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.
