Overall
Total credit extended to the private sector increased by N$113.7 million or 0.13% m/m in April, bringing the cumulative credit outstanding to N$87.36 billion. On a year on year basis, credit extended grew by 8.1%, the slowest growth recorded since mid-2010. On a rolling 12-month basis, N$6.51 billion worth of credit was extended, down significantly from the highs of 2015. This consisted of N$2.49 billion worth of credit extended to corporates and N$4.06 billion to individuals, while the non-resident private sector decreased their borrowings by N$33.7 million.
Credit extension to households
Credit extension to individuals continued to slow in April, expanding by 8.7% y/y and 0.5% m/m. Installment credit contracted by 0.5% m/m bringing the year on year growth to 2.2%. Vehicle sales, which make up a large portion of installment credit, has been in negative territory since the end of 2015 which has decreased the demand for these loans considerably. Similarly, the growth in mortgage loans has been slowing from an average of 12.3% y/y over the previous five years to the current level of 8.9% y/y.
The general slowdown in credit extended to individuals is attributable to tighter lending conditions and banking sector liquidity, as well as a deterioration in the creditworthiness of the average borrower due to an increase in debt to incomes over the last two years. Additionally, overdraft loans to individuals has picked up strongly in 2017, increased by 1.2% m/m and 12.3% y/y in April, which is an indication of the financial stress felt by the consumer.
Credit extension to corporates
Credit extended to corporates contracted by 0.4% m/m in April after contracting 0.3% m/m in March. This has slowed annual growth to 7.4% y/y, the lowest growth rate since December 2011. Instalment credit extended to corporates contracted by 0.8% m/m, the seventh consecutive monthly contraction, which brings the annual growth figure to 0.2% y/y. Mortgage loans extended to corporates also contracted by 0.4% m/m and grew by 6.1% y/y. Mortgage loans extended to corporates have recorded single digit growth figures for the last eight months, a significant slowdown from the 20% plus growth rates seen pre-March 2016. Overdrafts have increased quite strongly, growing by 1.3% m/m and 12.6% y/y.
Banking Sector Liquidity
Although still relatively low, the overall liquidity position of commercial banks improved to an average of N$1.84 billion during April, a N$467.4 million improvement from the preceding month. We expect liquidity to continue improving as the loan from the African Development Bank has relieved some of the pressure on government to fund their deficit though debt issuance. This will allow some of these funds to find its way back to the banking sector, decreasing the cost of funding and opening margins for the banks. An increase in funding would increase the supply of loanable funds and would likely be supportive of credit extension going forward.
Reserves and money supply
Foreign reserves increased by N$3.1 billion to N$25.7 billion at the end of April from N$22.6 billion in March. According to the Bank of Namibia the rise in the level of reserves emanated mainly from SACU inflows. The increase in foreign reserves is estimated to increase our import coverage ratio to 3.1x, up from the 2.7x reported in March and above the best practice of a minimum of three months import cover.
Outlook
The outlook for private sector credit extension has improved slightly. As mentioned, we expect short term money market investments to find their way to the banking sector, increasing the supply of loanable funds and drive down funding costs. Which should incentivize the commercial banks to lend more. However, the demand for credit may remain slightly muted as the economic environment has not yet improved to such an extent as to increase the demand for capital goods such as houses and vehicles. Furthermore, South Africa’s local currency debt rating is still under review by both S&P and Moody’s. A downgrade of this rating may trigger capital outflows resulting in currency depreciation and higher inflation expectations. As the South African Reserve Bank is an inflation targeting bank, an unexpected increase in inflation due to currency weakness could trigger interest rate hikes which will have to be matched by Bank of Namibia, putting pressure on credit extension.