Overall
Total credit extended to the private sector increased by N$1.486 billion, or 1.9%, in November 2015, taking total credit outstanding to N$78.2 billion. On an annual basis PSCE growth slowed slightly from 14.9% in October to 14.5% in November. A total of N$10 billion worth of credit has been approved over the last 12 months with N$8.8 billion worth of credit being approved in 2015 thus far. Of this N$10 billion worth of credit issued during the last 12 months, approximately N$5.2 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 1.4% on a monthly basis and 12.9% on an annual basis in November. Credit extension to households has continued to slow as interest rate hikes change consumer trends. It is worth remembering however that the transmission mechanism between rate hikes and PSCE contractions is relatively slow, particularly when interest rate increases are small. We do expect to see further rate hikes going forward and this should lead to a continuation of the slowdown of credit extension to households. On a month on month basis Namibia has experienced two contractions in credit extended to households this year.
Household mortgage loans expanded by 1.5% month on month and 13.0% year on year and continue to make up the majority of credit extended to households or individuals. On a year on year basis the rate at which individuals are taking up mortgage loans has been increasing from below the average rate of private sector credit extension to households to well above it. On a year on year basis mortgage loan issuance is thus driving credit extension to individuals.
Instalment credit, the second largest component of loans extended to individuals, grew at 14.4% year on year in November, down from 14.7% in October, well off the long term average growth for this component. On a month on month basis instalment credit grew by 1.4%. 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. The liquidity issues currently faced by the country are highlighted in these articles: Namibian Economy to Slow and Banking sector liquidity crisis exacerbated by Kwanza agreement.
Credit extension to corporates
Credit extension to corporates grew by 2.6% on a month on month basis and 16.7% year-on-year in November, once again meaningfully higher than credit extended to households. This expansion was again primarily driven by exceptional growth in mortgage loans, up 25.9% year on year and 1.0% month on month. Instalment credit extended to corporates grew at a rate of 15.5% year on year and 1.1% month on month, while overdraft facilities grew by 9.0% year on year and 6.3% on a month on month basis. Although corporate credit has been growing at a far quicker rate than credit extended to individuals, the relatively low base from which this growth stems means that the majority of private sector credit still sits with the individual.
Foreign Reserves
The stock of foreign reserves increased significantly by the end of October due to the inclusion of the proceeds of the successfully issued second Eurobond. Foreign reserves increased further during November, with the increase that primarily came as a result of Rand purchases by commercial banks for the payment of imported goods and services and investment purposes and pension fund swaps that occurred during the month. International reserves stood at N$24.8 billion at the end of November, up from N$22.7 billion at the end of October. The Eurobond proceeds are a major boost to the reserve position of the country which has been declining in real terms. A concern is that the hard currency raised via the Eurobond will be converted into Namibia Dollars in order to fund Government. The first Eurobond has become relatively more expensive than debt raised locally due to the depreciation of the Rand versus the dollar. There is a risk that history will repeat itself if the money raised via the second Eurobond is converted to Namibia Dollars and used to fund consumptive spending in Government.
Outlook
Private sector credit extension continues to grow at a rapid rate, adding approximately N$1 billion to the total outstanding private sector credit each month. While the rate of growth has been slowing slightly in recent months, the base off of which it is calculated has grown significantly. A slowdown in the growth rate of credit extended to individuals since 2014 has been compensated for by the rapid growth of credit extended to corporates. The current rate hiking cycle is likely to put further pressure on credit extended to individuals in the coming months. Should we see a slowdown in the rate of mortgage loans extended to individuals we could experience contractions in the overall credit extended to individuals. The outlook for credit extended to corporates continues to look good although further rate hikes in 2016 as well as looming drought conditions may put pressure on this measure.
Current banking sector liquidity conditions should put further pressure on credit extension growth as funding becomes more expensive. While not ideal, negatives to the slowdown in credit extension, especially to individuals, may be outweighed by longer term positives. A slowdown in credit extension growth should lead to a reduction in the amount of money flowing out of the country for consumptive purposes, boosting the international reserve position of Namibia. Higher interest rates should also lead to an increase in saving by individuals which is at low levels at present. A slowdown in credit extension to more natural rates (GDP growth) should be positive for the economy and prevent it from overheating.