Overall
Total credit extended to the private sector increased by N$1.15 billion or 1.4% in September, bringing the cumulative credit outstanding figure to N$84.39 billion. Annual growth in PSCE ticked up slightly, to 11.1%, versus the August figure of 10.8%. Over the last twelve months a net of N$8.45 billion worth of credit was extended, N$3.98 billion to corporates and N$4.31 billion to Individuals.
Credit extension to households
Credit extension to households expanded by 0.5% m/m and 9.7% y/y in September. There has been a marked deceleration in mortgage and installment credit growth, which is down from the 16% plus y/y growth seen last year September, to 10.1% and 6.8% respectively. Monthly mortgage credit extension to households increased by 0.95%, versus the 1.11% figure seen in August, while installment credit to households contracted by 2.35% m/m. The slowdown in these sections is likely to continue as interest rate increases continue to result in a focus on servicing current debt rather than taking up new debt, and low banking liquidity slows the supply side of credit. Mortgage loans make up the largest portion of credit extended to individuals, current accounting for 67% of the total, while installment credit makes up nearly 15% of this figure.
Credit extension to corporates
Credit extension to corporates increased by 2.0% m/m in September versus August’s growth of 1.2% m/m, and was up 12.7% y/y from 11.7% y/y in August. This still represents a marked slowdown from the 18.8% y/y figure exhibited in September 2015. September saw overdrafts grow by 7.7% m/m and installment leases increase by 7.5% m/m, while mortgages, the largest portion of corporate credit, expanded by just 0.4%. On an annual basis growth was largely driven by the other claims section, which grew 38.8% y/y. Mortgage loans grew by 8.7% y/y and overdrafts were up 9.7% y/y. 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 most private sector credit (almost 60%) still sits with the individual.
The overall liquidity position of commercial banks rose to an average of N$3.1 billion during September 2016, reflecting an increase of N$219.6 million when compared to the preceding month. However, the liquidity position of the banking industry was higher on average in September the month ended at a relatively low level of N$ 1.2 billion, and has been low ever since.
Reserves and money supply
Foreign reserves increased by N$ 5.9 billion (+28.8% m/m) to N$ 26.4 billion at the end of September. The increase was due to asset swaps during the reviewed period. To our knowledge, these asset swaps are callable, and are linked to Namibia Dollar liabilities on the Bank of Namibia’s balance sheet, and as such serve little useful purpose in their ability to fund the current account deficit. They do, however, improve the ratio of reserves to imports, and to currency in circulation.
Outlook
Private sector credit extension growth has slowed considerably on a year to date basis due to increasing interest rates and a low liquidity environment. Although the increases have been gradual, and have not shocked the market, the cumulative effect of the small increases is undoubtedly reduced the discretionary disposable income of Namibian households, and likely 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.
Global monetary policy remains accommodative. The Bank of England, European Central Bank and Bank of Japan are still in full easing mode, and are becoming ever more creative in the ways of unconventional monetary policy. The US, on the other hand, appears to be on track to hike again in December, the second hike in just under ten years. The Fed’s dot plot only shows a mild rate hiking trajectory going forward.
Recently, South African reserve bank governor Lesetja Kganyago has become much more dovish. The rand has strengthened substantially and inflation expectations have moderated to within the target band. Additionally, South African growth expectations have been revised downwards again. Our base case is thus for South African interest rates to remain flat for the remainder of this and next year.
Our second scenario is built around a ratings downgrade by at least two of the ratings agencies. This immediately leads to fund flows out of South Africa leading to a violent depreciation in the Rand. Inflationary pressures driven by a spiraling currency force the hand of the SARB, which immediately hikes rates by 50 basis points followed by further hiking through the year. Should we see such a reaction to a ratings downgrade, we may see much more aggressive hiking than we currently predict.
A third scenario, fueled by the British exit from the European Union leads to worldwide economic weakness and monetary easing in the UK and Japan. 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 cuts rates on two occasions during 2017.
Should we see further rate hikes in the SA market, we will see further rate hikes from the Bank of Namibia as well. This will put further pressure on the consumer which will in turn affect corporates. Further impacting the current economic climate is the drought experienced in the central region. Water restrictions may limit business activities and deter further investment, all of which has a negative impact on credit extension. We thus expect PSCE growth to continue to slow recovering only mid-2017.