5.9%. This is supported by market expectations reflected in South African forward rate agreements (FRA curve) which currently indicates a larger probability of a cut than a hike in 2017.

In our second scenario, we make provision for the possibility of a downgrade in 2017. This would likely be fueled by indications of political instability, such as a cabinet reshuffle or amendments to legislation which would allow expropriation of land without compensation. This would lead to large outflows, currency depreciation and the resultant inflationary pressures will warrant a reaction from the SARB. Rate hikes of 50 basis points can be expected as an immediate reaction, possibly followed by further rate hikes as the reserve bank deems necessary.

A third scenario, a low growth environment coupled with easing inflation, allows the SARB to loosen their monetary policy. The SARB will likely cut by 25 basis points in late 2017 in this scenario, in an attempt to stimulate growth.

Whichever outcome materializes for South Africa, the Bank of Namibia is likely to follow the SARB relatively closely. Any further increases in rates will put further pressure on the consumer which will in turn affect corporates. However, the last round of increases is still filtering its way through the system and thus we expect PSCE growth to continue to slow in the short term, possibly recovering mid-2017.

Overall

Total credit extended to the private sector increased by N$173.3 million or 0.20% in December, bringing the cumulative credit outstanding figure to N$85.80 billion. Annual growth in PSCE continued to decelerate, coming down to 8.9% compared to the November figure of 9.4%. Over the last twelve months a net of N$6.97 billion worth of credit was extended, N$2.56 billion to corporates, N$4.24 billion to Individuals, while the nonresident private sector decreased their borrowings by N$28.8 million.

Credit extension to households

Credit extension to households remains relatively robust, having expanded by 1.2% m/m and 9.3% y/y in December, however the longer-term trend of slowdown remains intact. The month on month increase in credit was largely due to a 1.1% m/m increase in mortgage loans and a 3.2% m/m increase in overdrafts, amounting to loans of N$374.1 million and N$91.4 million respectively. Installment credit to individuals also increased by 0.9% m/m or N$69.8 million. On an annual basis mortgage loans have grown 9.5% y/y, overdrafts have accelerated to 11.1% y/y, and installment credit has slowed to 8.1% y/y.

The slowdown in household credit is likely to continue as interest rate increases dampen the demand for new debt and low banking sector liquidity suppresses the supply of loans. 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 21.6% y/y.

Credit extension to corporates

The slowdown in extensions is much more pronounced in the corporate space as opposed to individuals. Credit extension to corporates declined by 0.6% m/m in December. On an annual basis extensions slowed to 8.5% y/y from 9.4% y/y in November. This represents quite a severe slowdown from the 14.9% y/y growth exhibited in December 2015. December saw mortgage loans grow by 0.4% m/m while overdrafts decreased by 1.3% m/m and installment credit decreased by 0.9% m/m. This brings the annual figures for mortgage, overdrafts and installment credit to 6.3% y/y, 6.1% y/y and 0.7% y/y respectively. As with credit extended to individuals, the drop off in installment credit has been quite pronounced. The split of private sector credit between corporates and individuals is still skewed towards individuals who hold 58.3% of the total credit extend.

The overall liquidity position of commercial banks increased to an average of N$2.6 billion during December 2016, reflecting an increase of N$778.8 million when compared to the preceding month. Although liquidity increased in December, average repos increased to N$376 million over the month of December from N$326m in November, which indicates that the banks are still feeling some stress in terms of liquidity. The use of the repo facility has indeed been more pronounced over the last 6-months that we have seen in prior years.

Reserves and money supply

Foreign reserves decreased by N$850 million (-3.3% m/m) to N$25.0 billion at the end of December. 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

Private sector credit extension growth continues to slow as a result of lower demand and lower supply. 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. This, in conjunction with amendments in the credit affordably act, has undoubtedly dampened down conventional credit demand for capital goods such as vehicles. The new minimum deposit requirements on mortgages should have a similar effect on housing demand.

Since the start of the rate hiking cycle in 2014, the Bank of Namibia has increased the repo rate six times in 25 basis point increments, from 5.5% to the current 7.0%. Future increases are likely to follow moves made by the South African Reserve Bank, as has been the case over the last couple of years, guarding against capital outflows and protecting the currency peg.

The SARB, however, seem very uncertain of the direction of monetary policy as they face several unknowns. Firstly, all three ratings agencies are on a negative outlook and South Africa (narrowly) avoided a downgrade by S&P early in December. If there is no clear indication of an upswing in the growth trajectory by June, it is completely conceivable that South Africa will be downgraded to a “junk” rating. The political landscape also continues to be unsteady as the ANC succession battle starts to gain momentum.

Secondly, the SARB faces a storm of global uncertainties. Economic policy uncertainty has arisen following the US presidential election, as speculation is for president Donald Trump to usher in a new era of fiscal expansion. However, the new president has been making questionable decisions regarding foreign policy, which bring with it even more uncertainty about global growth. Policy in the UK is also very unclear, as prime Minister T(h)eresa May’s speech points to a “hard Brexit”. Furthermore, there are a few European elections coming up, in which populist and euro sceptic parties are expected to make some inroads.

Lastly, South Africa faces a combination of low growth and high inflation making monetary policy a tight balancing act. The SARB have already lowered their growth expectations for 2017 in the January MPC meeting to 1.1%, while their inflation outlook has deteriorated to an average of 5.9%. Given these factors our base case remains for South African interest rates to remain flat for the remainder of this and next year.

Our second scenario is built around a disorderly reaction to a ratings downgrade which may take place in the second half of 2017. Large outflows, currency depreciation and the resultant inflationary pressures will warrant a reaction from the SARB. Rate hikes of 50 basis points can be expected as an immediate reaction, possibly followed by further rate hikes as the reserve bank deems necessary.

A third scenario, fueled by a breakdown in the European Union, leads to worldwide economic weakness and monetary easing from the major central banks. Looser monetary policy leads to fund flows into EM nations including South Africa lending support to the Rand and allowing the SARB to focus on stimulating the South African economy. The SARB will likely cut by 50 basis points in late 2017 in this scenario.

Whichever outcome materializes for South Africa, the Bank of Namibia is likely to follow the SARB relatively closely. Any further increases in rates will put further pressure on the consumer which will in turn affect corporates. However, the last round of increases is still filtering its way through the system and thus we expect PSCE growth to continue to slow in the short term, possibly recovering mid-2017.