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Sacrificing Debt Holders To Maintain The Peg

By: Nghiinomenwa Erastus

The central bank has decided to maintain the peg and contain inflation that is not internally driven and burden those paying their debts or holding interest-bearing obligations further.

Moreover, to enable favourable real interest rates conducive to long-term growth, the bank did not explain how the hikes would achieve long-term growth.

The bank announced yesterday that it has increased the cost at which commercial banks borrow money from the current 4 per cent to 4,25 per cent. Automatically, the banks will follow suit by jerking up their prime lending to 8 per cent.

This means those who seek capital will be charged 8 per cent as the lowest; depending on their risk profile, it can even go above 10 per cent.

However, those who haven’t borrowed yet have a choice not to borrow and seek equity or other forms of funding.

Those with interest-bearing expenses or financial obligations are in for a bumpy ride as their monthly instalments automatically adjust with the repo rate.

These are mortgages, instalments and others who now have to dedicate more money from their stagnant income to pay interests on their loans. This means such households or enterprises have to cut down on certain expenditures.

The repo hike will impact the loan holder and get to be transported further in the economy, especially through rent.

The biggest driver of credit extension in the country is mortgage loans for both businesses and households. Businesses owed banks N$13,1 billion and households N$43,2 billion in mortgages by the end of August.

Those who borrowed to invest, especially in property, will also pass on the increase to renting tenants, workers, or businesses to service their loans.

As for those who borrowed just to buy houses, they have to channel more of their salary to their mortgage instalment. Given the average house price of N$1,3 million, homeowners will dedicate more to their houses.

Simonis Storm has warned of the burden to borrowers with consistent repo rates hikes early in February this year.

The current average mortgage rate is 8,75 per cent and will also move up with the repo.

With an increase of 50bps year to date and four meetings left for 2022, this implies a 25bps hike in the repo rate in the next three meetings again, according to Simons Storm focused.

This will not be the only hike to be squeezed into a constrained budget. Monthly fuel hikes and food prices have led to straining sluggish wages for many.

Simonis Storm has cast doubt on individuals affording their monthly payments in February this year.

“How many families will be able to afford this increase, coupled with rising fuel and food prices putting a strain on household budgets?” they stated.

According to BON governor Johanness !Gawaxab, the monetary policy committee’s decision is “appropriate to maintain the one to one link between the Namibian dollar and the South African rand while meeting the international financial commitments.

Further, the central bank said their hike is a step toward normalising the current negative real interest environment, and a positive real interest is good for long-term growth.

While mindful of the need to counter the buildup of inflationary pressure in the economy.

Domestic prices have been moving at the average rate of 4,5 per cent in the past first months of the year compared to 2,7 per cent observed in the same period last year- driven by none other than transport inflation due to international oil prices.

Observation of the country’s credit uptake since 2003 shows that between 2019 to date, the country has experienced the lowest annual credit uptake historically, below 5 per cent.

The latest data shows that annual credit growth (Private Sector Credit Extension (PSCE)) was 2,8 per cent y/y in February 2022 and 2,7 per cent y/y in January 2022.

PSCE is an indicator of how households and businesses borrow to fund their economic activities (consumption and investment in a nutshell).

Borrowing is good for investment purposes, but for consumption, it drives up general prices in the economy, especially when supply is constrained.

However, in the Namibian case, borrowing is mostly to buy residential properties, not for consumption as the private sector credit extension.


Julia Heita

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