Private Sector Credit to Grow Despite Rate Hikes

IJG Securities expects g growth in private sector credit, despite the commencement of an interest rate hiking cycle in the country.

The firm said in a report yesterday that due to g wealth effects as a result of prolonged and abnormally high growth, it believes that demand for credit will remain high, while increases in disposable income will allow suppliers of debt to continue to lend with a fair level of confidence.

“Additionally, the lagged effects of increasing interest rates mean that it is unlikely that we will see a major impact on credit demand by household for a period of six to 18 months, after which higher interest rates can be expected to cause sufficient burn on the pockets of highly leveraged individuals to dampen demand, at which point the supply side of debt is also likely to be more cautious in their credit extension,” IJG said.

Credit extended to the private sector increased by N$269 million or 0,42%, in July 2014, taking total credit outstanding to N$63,9 billion. On an annual basis, the growth picked up by 0,1 percentage point, to 15,5%.

“As such, a net total of N$8,56 billion worth of credit has been extended over the last year. This is the second highest level of net issuance seen over a 12-month period in the history of the country, as high growth continues to be seen off an ever increasing base. Of this N$8,56 billion approximately N$3,63 billion was issued to businesses, while N$4,86 billion was taken up by individuals,” the report said.

The growth is attributable to a number of factors, all of which contribute to, or result from, the current g performance seen by the Namibian economy, IJG said.

The expansive monetary policy witnessed in Namibia over the past half-decade has contributed significantly to the current high levels of private sector credit extension and private sector credit extension growth. In June, the Bank of Namibia started increasing interest rates.

Prior to this, Namibia was in a cutting cycle which saw record low interest rates for the country for a prolonged period of time. This cycle began in November 2008, as the world was in the midst of round one of the global financial crisis and resultant recession. At the time, Namibia’s outstanding credit within the private sector stood at N$32,5 billion, and in order to support and stimulate aggregate demand in the local economy, the bank slashed rates from 10,5% to 7% in 8 months, thereafter bringing rates down further, to 5,5% over the following three years.

“As a result, Namibia rode out the global headwinds with a fair measure of success, however, outstanding credit to the private sector has now almost doubled to the current levels of N$63,9 billion,” the report said.

Foreign reserves declined by 7,2% in July, from N$15,9 billion. IJG said this decline is on account of a net outflow of funds on the balance of payments, as a large merchandise trade deficit was seen, and capital inflows in the capital account were insufficient, despite a SACU payment, to offset the negative balance that resulted in the current account of the balance of payments.

Source : The Namibian