Overall
Total credit extended to the private sector increased by N$117.5 million or 0.15% in May, taking total credit outstanding to an approximate of N$81 billion. On an annual basis PSCE growth increased by 11.2% in May, down from 12.4% growth recorded over the preceding month. A total of N$8.1 billion worth of credit has been approved over the last 12 months with N$2.1 billion worth of credit being approved in 2016 thus far. Of this N$8.1 billion worth of credit issued during the last 12 months, N$3.3 billion was taken up by businesses, while N$4.7 billion was taken up by individuals.
Credit extension to households
Credit extension to households expanded by 0.5% on a monthly basis and 11.2% on an annual basis in May. Credit extension to households has seen a consistent slowdown over recent months, both on account of higher interest rates reducing credit demand, but mainly due to 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 funding challenges in the commercial banks.
During the month household mortgage loans expanded by 0.5% month on month and 11.4% year on year, down from 0.6% month on month and 12.1% year on year in the preceding month. Mortgage loans continue to make up the majority of credit extended to households. Mortgage loans remain the largest component of total loans extended to households, at 67% of the total. Thus, while not the fastest growing category of credit, the largest monthly and yearly net issuance to households was seen in this credit category.
Instalment credit, the second largest component of loans extended to individuals, grew at 12.1% year on year in May, down from 12.4% in April, and well off the long term average growth for this component of PSCE. On a month on month basis instalment credit growth remained unchanged at 0.1%. The lackluster 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.
Credit extension to corporates
Credit extension to corporates contracted by 0.4%, from a positive growth of 0.1%, on a month-on-month basis. On an annual basis, corporate credit grew by 11.0%, down from 12.9% in April. Credit extended to corporates during May was again primarily driven by strong growth in mortgage loans, up 16.6% year on year and 2.4% month on month. Instalment credit extended to corporates grew at a rate of 3.5% year on year and 0.1% on a month on month basis, while overdraft facilities grew by 5.4% year on year and contracted by 4.8% on a month on month basis. Credit extension to corporates grew at a slower rate than the growth in credit extension to private households for the first time this year. This was particularly as a result of net-repayment in overdrafts and other loans and advances by corporates.
Reserves and money supply
Foreign reserves have stabilized over the past few months, following the major outflows in the past few years. The exchange rate was out of equilibrium for Namibia for a number of years, 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. 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.
Outlook
Going forward, we expect to see interest rates top out in the next quarter, driven by recent events in Europe. Brexit, particularly, is likely to ensure that UK and ECB rates remain low or fall over the next few months, while the US is also expected to keep interest rates on hold. This will likely drive fund flow reversals out of advanced economies into EM. This will cause EM currency strength, and drive down the cost of corporate and government borrowing in EM economies. It is further expected to provide some inflation space for the SARB, who will thus be able to keep interest rate increases on hold, and possibly even allow for some interest rate easing, given the weak regional outlook.
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.