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.
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.
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.
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.