Business credit uptake to bottom out in 2018 …as low business confidence remains in the economy

Following a downward trend on credit extended to business ahead of December 2017 experts are optimistic of marginal increases in borrowing in the2018 business calendar.

“We expect the PSCE growth figure to bottom out this year and that borrowing will improve marginally in 2018, largely due to the low base set in 2017. Going forward we do not expect to see the double digit growth figures witnessed over the last decade, but rather a more moderate 8-10% growth over the next three years,” says senior researcher at Cirrus, Dylan van Wyk. 

Despite central bank governor, Iipumbu Shiimi rallying business to off-take credit and allow for more breathing in the contracted economy, business confidence remained at a low. 

“Definitely, the slowdown in PSCE is more pronounced in corporates. This indicates that capital expenditure has decreased, which means people are investing less into their businesses,” Van Wyk notes.

He says that the slowdown in credit is largely due to a slowdown in economic activity caused by a change in fiscal policy (fiscal consolidation).

Analyst at IJG Securities, Cecil Anthony Goliath submits that growth in credit extended to businesses averaged 5.6% in 2017, which also has been the lowest rate of growth in the last ten years.

He, however expects no substantial growth in the level of credit issuance to businesses in 2018 with subdued economic activity having put pressure on corporates.

“The downturn in economic activity has more than likely led to the business community taking a more cautious approach with regards to taking on new business ventures or expanding on current operations,” says Goliath. 

The fact that businesses are not taking on credit to finance capital projects, and not growing their business, in turn means that less jobs are being created, says the expert.

"The low business confidence as such spills over to low consumer confidence,” he adds.

Yet attempts to remedy the situation by cutting the repossession rate last year seems to have not moved a needle and Van Wyk is not convinced the repo rate would be the answer to remedying the situation and stimulate more borrowings.

“In my opinion cutting the repo rate will be ineffective in stimulating PSCE, as we need improvements in consumer and business confidence to spur new credit extension, rather than lower interest rates,” he counters.

The South African Reserve Bank has this past month maintained its repo rate at 6.75% and Wan Wyk does not see the Bank of Namibia going anywhere further than that. 

“It is possible but unlikely. If the South African repo rate is higher than the Namibian repo rate, this might result in capital outflows. Thus to keep sufficient foreign reserves to maintain our currency peg, it is generally accepted that we need to maintain our repo rate at a rate equal to or below the South African rate,” says the analyst. 

Goliath thinks otherwise, “A reduction in the repo rate does provide for relief in the form of cheaper debt servicing cost. The timing and magnitude of looser monetary policy plays an equally important role with too high of a cut too soon putting upward pressure on inflation.”

“Notwithstanding that cheaper debt also clears the room for more accumulation of debt. Therefore, a cut in the repo rate should theoretically stimulate economic growth,” he adds. 

Towards the festive season, PSCE eased up to 5.1%, thus halting the downward spiral, but the sudden development was spurred by the need by business to meet consumer demands towards Christmas, the central bank has noted. 

“Overall, credit extension growth remains on a broad downward trend, but the uptick in credit extended to corporates could signal the start of a recovery in PSCE and overall economic growth,” says analyst and equity strategist at PSG Konsult Wealth Management (Namibia) (Pty) Ltd, in the research division, Eloise Du Plessis.

Head of research at FNB Namibia, Namene Kalili, agrees businesses will not borrow more if there is no consumer demand. 

“We saw businesses borrowing more to meet the expected increase in consumer demand during December, but based on the feedback we have, the sales were lower than normal and thus the retailers are sitting with excess stock and higher debt levels. From here on it is more of a case of once bitten twice shy for the the retailers,” he says. 

He, however, maintains that the weakening uptake of credit does not reflect a waning business confidence in the economy but weak demand. 

Eloise further credits the weakness in credit uptake to job losses, fiscal tightening and stricter lending criteria.

“Nevertheless, we expect credit demand will improve somewhat during 2018 thanks to a modest economic recovery from the current recession on the back of stronger output in the mining and agricultural sectors, lower consumer inflation and improved government liquidity thanks to an African Development Bank (AfDB) loan,” she says.

In remedying the situation Kalili regards stimulating consumption demand as the wrong strategy.

“Consumption is already too high, which increases import demand and erodes reserves. I believe increasing the interest rate is the appropriate monetary strategy to encourage savings, which then stimulate investment and increases the country’s productive capacity.”

“Furthermore higher interest rates reduce the net present value of future projects and as such thin out non viable capital projects, meaning the most profitable projects get implemented – which is what we need at this point,” he explains.