Overall
Total credit extended to the private sector increased by N$180.6 million or 0.2% m/m in June, bringing the cumulative credit outstanding to N$88.13 billion. On a year on year basis, credit extended grew by 7.96% in June, compared to 8.24% recorded in May. Growth in private sector credit extension has been slowing since 2015, on a rolling 12-month basis N$6.49 billion worth of credit was extended. N$2.51 billion worth of credit has been extended to corporates and N$4.01 billion to individuals on a 12-month cumulative basis, while the non-resident private sector has decreased their borrowings by N$36.03 million.
Credit extension to households
Growth in credit extension to individuals moderated to 8.47% y/y and 0.7% m/m, compared to 8.55% y/y growth recorded in May. Installment credit contracted by 0.6% m/m bringing year on year growth to 1.5%. New vehicle sales, which make up a large portion of installment credit, have been under pressure since mid-2015. Amendments to the Credit Agreement Act which now obligate shorter repayment periods, abolishment of balloon payment options and zero deposit financing have further added to the slowdown in vehicle sales. Growth in mortgage loans showed some improvement in June, recording growth of 0.9% m/m and 8.7% y/y. Overdraft facilities remains the fastest growing form of credit extended to individuals, growing by 15.5% y/y and 0.20% m/m. Other loans and advances recorded growth of 1.00% m/m, with an increase of 18.9% y/y.
Credit extension to corporates
Credit extended to corporates contracted by 0.2% m/m in June after ticking up 0.7% m/m in May. Annual growth fell from 8.4% y/y recorded in May to 7.5% in June. Instalment credit extended to corporates contracted by 0.1% m/m, continuing into its ninth consecutive month of contraction. Year on year installment credit extended to corporates has contracted by 3.8%. Mortgage loans extended to corporates in June remained relatively flat compared to loans extended in May, contracting by 0.4% m/m and growing only by 4.5% y/y. Mortgage loans extended to corporates have recorded single digit growth for the past nine months Overdrafts extended to corporates recorded growth of 2.0% on a m/m basis and 17.5% y/y.
Banking Sector Liquidity
The average monthly liquidity position of commercial banks has remained well over N$3 billion in June, closing at a monthly average of N$3.17 billion. A significant improvement from the N$1.83 billion seen just two months before. This position was to a large extend boosted by funding secured through the African Development Bank (AfDB), with the Ministry of Finance affirming that these funds were received in June. How the proceeds of this loan will be utilized remains to be seen. The liquidity position of the commercial banks has been ticking up following a sustained period of pressure, suggesting that commercial banks now have more loanable funds at their disposal for extension to consumers. However, banks behavior towards extending credit may take a new turn with impending IFRS 9 regulations, with preliminary analysis indicating that banks will be required to change their provisioning models from a loss incurred basis to future potential loss basis. This means that banks will be required to provide for loans extended as potentially irrecoverable, and this may have a significant bearing on bank profits and credit extension as a result.
Reserves and money supply
Foreign reserves rose by N$3.096 billion to N$28.5 billion at the end of June from N$25.4 billion in May. According to the Bank of Namibia the increase in the level of reserves emanated mainly due to an inflow of international loans received from the African Development Bank (AfDB).
Outlook
Our expectation is for private sector credit extension to remain under pressure. As the South African Reserve Bank (SARB) has cut rates for the first time in five years, all eyes are on the Bank of Namibia (BoN), poised to make its decision on policy rates next week. All signs point to BoN starting a cycle of monetary easing given that economic growth has been sluggish and inflation moderating. Easing monetary rates will be followed by banks applying symmetric cuts to lending rates, this will provide some relief to an already ailing consumer. However, a projected rate cut of only 25 basis point will do little to alleviate the current slowdown, especially in the short-term. Further rate cuts are projected towards the end of the year. However, changes to banks reporting regulation pose immediate risks as to how banks will react towards these new developments. One reaction may be that banks become more reluctant towards extending more credit into an economy currently in a recession, or it may react by making credit more expensive.