Mortgage and loan servicers are in for a torrid financial time following the decision by the Bank of Namibia to increase the repo rate by 0.25 basis points last week analyst have argued Writes Honorine Kaze.
Bank of Windhoek Executive Officer: Credit, Anton Smit said repo rate is a macro- economic tool to stimulate economic growth. Therefore, as household debt in Namibia has grown to more uncomfortable levels the increase of repo rate will be used to curb the spending.
“Increasing the repo rate will lead to an increase in banks and other financial institutions prime lending rate, leading to an increase in the interest rate at which loans were taken out, putting pressure on the monthly repayment ability of consumers. Therefore less debt can be accommodated”.
He advises people who have taken up debts that “As we enter an upward cycle of the interest rate hikes, the result demands that consumers need to refine their budget to ensure that they can withstand the impact of the changes. Limit further borrowing and make sure that you can easily cut back on spending on luxury or non essential items when needed. Try to pay off debt as quickly as possible, especially non income generated debt; consumers must learn to live within their means, while at the same time plan for any unforeseen expenses”.
Simonis Storm Securities (SSS) economist Daniel Kavishe, in an interview told The Villager that it depends on how much the interest rates are increased to make a noticeable impact on the consumer spending. “Spending patterns are often engrained in people so the higher income earners would not necessarily change their spending habits as quickly as those on the lower income side. Again it is important to note that there are individuals who are already highly indebted with car loans and house mortgages which have floating interest rates. In this context they will just have to bear the brunt and make the due payments as they watch their disposable income being pinched”.
The latest (SSS) money and banking statistics also notes that credit extended to the private sector (Corporate and households) grew to N$61.97b in April. “Other loans and advances grew by 28.8% and instalment credit grew by 16.9% year on year. On a monthly basis, we find that PSCE grew by 1.27% higher than March’s monthly growth rate of 0.48%”.
SSS attribute the PSCE growth to both household and corporate debt which grew by 15.8% and 15.9% respectively. The growth is a result of monthly growth rates of 1.92 % and 1.72% in the category of ‘loans and advances and mortgage loans’ respectively.
Corporate debt stood at N$23.27b in April with a yearly growth of 15.8%. The corporate debt seems to be centralised amongst the other loans and advances (other loans) category which has recorded an annualised increase of 31.09% and in the category of instalment credit which showed an annual increase of 15.67%.
While SSS report shows that the household debt yearly growth stood at 15.69% due to the low interest rates. Mortgage grew by 13.26 % while other loans and advances (other loans) category grew by 25.03% which will only reduce in an event of interest rate hikes.
The BoN Chief Ipumbu Shiimi in his latest monetary policy also raised concern on the continual increase of the domestic debt recorded since December 2013.
“The annual growth in Domestic Private Sector Credit Extension (PSCE) increased from 14.3% in December 2013 to 15.8%. Growth in private sector credit resulted from higher demand by both individuals and businesses. The rise in household credit largely reflected strong growth in instalments credit and overdraft loan,” he said.
BoN Governor said vehicle imports partly financed by instalment credit remain a great concern putting pressure on the international reserves of the country and requires monitoring.
In the back of the rapid growth in PSCE and the increase in the inflation rate recorded an increase to 6.1% in May from 4.9% in December 2013, BoN increased the repo rate to 5.75%. Central Banks normally use increases in lending rates to cut down on inflation.
Meanwhile Bank Windhoek have since reacted to the increase in the policy rate by increasing in our Prime Lending Rate by 0.25% from 9.25% to 9.50% and our mortgage lending rate from 10.25% to 10.50%. These interest rate changes will be effective today.