Category Archives: Private Sector Credit Extension

Private Sector Credit Extension

PSCE – July 2015

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PSCE Jul 01

Total credit extended to the private sector increased by N$1.0 billion, or 1.4%, in July 2015, taking total credit outstanding to N$74.1 billion. On an annual basis PSCE growth picked up from 14.8% in June to 15.9% in July, returning to longer term trend levels. A total of N$10.2 billion worth of credit has been approved over the last 12 months with N$4.7 billion worth of credit being approved in 2015 thus far. Of this N$10.2 billion worth of credit issued during the last 12 months, approximately N$5.6bn was taken up by businesses, while N$4.5bn was taken up by individuals.

PSCE Jul 02

Credit extension to households expanded by 1.5% on a monthly basis and 11.4% on an annual basis in July. Credit extension to households is now growing at a more constant pace than in the past and may start to slow as interest rate hikes start to 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.

Household mortgage loans expanded by 1.5% month on month and 13.4% year on year and continue to make up the majority of credit extended to households or individuals. On a year on year basis the rate at which individuals are taking up mortgage loans has been increasing from below the average rate of private sector credit extension to households to well above it. On a year on year basis mortgage loan issuance is thus driving credit extension to individuals at present.

Year on year installment credit growth dropped to 2.2% in June after posting figures of 17.9% in April and May. In July installment credit growth was once again down at 2.2% year on year reinforcing June’s reading. Thus there has been a noticeable slowdown in the uptake of installment leases by individuals which may be attributed to tighter monetary policy by the Bank of Namibia, but needs to be confirmed by future growth rates.

PSCE Jul 03

Credit extension to corporates grew by 1.4% on a month on month basis and 22.8% year-on-year In July, meaningfully higher than the growth of credit extended to households as has been the trend for the last few years. This expansion was primarily driven by huge growth in mortgage loans, up 28.4% year on year, followed by other claims instalment credit growth of 41.7%. The rapid uptake of credit by businesses can, at least partly, be attributed to the rapid expansion of the local economy thus far as well attractive prospects going forward.

Reserves and money supply

The stock of foreign reserves decreased slightly by the end of July 2015. International reserves stood at N$14.3 billion at the end of July, down from N$14.8 billion at the end of June. The decrease from June to July, although slight, was unexpected due to the position generally benefiting from SACU and tax receipts in July.

PSCE Jul 04

Outlook

The extended period of rapid credit extension seems to be slowing around the fringes. This is to be expected as individuals and businesses adjust their expectations of future interest rates due to tightening monetary policy. Total credit extended as well as credit extension growth has been buoyed by strong wealth effects as a result of prolonged and abnormally high growth within Namibia. A slowdown in credit extension to longer term sustainable levels would be a positive development considering the current economic climate. However, the decline in reserves over the past few years is cause for concern.

PSCE – June 2015

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PSCETOTALS

Private sector credit extension growth slowed to 14.8% in June, from 16.2% in the preceding month, on a year-on-year basis. On a month-on-month basis, credit extension contracted by 0.24%. This is the first time since July 2011 that we have seen a month-on-month contraction in credit extension. This contraction is likely to be driven by supply side issues, most notably the abnormally high loan-to-deposit ratio seen in the banking industry and the abnormally low liquidity levels seen in the industry at the current point in time. As such, the banking sector recovered more credit than it issued in June, resulting in the negative net issuance figure seen.

12MPSCEIssuance

While somewhat worrying, these two indicator levels were foreseeable, as N$9.4 billion (net) worth of new credit has been issued by the banking sector over the past 12 months. Of this, approximately N$4.3 billion of net issuance was seen to non-financial corporates, while N$5.0 billion was issued to households (the remainder was issued to financial corporates). Of this total issuance, approximately N$5.1 billion was issued in the form of mortgage loans, with the remainder being largely made up of installment and leasing credit, overdrafts, credit card and personal loans.

