Category Archives: Private Sector Credit Extension

Overall

Total credit extended to the private sector increased by N$206.7 million or 0.24% in October, bringing the cumulative credit outstanding figure to N$84.60 billion. Annual growth in PSCE came down slightly, to 10.2%, versus the September figure of 11.1%. Over the last twelve months a net of N$7.85 billion worth of credit was extended, N$3.32 billion to corporates, N$4.34 billion to Individuals and 190.1 million to the nonresident private sector.

Credit extension to households

Credit extension to households expanded by 0.8% m/m and 9.7% y/y in October. Installment credit to individuals has been steadily decelerating since the start of 2015, down from its peak growth of 23.5% y/y, and is currently running at 9.6% y/y. However, given the 19.5% drop in vehicle sales, this growth is still relatively high and has not seen contracted since 2009. Mortgage loans to individuals have also been slowing, but are still displaying double digit growth of 10.3% y/y. The slowdown in these sections are likely to continue as interest rate increases dampen the demand for new debt and low banking sector liquidity suppresses the supply of loans. Mortgage loans make up the largest portion of credit extended to individuals, currently accounting for 67% of credit, while installment credit makes up nearly 15% of the total figure.

Credit extension to corporates

Credit extension to corporates contracted by 0.5% m/m in October versus September’s expansion of 2.0% m/m. On a yearly basis extensions slowed to 10.4% y/y from 12.7% y/y in September. This represents a marked slowdown from the 17.5% y/y figure exhibited in October 2015. October saw overdrafts contract by 2.2% m/m and installment credit decrease by 1.1% m/m, while mortgages, the largest portion of corporate credit, remained flat on a monthly basis. On an annual basis growth was largely driven by the other claims section, which grew 26.8% y/y. Mortgage loans grew by 6.7% y/y and overdrafts were up 9.2% y/y. The split of private sector credit between corporates and individuals is still skewed towards individuals who hold 61% of the total credit extend.

The overall liquidity position of commercial banks decreased to an average of only N$1.1 billion during October 2016, reflecting a decrease of N$2.0 billion when compared to the preceding month. These low levels of liquidity are causing the banks to make use of the Bank of Namibia’s repo facility more often, average repos amounted to N$588 million over the month of October.

Reserves and money supply

Foreign reserves decreased by N$1.4 billion (-5.2% m/m) to N$25.1 billion at the end of October. The decrease emanated mainly from net government payments and net foreign currency purchases by commercial banks during the reviewed period.

Outlook

Private sector credit extension growth continues to slow as a result of lower demand and 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.

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 in the near future. 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 a headache as the ANC failed to pass a vote of no confidence in president Jacob Zuma who responded by launching a challenge to the public prosecutors State of Capture report.

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. In Europe, Brexit has sparked a new wave of “-xit” possibilities, including Frexit and Italexit. Italy’s referendum on constitutional reform that took place early in December is poised to set the political and economic stage for the foreseeable future. The “no” vote dealt a blow to investor confidence as it could be significantly detrimental to Italy’s banking sector and may have serious contagion effects on the rest of the Europe.

Lastly, South Africa faces a combination of low growth and high inflation making monetary policy a tight balancing act. 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 recovering only mid-2017.

Overall

Total credit extended to the private sector increased by N$1.15 billion or 1.4% in September, bringing the cumulative credit outstanding figure to N$84.39 billion. Annual growth in PSCE ticked up slightly, to 11.1%, versus the August figure of 10.8%.  Over the last twelve months a net of N$8.45 billion worth of credit was extended, N$3.98 billion to corporates and N$4.31 billion to Individuals.

Credit extension to households

Credit extension to households expanded by 0.5% m/m and 9.7% y/y in September. There has been a marked deceleration in mortgage and installment credit growth, which is down from the 16% plus y/y growth seen last year September, to 10.1% and 6.8% respectively. Monthly mortgage credit extension to households increased by 0.95%, versus the 1.11% figure seen in August, while installment credit to households contracted by 2.35% m/m. The slowdown in these sections is likely to continue as interest rate increases continue to result in a focus on servicing current debt rather than taking up new debt, and low banking liquidity slows the supply side of credit. Mortgage loans make up the largest portion of credit extended to individuals, current accounting for 67% of the total, while installment credit makes up nearly 15% of this figure.

