Overall
Total credit extended to the private sector increased by N$667.4 million or 0.8% in July, taking total credit outstanding to N$82.3 billion. On an annual basis, PSCE growth slowed down, increasing by 11.1% in July compared to 11.7% in June. A total of N$8.2 billion worth of credit has been approved over the last 12 months with N$3.5 billion worth of credit being approved in 2016 thus far. Of this N$8.2 billion worth of credit issued during the last 12 months, approximately N$3.9 billion was taken up by businesses, while N$4.2 billion was taken up by individuals.
Credit extension to households
Credit extension to households expanded by 0.5% on a monthly basis and 9.7% on an annual basis in July. 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 0.6% month on month and 10.4% year on year, down from 0.7% month on month and up from 11.5% year on year and continue to make up the majority of credit extended to households. Of the N$47.6 billion credit extended to individuals, 67% is mortgage loans.
Instalment credit, the second largest component of loans extended to individuals (15%), grew at 11.6% year on year in July, down from 12.0% in June and well off the long term average growth for this component of PSCE. On a month on month basis instalment credit grew by 1.3%, down from 0.9% in June. The lackluster instalment credit growth on a yearly basis can be attributed to tighter monetary policy as well as a slowdown in credit extension by credit providers due to less than ideal liquidity conditions. The overall liquidity position of the banking industry declined further at the end of July 2016. The overall liquidity position of commercial banks declined by 41.3% to an average of N$2.1 billion during July 2016 when compared to the preceding month.
Credit extension to corporates
Credit extension to corporates registered a lower but positive growth of 12.8% from 12.9% on a year-on-year basis. On a monthly basis, credit extensions to corporates increased by 1.3% month-on-month in July, up from 0.9% in June. Credit extended to corporates during July was again primarily driven by exceptional growth in mortgage loans, up 13.4% year on year and 0.7% month on month. Instalment credit extended to corporates grew at a rate of 4.5% year on year and rose 1.1% on a month on month basis, while overdraft facilities grew by 3.1% year on year and declined 3.7% 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.
Foreign Reserves
Foreign reserves rose 8.5% to N$22.8 billion at the end of July 2016. The higher growth stemmed from SACU inflows of N$3.5 billion received during July 2016, coupled with interest received on investments.
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.
