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.
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.
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.
