PSCE surprisingly picks up despite tight monetary policy

by Edgar Brandt

PSCE surprisingly picks up despite tight monetary policy

Windhoek

The latest Bank of Namibia (BoN) monthly statistics indicate a surprising increase in private sector credit extension (PSCE)

to 13 percent year-on-year (y-o-y). While this figure compares closely to the 12.6 percent y-o-y recorded in February 2016, it is nevertheless slower than the 15.9 percent growth registered at the same time in 2015.



Commenting on these latest numbers, Simonis Storm Securities (SSS) economist, Frans Uusiku, noted in his March 2016  Credit Report that PSCE continues to decelerate on a monthly basis, coming in at N$79.9 billion during March 2016, or accounting for a 0.4 percent growth.

Uusiku stated that overall, annual growth in PSCE can be attributed to growth in other loans and advances that grew by 18.6 percent and 10 percent for borrowings done through overdraft facilities. He pointed out that other categories (mortgage loans and instalment credit) continue to shrink on an annual basis, while observing that continued slow growth in loans and advances (1.0 percent m-o-m) as well as in instalment credit (0.1 percent m-o-m) compared to the monthly growth of 2.5 percent and 0.3 percent in the preceding month, respectively.

The most recent BoN monthly statistics shows that total Namibian debt (comprising of domestic and foreign government, corporate and household debt) grew by a slower pace of 14.6 percent y-o-y to N$121.4 billion during March 2016, compared to the debt level of N$106 billion in the previous year. Monthly, however, total debt grew significantly by 2 percent, compared to a 0.4 percent growth recorded in the prior month. The significant rise in monthly growth is mainly attributed to a 5.2 percent growth in government debt during March compared to 0.1 percent in February.

“We believe that the overall slowdown in PSCE is indicative of the pass-through effects of a continued tightening of the monetary policy cycle by the BoN, with two interest rate hikes of 25bps each already executed since January this year. Admittedly vehicles sales, which are a good indicator of how individuals spend their credit through instalment facilities, have picked up by 13 percent to 1 525 units in March, but are still lower than the y-o-y figure of 2 150 units recorded in 2015,” said Uusiku.

The latest figures from the National Association of Automobile Manufacturers of South Africa (NAAMSA), which include sales figures for Namibia, confirmed that as had been the case since the end of last year, the new car market continued to experience pressure during April 2016 and at 26 077 units registered a decline of 3 949 cars or a fall of 13.2 percent compared to the 30 026 new cars sold in April last year. Based on the South African motor industry’s general outlook and prevailing macro-economic conditions, NAAMSA feels the balance of 2016 is likely to continue to be characterised by subdued economic growth and pressure on consumer disposable incomes.

“The likelihood of double digit new vehicle price increases in response to earlier rand weakness and the possibility of further interest rate hikes would combine to further pressurise consumers and businesses at a time of rising retrenchments across a number of sectors. Above-inflation new vehicle price increases, estimated at between 12 percent and 15 percent plus for the year, would put further downward pressure on sales of new motor vehicles. Despite the short-term unfavourable outlook, a major source of encouragement emanated from the further substantial improvement, for the third month in a row, in the Purchasing Manager’s Index which at 54.9 signalled an expected improvement in business activity levels and manufacturing output over the medium term,” reads the NAAMSA statement.

Meanwhile, BoN’s statistics indicate that household debt, which is the biggest contributor to total debt, grew by 0.6 percent month-on-month (m-o-m) during March 2016 compared to the 0.4 percent m-o-m recorded during February 2016. “Despite the tough consumer environment resulting from the increase in interest rates, household debt continues to grow. During March 2016, debt accumulated by households was mainly through overdraft and instalment credit. We believe that the impact of rising inflation and debt servicing costs have reduced households’ real disposable income, and thereby prompting them to take on additional debt to stay afloat,” warned Uusiku.

Furthermore, government debt grew significantly by 5.2 percent (m-o-m) in March 2016 compared to 0.1 percent in the prior month. “We expect the monthly growth in government debt to increase further. This is because BoN’s Borrowing Plan aspires for 90 percent of the budget deficit for 2016/17 (N$-8.2 billion) to be funded from the domestic capital market. In contrast, the monthly growth in corporate debt slowed to 0.2 percent compared to 0.7 percent in the prior month,” Uusiku noted.

BoN’s new figures also confirm that foreign reserve levels slowed by -1.2 percent m-o-m, settling at N$24.9 billion at the end of March 2016 from N$25.2 billion in February 2016. BoN cited the decline emanated from net government payments and net commercial banks’ rand purchases during the month of March 2016.

“Looking ahead, we expect foreign reserves to remain under pressure over the short, medium-term due to the widening trade deficit that is triggered by the weaker rand, and lower commodity prices that put pressure on Namibia’s export revenue,” said Uusiku. He further noted that the import cover stood at 2.8 months of imports during December 2015, which is below the international import cover requirement of three months.

“We are also of the view that the government’s commitment towards debt sustainability may imply a possible standstill on borrowing from the foreign markets to safeguard its sovereign credit rating, thus once again reinforcing the potential challenge for the BoN in managing foreign reserves,” Uusiku concluded.

 

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