Overall
Total credit extended to the private sector increased by N$937.1 million or 1.1% in February, bringing the cumulative credit outstanding to N$87.21 billion. This is a slight uptick in the annual growth rate which has increased to 9.0% from 8.5% in January. The increase was driven by increases in overdrafts and other loans. Over the last twelve months a net of N$7.23 billion worth of credit was extended, N$3.03 billion to corporates, N$4.24 billion to Individuals, while the non-resident private sector decreased their borrowings by N$43.6 million.
Credit extension to households
Credit extension to households pick up slightly in February, increasing 0.8% m/m and expanding by 9.2% y/y. The monthly increase was largely as a result of a spike in overdrafts and other loans which increased by 3.7% m/m and 4.2% m/m respectively, bringing the annual increases to 15.4% y/y and 21.8% y/y respectively. The sharp increases in these categories may be an indication of a very stretched consumer. Growth in mortgage loans on the other hand, was flat at 0.3% m/m and slowed to 9.2% y/y.
The slowdown in household credit is likely to continue as the demand for new debt remains low and low banking sector liquidity suppresses the supply of loans. Furthermore, there is an increased possibility of higher interest rates in the near future, which would deter long term borrowing. Installment credit has been the hardest hit by this squeeze as the demand for capital good such as vehicles has faded. Cumulative 12-month vehicle sales have declined by 21.3% y/y. Installment sales decreased by 0.2% m/m and grew by 5.3% y/y.
Credit extension to corporates increased by 1.5% m/m in February after increasing by 1.3% in January. On an annual basis credit extension accelerated to 9.1% y/y from 8.2% y/y in January. This was also due to strong growth in overdrafts and other loans, which grew by 4.8% m/m and 8.8% m/m respectively. Mortgage loans and installment credit growth was muted, mortgage loans grew by 0.3% m/m while installment credit declined by 1.8% m/m. This brings the annual extension figures for mortgages, overdrafts and installment credit to 7.1% y/y, 12.3% y/y and -0.2% y/y respectively. As with credit extended to individuals, the drop off in installment credit has been the most pronounced, and is now in negative territory on an annual basis. This means that, on average, corporates are repaying these loans, and is an indication that businesses are not expanding as they are not spending on equipment and vehicle fleets at the same rate as in the past.
The overall liquidity position of commercial banks improved to an average of N$2.11 billion during February. This is an increase of N$748.9 million when compared to the preceding month, which is usually a challenging month for the banking sector in terms of liquidity. Average repos decreased to N$880.8 million from N$1.29 billion in January. The continued use of the repo facility indicates that the banks are still facing challenges in terms of liquidity, although it seems to be improving.
Reserves and money supply
Foreign reserves decreased by N$231.3 million (-1.0% m/m) to N$22.71 billion at the end of February. According to the Bank of Namibia the decline in the level of reserves for the month under review emanated from the exchange rate appreciation effect.
Outlook
Despite the uptick in overdrafts, the overall trend for slower PSCE growth remains intact. Higher interest rates have dampened demand while a low liquidity environment constrains the supply of new loans. The gradual interest rate increases have reduced the discretionary disposable income of Namibian households while banks face increasingly expensive funding as a result of an increase in market rates due to excessive government borrowing. However, we see rising interest rates as the biggest obstacle facing private sector credit growth going forward.
Following the developments in South Africa, where president Zuma decided to fire his finance minister and stack his Cabinet with loyalists, we have altered our outlook to reflect the heightened risk of South Africa losing its investment grade rating. The South African president’s actions led to an immediate downgrade of the nation’s credit rating by S&P Global Ratings and we believe that either Moody’s or Fitch are likely to follow suite. Moody’s Investors Service, which rates South Africa’s debt at two levels above junk with a negative outlook, has already put the nation on review for a downgrade.
A ratings downgrade in South Africa is likely to lead to a downgrade of the Namibian credit rating as well. This would mean that both countries would have increased borrowing costs, a weaker currency and possibly higher inflation. This would likely trigger a move by the South African reserve bank to increase rates in which case Namibia would be forced to follow. Our downgrade scenario called for an immediate reaction of 50 basis points, with more to possibly follow. Higher interest rates and a weaker growth environment will put further pressure on private sector credit extension which is already waning.