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.
