By:Nghiinomenwa-vali Erastus
Analysts are worried that the cost of money and banks becoming too shy to lend will affect the Namibia’s economic recovery.
To date, the Bank of Namibia has increased the benchmark rate by around 300 basis points as a result pushing up the cost of money in the economy (prime interest) to 10.50%.
At the same time, the commercial banks which have been instrumental in funding the economy through loans and overdrafts, have adopted a conservative approach in their lending, showing sign of risk-aversion.
The banks are channelling more of their capital to investment assets such as treasury bills and others as opposed to their traditional operation of issuing loans to businesses and individuals for economic activities. This is despite a high level of credit demand, especially in the SMEs space.
This has been observed by Simonis Storm in their latest commentary on Private Sector Credit Extension (PSCE).
Last week the central bank continued with its restrictive monetary policy by increasing the repo rate by 50 basis points to 6.75% citing inflation and maintaining the peg.
Namibia’s average inflation rate rose to 5.9% during the first ten months of 2022, compared to 3.5% in the corresponding period of 2021.
The economy has been struggling since 2017, with fiscal consolidation shocks, droughts and Covid-19 which sank the economy deeply. However, green shoots emerged last year and continued this year.
Now concerns are that the tight monetary policy which is meant to control inflation and maintain the peg could suffocate SMEs and households with debt obligation as they are expected to fork out more of their income to repay their loans.
At the same time, those who seek capital for expansion or new ventures will have to agree to high-interest rates.
This is worsened by commercial banks’ low appetite to lend out to the productive economy due to heightened risk as the outlook struggles to change significantly.
Economic lecturer at the Namibia University of Science and Technology, Eden Shipanga weighed in that “we are living on the edge of despair, where desperate times require desperate measures and strategic positioning”.
Hence individuals are scavenging all sorts of business ideas, starting up SMEs in their desperation for economic survival, which is creating a high demand for credit despite the high-interest rates.
On banks acquiring more investment holdings and adopting a conservative approach to lending, Shipanga explained that the world is increasingly being sold the idea of a better tomorrow.
“Hence banks are in the quest of strategically positioning themselves or preparing to cater for the mass economic boom that comes after the recession, “he noted.
He called for more innovation and accommodative alternative methods in the financing space.
Acknowledging the hardship, Shipanga is optimistic that business-minded individuals will be creative and find ways to survive.
“With all these hardships, comes alternatives, and surely many business-minded individuals will try to find alternatives which will eventually boost economic activities,” he said.
He stressed that as long as job security and economic survival of individuals are threatened economic participants become risk averse and try to ignore all sorts of laws in their quest to survive.
Economist and analyst Theo Klein explained that the downward trend in private sector credit extension is not entirely due to low demand because there are businesses that are seeing opportunities.
As for households, Klein indicated that the cost of money which is pushing up their monthly debt obligations will reduce their consumption.
He explained that the reduction in consumption expenditure will have a significant impact on the overall growth as more than 70% of the country’s economy is coming from consumption expenditure.
The expectations are that the South African Reserve Bank which is the leading authority on monetary policy will probably end the repo rate hiking journey by the third quarter of next year.
The Bank of Namibia’s projections are however that domestic economic activity continued to recover, building up positive momentum during the first ten months of 2022.
The recovery was mainly reflected in sectors such as mining, agriculture, transport, communication, tourism as well as wholesale and retail trade.
Except for the activity in the construction sector which still remained subdued.
Despite the risk from the monetary policy and lenders’ conservative approach, the central bank has indicated that the economic growth rate for 2022, which was estimated at 3.2% in the August economic outlook, is currently being revised upwards.
“This is in the light of more positive information that is accumulating,” the central bank wrote.
The Bank of Namibia researchers donot foresee or have not mentioned any monetary risk nor commercial bank risk-averse risks impact the recovery process.
The only risks to the domestic economy include the weakening global economic activity, high inflation arising from the ongoing Russia- Ukraine conflict, and global supply chain disruptions.
Additional risks include climatic swings, animal disease outbreaks within the region, other infectious diseases, and the fallout from strict COVID-19 policies in some jurisdictions.
Simonis Storm’s researchers haveindicated that for the last five years, banks’ investment holdings have increased by 13.2% on an annualised basis at FNB, 5.7% (Capricorn Group), and 12.1% (Standard Bank).
In comparison to annualised growth in advances (credit extension) of 2.1% (FNB), 4.5% (Capricorn Group), and 2.8% (Standard Bank).
The analysis cements analysts’ sentiments on the impact of risk aversion on the recovery of the economy.
Commercial banks have traditionally been leading funders of economic activities through mortgages, overdrafts, other advances, and instalment and leasing.
By the end of October 2022, the business community has utilised N$45, 8 billion of commercial bank deposits for various economically stimulating activities.
While households have utilised around N$19,4 billion (excluding mortgage) of commercial bank deposits to fund their consumption and for some investments beyond houses by the end of October 2022.
This is critical to show the importance of the banking sector in facilitating credit in the economy and validate analysts’ worry about the emerging trend that shows commercial banks deploying their capital somewhere else rather than loaning it out to the productive economy.
Furthermore, credit extension is a leading indicator of investments that impacts economic growth, the slowdown in credit indicates the private sector or financier sentiments on the outlook of the economy.
Simonis Storm in line with the central bank has also indicated that the economic outlook has improved.
With the economic outlook having significantly improved for Namibia over the medium term, “it remains to be seen whether local banks invest less and supply the market with more credit to take advantage of growth opportunities and allow investments to expand economic activities,” Simonis Storm analysts wrote.
Email: erastus@thevillager.com.na
Expensive Money And Risk-Aversion Casting Shadows On The Recovery
