Overall
Total credit extended to the private sector increased by N$206.7 million or 0.24% in October, bringing the cumulative credit outstanding figure to N$84.60 billion. Annual growth in PSCE came down slightly, to 10.2%, versus the September figure of 11.1%. Over the last twelve months a net of N$7.85 billion worth of credit was extended, N$3.32 billion to corporates, N$4.34 billion to Individuals and 190.1 million to the nonresident private sector.
Credit extension to households
Credit extension to households expanded by 0.8% m/m and 9.7% y/y in October. Installment credit to individuals has been steadily decelerating since the start of 2015, down from its peak growth of 23.5% y/y, and is currently running at 9.6% y/y. However, given the 19.5% drop in vehicle sales, this growth is still relatively high and has not seen contracted since 2009. Mortgage loans to individuals have also been slowing, but are still displaying double digit growth of 10.3% y/y. The slowdown in these sections are likely to continue as interest rate increases dampen the demand for new debt and low banking sector liquidity suppresses the supply of loans. Mortgage loans make up the largest portion of credit extended to individuals, currently accounting for 67% of credit, while installment credit makes up nearly 15% of the total figure.
Credit extension to corporates
Credit extension to corporates contracted by 0.5% m/m in October versus September’s expansion of 2.0% m/m. On a yearly basis extensions slowed to 10.4% y/y from 12.7% y/y in September. This represents a marked slowdown from the 17.5% y/y figure exhibited in October 2015. October saw overdrafts contract by 2.2% m/m and installment credit decrease by 1.1% m/m, while mortgages, the largest portion of corporate credit, remained flat on a monthly basis. On an annual basis growth was largely driven by the other claims section, which grew 26.8% y/y. Mortgage loans grew by 6.7% y/y and overdrafts were up 9.2% y/y. The split of private sector credit between corporates and individuals is still skewed towards individuals who hold 61% of the total credit extend.
The overall liquidity position of commercial banks decreased to an average of only N$1.1 billion during October 2016, reflecting a decrease of N$2.0 billion when compared to the preceding month. These low levels of liquidity are causing the banks to make use of the Bank of Namibia’s repo facility more often, average repos amounted to N$588 million over the month of October.
Reserves and money supply
Foreign reserves decreased by N$1.4 billion (-5.2% m/m) to N$25.1 billion at the end of October. The decrease emanated mainly from net government payments and net foreign currency purchases by commercial banks during the reviewed period.
Outlook
Private sector credit extension growth continues to slow as a result of lower demand and supply. Higher interest rates have dampened demand while a low liquidity environment constrains the supply of new loans. The gradual interest rate increases have reduced the discretionary disposable income of Namibian households. This, in conjunction with amendments in the credit affordably act, has undoubtedly dampened down conventional credit demand.
Since the start of the rate hiking cycle in 2014, the Bank of Namibia has increased the repo rate six times in 25 basis point increments, from 5.5% to the current 7.0%. Future increases are likely to follow moves made by the South African Reserve Bank, as has been the case over the last couple of years, guarding against capital outflows and protecting the currency peg.
The SARB, however, seem very uncertain of the direction of monetary policy as they face several unknowns in the near future. Firstly, all three ratings agencies are on a negative outlook and South Africa (narrowly) avoided a downgrade by S&P early in December. If there is no clear indication of an upswing in the growth trajectory by June, it is completely conceivable that South Africa will be downgraded to a “junk” rating. The political landscape also continues to be a headache as the ANC failed to pass a vote of no confidence in president Jacob Zuma who responded by launching a challenge to the public prosecutors State of Capture report.
Secondly, the SARB faces a storm of global uncertainties. Economic policy uncertainty has arisen following the US presidential election, as speculation is for president Donald Trump to usher in a new era of fiscal expansion. In Europe, Brexit has sparked a new wave of “-xit” possibilities, including Frexit and Italexit. Italy’s referendum on constitutional reform that took place early in December is poised to set the political and economic stage for the foreseeable future. The “no” vote dealt a blow to investor confidence as it could be significantly detrimental to Italy’s banking sector and may have serious contagion effects on the rest of the Europe.
Lastly, South Africa faces a combination of low growth and high inflation making monetary policy a tight balancing act. Given these factors our base case remains for South African interest rates to remain flat for the remainder of this and next year.
Our second scenario is built around a disorderly reaction to a ratings downgrade which may take place in the second half of 2017. Large outflows, currency depreciation and the resultant inflationary pressures will warrant a reaction from the SARB. Rate hikes of 50 basis points can be expected as an immediate reaction, possibly followed by further rate hikes as the reserve bank deems necessary.
A third scenario, fueled by a breakdown in the European Union, leads to worldwide economic weakness and monetary easing from the major central banks. Looser monetary policy leads to fund flows into EM nations including South Africa lending support to the Rand and allowing the SARB to focus on stimulating the South African economy. The SARB will likely cut by 50 basis points in late 2017 in this scenario.
Whichever outcome materializes for South Africa, the Bank of Namibia is likely to follow the SARB relatively closely. Any further increases in rates will put further pressure on the consumer which will in turn affect corporates. However, the last round of increases is still filtering its way through the system and thus we expect PSCE growth to continue to slow recovering only mid-2017.