Macroeconomic Backdrop
By Rowland Brown
Following the release of the IJG Economic Outlook in January 2014, we have revised our macro projections, including inflation, private sector credit extension, GDP growth and interest rate forecasts. As always, these forecasts are based on our various models, tempered by the views of the research team with regards to known and expected factors not generally accommodated for within the models.
National Accounts – Growth:
Our growth forecast revisions come after the release of rebased national accounts (base 2010 from base 2004), which rebasing naturally results in marginally higher growth figures for most categories in the National Accounts. Moreover, since the release of our previous projections, we have witnessed a number of changes within the local economy that have a material impact on growth, as detailed below.
First and foremost, the Government announced a major expansion in the National Budget, increasing planned expenditure for the 2014/15 financial year by 26 percent when compared to the 2013/14 financial year, and up nearly 25 percent when compared to the previous estimated figure announced for the 2014/15 financial year. Much of this expenditure increase is on account of increases in salaries and wages. A low marginal propensity to save in Namibia suggests that much of this increase will thus flow into the pockets of local retailers, or be leveraged upon for the purchase of property, vehicles and other consumer goods. Thus, from a growth perspective, we expect to see a strong expansion in both wholesale and retail trade, as well as public administration – both large weightings in the national accounts.
Secondly, the Bank of Namibia maintained interest rates at historically low levels for the first half of 2014 as expected (then hiking rates by 25 points in June), however, unprecedented increases in private sector credit extension (in absolute terms) witnessed over the period were above expectations. A large component of this credit extension covers mortgage loans, while around 15 percent represents instalment credit increases. This should further contribute to wholesale and retail trade growth.
Thirdly, the country’s external position has continued to weaken on account of unprecedented fiscal and monetary stimulus, a boom in construction and weakening export earnings on account of falling commodity prices for minerals. First quarter figures show the largest current account deficit (in absolute terms) in the history of the country following the receipt of vast levels of imports, largely for the construction of the Husab, Otjikoto and Tschudi mines. This current account weakness was not offset by a positive balance in the capital and financial account, and as such the overall balance of payments, and thus the change in reserves, was negative, with a net outflow of approximately N$1.06 billion. Preliminary data for the 3rd quarter shows a further worsening of the external position, as revised April trade figures showed the largest ever level of imports for the country, at N$11.8 billion, and the lowest level of import to reserve coverage since 2007, at 1.5 months, half of the benchmark level.
Source: IJG Research
Source: IJG Research
Fourth, a major rebound in agriculture is expected in the National Accounts, on account of base effects. Following a drought in Namibia in 2013, a major sell-off of the national herd was witnessed, and the livestock farming category of the national accounts contracted by a whopping 39.2 percent. In 2014, we have seen the start of the rebuilding of the national herd, and as a result, some of the lowest cattle marketed numbers in over a decade. However, this growth in the national herd should be recorded as a positive in the national accounts, and as such we are expecting a rebound in growth, to 28 percent in real terms. These lower sales figures are expected to impact on meat processing and manufacturing, which is expected to contract by as much as 15 percent in 2014.
Source: IJG Research
Source: IJG Research
Fifth, we have revised up our construction figures for 2014, despite the vast base set by the 35.2 percent growth seen in 2013. This expansion is based on the construction figures that we have seen coming through from the various municipalities to date in 2014, as well as the on-going construction of the three new mines, the major increase in the national budget, and the abnormally large import figures seen for the year to date. As such, we are now looking at growth of 27.3 percent in 2014, after which we believe growth will slow. In late 2016 and 2017 we expect to experience a contraction in construction, as mine construction for two of the three new mines come to completion.
Finally, we have revised down our uranium production expectations on the back of Rossing Uranium radically reducing production in 2014 and 2015, as the uranium spot price fell to U$28/lb, a half decade low. On account of the change in production profile for Rossing, we are looking at a 26.2 percent contraction in the category, which has a notable effect on overall mining production and thus real growth.
On account of these changes, our growth projections for 2014 have seen a major upward revision, from 5.2 percent in January, to 6.9 percent. For 2015, we are looking at growth of 4.5 percent, largely on account of base effects and a slowing of growth in the categories of wholesale and retail trade and construction, as the high base of 2014 dampens new growth levels.
Source: IJG Research
Inflation:
Source: IJG Research
Inflation for 2014 has broadly surprised to the upside, driven by increasing food and fuel prices in Namibia Dollar terms, both on the back of a weakening/weaker currency and global US dollar prices for these commodities. Moreover, the strong growth seen and expected in the country appears to be instigating some demand-side inflation. This is particularly apparent where administered and housing prices are concerned. Large increases in the cost of utilities, school fees, rental prices and transport prices have been seen and/or are expected going forwards.
Additionally, cost push factors are expected to have a further negative effect on inflation, particularly should the Namibia Dollar/Rand remain weak or weaken versus major currencies. Local meat prices are expected to continue rising on account of lower livestock sales volumes at the beginning of the year. This is a result of abnormally high sales volumes in 2013, which were a result of the drought last year. Additionally, we are expecting to see an up-tick in bread and cereal inflation, on account of a rise in global food prices in Namibian Dollar terms. Ukraine, the world’s sixth-largest wheat exporter, is a strong contributor to rising wheat prices due to uncertainty about future production in the country as a result of the on-going political turmoil. Finally, we expect to see a pickup in transport inflation driven mainly by the rise in the cost of operating personal vehicles. This rise is largely attributed to fuel prices increasing around the world, with forecasts predicting that they will continue rising.
Interest Rates
Source: IJG Research
In our January Outlook, we called interest rate hikes in the third quarter of 2014, and like most analysts were taken by surprise when the SARB hiked rates in January. The Bank of Namibia then further surprised us by failing to follow the SARB hike in February, deciding only to hike in June. Nevertheless, as the interest rate differential between Namibia and South Africa has now been closed, we expect to see Namibia and South Africa to continue to hike rates in unison.
We maintain, however, that given the strong positive state of the Namibian economy, the growth in private sector credit extension, and the weakening external position, that higher rates are warranted in Namibia than in South Africa, but recognise the Bank of Namibia’s concern with regards to rapidly increasing interest rates on account of high household debt.
Private Sector Credit Extension
Source: IJG Research
Despite increasing interest rates in Namibia and South Africa, we continue to forecast strong growth in demand for private sector credit extension for the next 18 months. This is partly due to the relatively slow transmission of monetary policy changes to the market, but also due to the relatively large increases in domestic disposable income (wealth effects) on the back of strong domestic growth. On the back of these wealth effects of growth, we expect to see a fair amount of household leverage, for the purpose of property and vehicle up-grading, particularly. Additionally, increasing property prices due to undersupply in the domestic market, and increasing vehicle and consumer electronics prices on the back of a weakened and weakening Namibia Dollar, are further expected to increase credit demand by households.
Following a spike in credit demand by corporates in mid-2014, we expect to see a slowing of growth to around 10 percent by end 2015, from current levels of over 16 percent. This is largely on account of our broad expectation of lower growth in 2015 than 2014, as an unprecedented construction boom starts to slow. The multipliers of this boom and subsequent slowing, are thought to have driven major increases in demand for credit by corporates over the past 18 months, however this demand should dampen with construction growth going forward.
As such, we are forecasting growth in total private sector credit extension of N$15.8 billion over the next 18 months, broken down into N$11.0 billion to households, and N$4.8 billion to corporates.