Overall
Total credit extended to the private sector expanded N$945.7 million or 1.17% in June, taking total credit outstanding to N$81.9 billion. On an annual basis, PSCE grew by 12.1% in June, a significant increase from 11.2% growth recorded over the preceding month. A total of N$8.9 billion worth of credit has been approved over the last 12 months with N$3.1 billion worth of credit being approved in 2016 thus far. Of this N$8.9 billion worth of credit issued during the last 12 months, N$3.8 billion was taken up by businesses, while an approximate of N$5 billion was taken up by individuals.
Credit extension to households
Credit extension to households expanded by 1.5% on a monthly basis and 11.7% on an annual basis in June. Credit extension to households has seen a consistent slowdown over recent months, both on account of higher interest rates reducing credit demand, and more cautious lending practices being undertaken by commercial banks. It is worth remembering that the transmission mechanism between rate hikes and PSCE demand is relatively slow, particularly when interest rate increases are small. Going forward, we expect to see interest rates starting to top out, partially due to expected rand strength and partially due to a weakening regional outlook. However, we expect credit supply to remain constrained going forward due to relatively tight fund positions in the commercial banks.
During the month, household mortgage loans expanded by 1.0%, while year on year growth was 11.4%. This compared to an increase of 0.5% month on month and unchanged at 11.4% year on year during the preceding month. Mortgage loans remain the largest component of total loans extended to households, representing 67% thereof. Thus, while not the fastest growing category of credit, the largest yearly net issuance to households was seen in this credit category.
Instalment credit, the second largest component of loans extended to individuals, grew at 12.0% year on year in June, down from 12.1% in May, and well off the long term average growth for this component of PSCE. On a month on month basis instalment credit grew by 0.9%. The lacklustre instalment credit growth can be attributed to tighter monetary policy, as well as a slowdown in credit extension by credit providers due to less than ideal liquidity conditions.
The category of credit extension to households that saw the largest month on month growth, as well as net issuance, was overdrafts. A total of N$309 million net issuance was seen in this category, up 11.3% month on month – the highest monthly growth rate since 2008. This is likely to be linked to tax season, as many individuals with non-PAYE income are likely to be required to make payments to the Government around this time. This speaks volumes to the financial position of many Namibian households, and the cash-flow positions of some small businesses.
Credit extension to corporates
Credit extension to corporates grew 0.7%, from a contraction 0.4%, on a month-on-month basis. On an annual basis, corporate credit grew by 12.7%, a significant increase from 11.0% recorded in May. Credit extended to corporates during June was again primarily driven by strong growth in mortgage loans, up 15.5% year on year, however month on month this category saw no new net issuance in June. Instalment credit extended to corporates grew at a rate of 3.7% year on year and 1.4% on a month on month basis, while overdraft facilities grew by 5.1% year on year and 2.9% on a month on month basis.
Reserves and money supply
Foreign reserves declined significantly in June, down 15% over the preceding month. The increase in net government payments and the demand for foreign currency by commercial banks were identified to be the main causations for the decrease. Between 2013 and late 2015, the exchange rate was out of equilibrium for Namibia, with demand for Namibia Dollars by internal and external parties well below demand for foreign currency by Namibians. As a result, the balance of payments was negative through most of 2013, 2014 and 2015, before Government issued a second Eurobond in October 2015. However, with the ZAR weakness through 2015 the currency has moved closer to an equilibrium level for Namibia, although this may now be starting to reverse once again. This, coupled with the general economic slowdown in the country which is driving reduced demand for imports, has helped to stabilize the balance of payments, and thus, reserves. This month’s decline is thus expected to be a move away from trend, although confirmation of this expectation will require time. Should we see sustained ZAR strength going forward, the reserve position of the country, as measured in NAD or ZAR, will likely deteriorate.
Outlook
Recent events in developed markets have materialized into an inflow of funds into larger emerging market economies. This is largely driven by increased uncertainty in advanced economies, particularly the UK and Euro-area, on the back of the successful Brexit vote, and the resultant expectation of a lower-for-longer interest rate position in these economies as a result. In particular, South Africa has seen all-time record fund inflows into bonds, and major ZAR strengthening as a result.
The aforementioned factors suggest that we could see inflationary levels in both South Africa and Namibia slowing down in the coming months, easing the pressure off consumers. As a result, the SARB may well put rate hikes on hold going forward, as the inflation outlook improves. This should result in improved borrowing costs for households, corporates and government. This process will take a few months, however, and we are likely to see PSCE growth remain weak over the next quarter, possibly picking up again towards year end.