Credit extension to corporates

Credit extension to corporates increased by 2.0% m/m in September versus August’s growth of 1.2% m/m, and was up 12.7% y/y from 11.7% y/y in August. This still represents a marked slowdown from the 18.8% y/y figure exhibited in September 2015. September saw overdrafts grow by 7.7% m/m and installment leases increase by 7.5% m/m, while mortgages, the largest portion of corporate credit, expanded by just 0.4%. On an annual basis growth was largely driven by the other claims section, which grew 38.8% y/y. Mortgage loans grew by 8.7% y/y and overdrafts were up 9.7% y/y. Although corporate credit has been growing at a far quicker rate than credit extended to individuals, the relatively low base from which this growth stems means that most private sector credit (almost 60%) still sits with the individual.

The overall liquidity position of commercial banks rose to an average of N$3.1 billion during September 2016, reflecting an increase of N$219.6 million when compared to the preceding month. However, the liquidity position of the banking industry was higher on average in September the month ended at a relatively low level of N$ 1.2 billion, and has been low ever since.

Reserves and money supply

Foreign reserves increased by N$ 5.9 billion (+28.8% m/m) to N$ 26.4 billion at the end of September. The increase was due to asset swaps during the reviewed period. To our knowledge, these asset swaps are callable, and are linked to Namibia Dollar liabilities on the Bank of Namibia’s balance sheet, and as such serve little useful purpose in their ability to fund the current account deficit. They do, however, improve the ratio of reserves to imports, and to currency in circulation.

Outlook

Private sector credit extension growth has slowed considerably on a year to date basis due to increasing interest rates and a low liquidity environment. Although the increases have been gradual, and have not shocked the market, the cumulative effect of the small increases is undoubtedly reduced the discretionary disposable income of Namibian households, and likely dampened down conventional credit 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.

Global monetary policy remains accommodative. The Bank of England, European Central Bank and Bank of Japan are still in full easing mode, and are becoming ever more creative in the ways of unconventional monetary policy. The US, on the other hand, appears to be on track to hike again in December, the second hike in just under ten years. The Fed’s dot plot only shows a mild rate hiking trajectory going forward.

Recently, South African reserve bank governor Lesetja Kganyago has become much more dovish. The rand has strengthened substantially and inflation expectations have moderated to within the target band. Additionally, South African growth expectations have been revised downwards again. Our base case is thus for South African interest rates to remain flat for the remainder of this and next year.

Our second scenario is built around a ratings downgrade by at least two of the ratings agencies. This immediately leads to fund flows out of South Africa leading to a violent depreciation in the Rand. Inflationary pressures driven by a spiraling currency force the hand of the SARB, which immediately hikes rates by 50 basis points followed by further hiking through the year. Should we see such a reaction to a ratings downgrade, we may see much more aggressive hiking than we currently predict.

A third scenario, fueled by the British exit from the European Union leads to worldwide economic weakness and monetary easing in the UK and Japan. 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 cuts rates on two occasions during 2017.

Should we see further rate hikes in the SA market, we will see further rate hikes from the Bank of Namibia as well. This will put further pressure on the consumer which will in turn affect corporates. Further impacting the current economic climate is the drought experienced in the central region. Water restrictions may limit business activities and deter further investment, all of which has a negative impact on credit extension. We thus expect PSCE growth to continue to slow recovering only mid-2017.

Overall

Total credit extended to the private sector increased by N$949.4 million or 1.2% in August, taking total credit outstanding to N$83.2 billion. On an annual basis, PSCE growth slowed down further, increasing by 10.8% in August compared to 11.1% in July. A total of N$8.1 billion worth of credit has been approved over the last 12 months with N$4.4 billion worth of credit being approved in 2016 thus far. Of this N$8.1 billion worth of credit issued during the last 12 months, approximately N$3.6 billion was taken up by businesses, while N$4.5 billion was taken up by individuals.

Credit extension to households

Credit extension to households expanded by 1.4% on a monthly basis and 10.4% on an annual basis in August. Credit extension to households has continued to slow as interest rate hikes change consumer trends. It is worth remembering however that the transmission mechanism between rate hikes and PSCE contractions is relatively slow, particularly when interest rate increases are small.