OutstandingPSCE

PSCEBreakdown

As much of the non-mortgage credit is effectively consumptive credit, and due to the fact that Namibia produces relatively few consumer goods, much of this credit flows out of the country. This is particularly true of vehicles, furniture and consumer electronics bought on credit. Due to the net-outflow of funds from the country, a negative balance of payments trend has been seen for a few years. The funding of this balance of payments deficit is effectively drawn from reserves (see the BOP identities), and as such reserves have declined, particularly in hard currency terms, over the past three years.

Reserves

However, in June, the reserve position recovered somewhat, climbing N$1.1 billion to N$14.8 billion. This was likely on account of the deadline for personal income tax payments for the tax year passed, which often results in commercial banks pulling funds back into Namibia (from the CMA) as clients make large tax transfers to Government. As these payments are made, banking sector liquidity dries up (see http://www.ijg-research.net/the-namibian-macroeconomic-environment/), while Government cash balances are boosted. Both factors were witnessed during the month as expected.

At its June MPC meeting, the Bank of Namibia also increased interests rates, part of the on-going rate normalisation being pursued by the Bank. While perhaps hard on the pockets of indebted Namibians, this was a welcomed, and certainly the correct, move from a macroeconomic perspective, as abnormally high levels of credit growth, low liquidity and reserves require that interest rates be increased in order to bring the currently misaligned Namibian economy back into alignment.

Going forward, interest normalisation is expected to continue in its current gradual manner, however current liquidity challenges in the banking sector mean that credit supply may start to dry up, and net issuance is likely to start to slow.

PSCE – May 2015

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Overall

Total credit extended to the private sector increased by N$1.0 billion, or 1.4%, in May 2015, taking total credit outstanding to N$73.0 billion. On an annual basis PSCE growth was in line with the 16.8% growth rate recorded in April. A net total of N$9.9 billion worth of credit has been extended over the last 12 months. Of this N$9.9 billion, approximately N$5.4bn was issued to businesses, while N$4.5bn was taken up by individuals.

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Credit extension to households

Credit extension to households expanded by 1.0% on a monthly basis and 11.9% on an annual basis in May, showing little reaction to the interest rate increase of February 2015. It is worth remembering that the transmission mechanism between rate hikes and PSCE contractions is relatively slow, particularly when interest rate increases are small.

Household mortgage loans expanded by 1.1% month on month and continue to make up the majority of credit extended to households. Mortgage loans to individuals make up almost 40% of total credit extended. Overdrafts expanded by 1.0% on a monthly basis, and other loans and advances increased by 0.7%.

Instalment credit makes up the second largest component of credit extended to households but is the fastest growing component with a year on year growth rate of 17.3% compared to the 11.9% growth seen in total credit extended to households. This points to a nation that is becoming more comfortable with the use of debt for private consumption. Installment credit is often used to purchase consumer goods and could be seen as a non-productive utilization of credit, and much of this is spent on imported goods.

Credit extension to corporates

Credit extension to corporates grew by 1.7% on a month on month basis and 21.4% year-on-year In May, meaningfully higher than the growth of credit extended to households once again. This expansion was, primarily driven by huge growth in mortgage loans, up 24.0% y/y, followed by other claims, 48.3% more than a year ago. The rapid uptake of credit by businesses can, at least partly, be attributed to the rapid expansion of the local economy as well as the potential growth in such yet to be unlocked.

Reserves and money supply

The stock of foreign reserves decreased at the end of May 2015. International reserves stood at N$13.7 billion at the end of May 2015, down from N$15.4 billion at the end of the preceding month. The slowed growth mainly came as a result of increased government expenditure and net capital outflows from commercial banks during May 2015.

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Outlook

Due to strong wealth effects as a result of prolonged and abnormally high growth, we believe that demand for credit will remain high, while real income growth will allow suppliers of debt to continue to lend with a fair level of confidence. Additionally, the lagged effects of increasing interest rates mean that it is unlikely that we will seen a major impact on credit demand by households for a period of 6 to 18 months after rate hikes start, provided that the magnitude of the hiking cycle is sufficient to cause an impact. However, the decline in reserves is cause for concern, as is the peculiar growth in installment credit seen through May, and these factors may result in a sooner, and more aggressive, interest rate hike than previously expected.