Overall
Total credit extended to the private sector increased by N$34.4 million or 0.04% in March, bringing the cumulative credit outstanding to N$87.25 billion. This is the slowest monthly growth in credit extension since July 2011. On a year on year basis growth in PSCE of 8.5% was recorded, the second slowest rate of growth in PSCE in the last 5 years. On a rolling 12-month basis N$6.85 billion worth of credit was extended, down significantly from the highs of 2015. Over the last 12-months N$2.8 billion worth of credit was extended to corporates, N$4.1 billion to Individuals, while the non-resident private sector decreased their borrowings by N$27.7 million.
Total credit extended to the private sector increased by N$34.4 million or 0.04% in March, bringing the cumulative credit outstanding to N$87.25 billion. This is the slowest monthly growth in credit extension since July 2011. On a year on year basis growth in PSCE of 8.5% was recorded, the second slowest rate of growth in PSCE in the last 5 years. On a rolling 12-month basis N$6.85 billion worth of credit was extended, down significantly from the highs of 2015. Over the last 12-months N$2.8 billion worth of credit was extended to corporates, N$4.1 billion to Individuals, while the non-resident private sector decreased their borrowings by N$27.7 million.
Credit extension to households
Credit extension to individuals slowed markedly in March, increasing by 0.2% m/m and expanding by 8.8% y/y. On a month on month basis mortgage loans extended to individuals expanded by 0.6% versus 0.3% in the previous month, while on a y/y basis the rate of growth of mortgage loans extended to individuals continued to slow, growing at 9.0%. Overdrafts extended to individuals spiked last month, recording growth of 3.7%, compared to a contraction of 0.7% in March. Instalment credit extended to individuals continued to contract on a m/m basis, recording negative 0.7% m/m, and growing at 4.0% 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.
Credit extension to corporates
Credit extended to corporates contracted by 0.3% m/m and grew at 8.4% y/y in March, a slowdown compared to the previous month in both cases. Overdrafts extended to corporates increased by 14.9% y/y due to base effects, but contracted by 1.0% m/m. Instalment credit extended to corporates contracted by 0.6% m/m, the sixth consecutive monthly contraction, while also contracting by 0.5% y/y. Mortgage loans extended to corporates grew by 0.9% m/m and 6.8% y/y. Mortgage loans extended to corporates have recorded single digit growth figures for the last 7 months, a significant slowdown from the 20% plus growth rates seen pre-March 2016.
Banking Sector Liquidity
The overall liquidity position of commercial banks deteriorated to an average of N$1.37 billion during March, a decrease of N$738 million compared to the preceding month. The figure above illustrates the challenges faced by the banking sector. Low liquidity and high cost of funding has squeezed interest margins for banks, leading to less aggressive credit extension strategies than in the past. We would expect the established banks to be selective when extending loans to the private sector and employ less aggressive strategies to increase the size of their loan books.
Reserves and money supply
Foreign reserves decreased by N$134.3 million or 0.6% to N$22.58 billion at the end of March. According to the Bank of Namibia the decline in the level of reserves for the month under review stemmed from a decrease in net purchases of rand by commercial banks. The US dollar value of reserves has declined to below the 2013 average despite large inflows in the form of the second Eurobond as well as asset swap agreements. Thus in hard currency terms, merchandise trade imbalances continue to result in a natural flow of funds out of Namibia.
Outlook
The outlook for private sector credit extension remains muted. The recent downgrade of South Africa to junk status increased the risk of interest rate hikes just when the outlook was turning decidedly positive. While the currency has not depreciated as rapidly as might have been expected, and thus the inflation outlook in South Africa remains largely intact at present, the general search for yield and fund flows into emerging markets in all likelihood masked the effects of the downgrade to some extent and future currency depreciation is likely. 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.