During the month household mortgage loans expanded by 1.1% month on month and 10.6% year on year, up from 0.6% month on month and slightly up from 10.4% year on year and continue to make up the majority of credit extended to households. Of the N$48.3 billion credit extended to individuals, 67% is mortgage loans.

Instalment credit, the second largest component of loans extended to individuals (15%), grew at 12.3% year on year in August, up from 11.6% in July, however well off the long term average growth for this component of PSCE. On a month on month basis instalment credit grew by 2.4%, down from 1.3% in July. The uptick of instalment credit growth on a yearly basis can be attributed to more credit extension by credit providers due to improved liquidity conditions. The overall liquidity position of commercial banks rose to an average of N$2.9 billion during August 2016, reflecting a month on month increase of N$763.8 million when compared to the preceding month.

Credit extension to corporates

Credit extension to corporates registered a lower but positive growth of 11.7% from 12.8% on a year-on-year basis. On a monthly basis, credit extensions to corporates increased by 1.2% month-on-month in August, down from 1.3% in July. Credit extended to corporates during August was primarily driven by growth in overdrafts, up 0.7% month on month, however on an annual basis, mortgage loans makes up the largest part of credit extended to corporates and grew at 10.0% year on year. Instalment credit extended to corporates grew at a rate of 3.5% year on year and rose 0.5% on a month on month basis, while other loans and advances grew by 11.1% year on year and 0.6% on a month on month basis. Although corporate credit has been growing at a far quicker rate than credit extended to individuals, the relatively low base from which this growth stems means that the majority of private sector credit still sits with the individual.

Reserves and money supply

Foreign reserves fell 10.1% to N$20.5 billion at the end of August 2016. The decline emanated from net Government payments and net commercial banks’ Rand purchases during the reviewed period.

Outlook

Private sector credit extension has slowed considerably on a year to date basis as a result of the current interest rate hiking cycle. Interest rates in South Africa and Namibia have been at or near historically low levels since the global financial crisis. Rates bottomed out in 2012 with the Namibia repo rate dropping to 5.5% during the year. Since then, the Bank of Namibia has administered six rate hikes of 25 basis points each. Thus, following a sustained period of expansive monetary policy, the tightening cycle has now come into full effect. The recent hikes in Namibia, however, have been driven by the South African Reserve Bank’s position, rather than by domestic forces. Following extensive rand weakness through 2015, driving expectations of an inflation blowout, the South African Reserve Bank started hiking rates aggressively in early 2016. The Bank of Namibia was required to follow these hikes in order to ensure that the reserve position of the country remained tenable, and that capital outflows did not occur.

Going forward, it appears that we are approaching the top of the interest rate cycle, as a weak regional growth outlook and improving rand and inflation outlooks -largely due to the Brexit vote and resultant lower-for-longer interest rate positions of the UK, US and Eurozone- mean more monetary space exists for interest rate easing.

Our base case scenario sees interest rates remain flat for the remainder of 2016, as fund flows into South Africa support the Rand, alleviating some of the inflationary pressures, while weak economic growth keeps the SARB on hold. The threat of a ratings downgrade in December is likely prevent the Reserve Bank from cutting rates in 2016 in order to stimulate growth.

Our second scenario is built around a ratings downgrade by at least two of the ratings agencies. This immediately leads to fund flows out of South Africa leading to a violent depreciation in the Rand. Inflationary pressures driven by a spiraling currency force the hand of the SARB, which immediately hikes rates by 50 basis points followed by further hiking through the year. Should we see such a reaction to a ratings downgrade, we may see much more aggressive hiking than we currently predict.

A third scenario, fueled by the British exit from the European Union leads to worldwide economic weakness and monetary easing in the UK and Japan. 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 cuts rates on two occasions during 2017.

Should we see further rate hikes in the SA market, we will see further rate hikes from the Bank of Namibia as well. This will put further pressure on the consumer which will in turn affect corporates. Further impacting the current economic climate is the drought experienced in the central region. Water restrictions may limit business activities and deter further investment, all of which has a negative impact on credit extension. We thus expect PSCE to continue to slow down, possibly topping out in the not too distant future.