Gloomy credit figures a grave concern
NPLs worrying
Halleluya NdimulundeIn July this year, the private sector experienced modest growth in credit extension of 1.8% year-on-year (y/y), matching the pace seen in June, but indicating a slowdown compared to the 2.6% y/y growth recorded a year ago.
Although this represents a deceleration, it still stands as the third-highest growth rate observed this year.
However, the year-to-date average growth of 2.0% highlights a concerning trend, as it represents the weakest period for credit expansion within the first seven months of the year over our two-decade dataset.
This sluggish credit growth, combined with persistently high levels of non-performing loans, raises concerns about the overall health of the financial sector.
Business
Credit extended to businesses, which comprises about 38% of total credit, showed a modest increase, rising to 0.8% y/y in July 2024 from 0.5% y/y in the previous month.
This is, however, an improvement from the negative growth of 1.2% y/y observed in July 2023.
Comparing the data on an annual basis, mortgage loans continued to decline, while there was some recovery in the other loans and advances category.
Overdrafts worsened significantly, registering a negative growth of 23.3% y/y in July 2024 - a sharp contrast to the 6.8% y/y growth recorded in July 2023, as corporates focused on debt repayment.
Despite being the smallest component of credit extended to businesses, the instalment and leasing category remains vital in maintaining corporate credit.
Instalment and leasing credit extended to corporates grew by 26.7% y/y in July 2024, up from 16.6% y/y in July 2023 - though it represents a slight deceleration from the 27.3% y/y growth observed in June 2024.
Tourism
According to the Bank of Namibia (BoN), this growth has been primarily driven by the car rental industry, which has benefited significantly from the rebound in tourism activity.
The tourism sector, one of the hardest hit by Covid-19, is now showing substantial signs of recovery, not only in the automotive industry but also in increased passenger arrivals and higher occupancy rates at hospitality establishments.
Supporting this positive trend, a total of 1 172 new vehicles were sold in July 2024, exceeding pre-pandemic levels.
Notably, rental agencies purchased 141 new vehicles, a significant increase compared to 54 units sold in the previous month.
Households
Credit extended to households, which accounts for the largest share of private sector credit, grew by 2.5% year-on-year (y/y) in July 2024.
This marks a deceleration from 2.7% y/y in June 2024 and is markedly below the 5.5% y/y growth seen in July 2023.
After a brief recovery in April 2024, overdrafts have resumed their downward trend, slowing to 7.2% y/y in July 2024.
This marks a decline from the 14.8% y/y growth recorded in June 2024, although it remains slightly higher than the 6.1% y/y growth observed in July 2023.
The situation for other loans and advances has also deteriorated, with growth dropping sharply to 1.4% y/y from the 15.9% y/y growth seen in July 2023, reflecting a tighter credit environment.
However, this does represent a modest improvement over the 0.8% y/y growth recorded in June 2024.
This decline in other loans could indicate a shift in household borrowing preferences, potentially due to rising interest rates or a greater inclination toward more secure forms of credit.
Meanwhile, mortgage loan growth remained steady at 1.9% y/y, consistent with the previous month.
In contrast, instalment and leasing credit saw a modest increase of 6.9% y/y compared to the prior month, suggesting that, despite minimal growth, there remains some appetite for financing durable goods or vehicles.
Reserves
Conversely, international reserves saw an increase during July 2024, reaching N$60.8 billion.
According to the BoN, this growth was driven by higher Southern African Customs Union (SACU) receipts and an uptick in Customer Foreign Currency (CFC) placements.
At this level, the foreign reserves offer 4.1 months of import cover, exceeding the international benchmark of 3.0 months and thereby providing a solid buffer for the economy.
Interest rates
In a surprising move, the BoN’s monetary policy committee decided to implement a 25-basis-point rate cut at its latest meeting, reducing the repo rate to 7.50% and the prime rate to 11.25%.
Although these rates remain relatively elevated, the reduction offers some relief to Namibian households and businesses by lowering borrowing costs.
Despite this rate cut, we anticipate that private sector credit extension growth will remain modest in the near term.
This is due to the lag effect of interest rate changes, where it typically takes some time for the impact of rate adjustments to fully materialise in the broader economy.
Looking ahead, our projections suggest that inflation will stabilise at around 4.9% year-on-year by the end of 2024.
Additionally, we foresee another 25-basis-point rate cut at the December monetary policy meeting, which would bring the year-end interest rate to 7.25%.
We expect the central bank to carefully observe the outcomes of this monetary easing before considering any further policy changes.