By: Nghiinomenwa-vali Erastus
Debt has been used more for consumption than investment, in the last 16 years.
An assessment by Simonis Storm based on the private sector credit extension indicates the amount of money lent to the private sector.
“For most of the last 16 years, growth in private sector debt (households and corporates combined) has exceeded economic growth rates,” wrote Simonis Storms
The private sector (households and corporates) borrow for two reasons to consume and to invest (productive)-the two are quite detrimental to the economy’s growth in the short and long run.
A long-run growth is, however, more sustainable and is often preferred over short-run growth.
The private sector utilisation of debts determines the type of growth the country will have to a large extent.
An analysis by Simonis Storm’s economist Theo Klein indicated that the country’s private sector has been mostly accumulating debt and not for productive purposes.
This is because, in the past 16 years, financiers have extended money/debts to households and companies at an increasing rate; however, economic growth rates have never caught up.
According to Klein’s assessment, this implies that most of the private sector debt went towards consumption spending and not toward investments which enhances long-run productivity in the economy.
He wrote that despite consumption expenditure fuelling growth in the short run, long-run economic sluggishness is likely to persist as the economy’s productive capacity is constrained.
By the end of June 2022, the private sector (households and companies) has outstanding debt of N$115,9 billion- which was extended for various purposes (consumption and investment).
This represents a growth of 3.4 per cent year on year (y/y) in June 2022 (compared to 4.5 per cent y/y in May 2022).
Net household debt increased by 2 per cent y/y in June 2022 (compared to 2.4 per cent y/y in May 2022), whereas net corporate debt increased by 5.3 per cent y/y in June 2022 (compared to 7.4 per cent y/y in May 2022).
For this period, households borrowed through other loans and advances, which recorded a growth of 5.8 per cent for the 12 months. It currently stands at N$10,2 billion.
The bank does not state how the borrowed money through other loans and advances was used by the households (for consumption or investment).
Another contributor to household debt is mortgage loans (residential financing) which grew by 1.5 per cent in the last 12 months.
Households borrowed N$43,3 billion (outstanding) to buy, build or extend their houses by the end of June 2022.
For businesses, their debt was driven higher mainly by instalment and leasing credit which increased by 18.1 per cent y/y), other loans and advances by 14.1 per cent y/yand mortgage loans (↑4.3 per cent y/y).
For this period, businesses in the energy, commercial and mining sectors were the main contributors to corporate credit growth, according to the Bank of Namibia.
By the end of June 2022, businesses owed commercial banks N$41,8 billion.
One observation made was also that demand for overdrafts from both households and corporates has been on a declining trend since the start of the year.
Debt needs to be serviced for those who borrowed to invest in income-generating assets. They can assist in paying off the loan, while those who borrowed for consumption have to find other sources of income.
The same thing is true for residential finances. Individuals have to use their salaries to service the loan used to buy the house.
However, all groups are affected by repo rate changes which is the benchmark for all interest rates in the economy, determining the cost of money or utilising someone’s money for a period.
The South African Reserve Bank recently hiked its repo rate by 75bps in July, with further tightening expected.
Simonis Storm indicated that it is likely that the Bank of Namibia will follow with a similar rate hike at its next meeting in August.
This will weigh heavily on indebted households who already battle with higher living costs as real disposable incomes deteriorate with rising inflation.
The same impact is expected on businesses with debts to services, while those requiring money/debt capital will do it at a high cost. Email: erastus@thevillager.com.
