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Higher Interest Rates Discourage Credit Demand – Economists

By: Justicia Shipena

Higher interest rates are unlikely to deter credit demand, which has been resilient since last year.

This is according to a report on private sector credit extension by financial research firm Simonis Storm.

However, the firm says the financial conditions of households are concerning.

“Real consumption spending increased by 14% on average in the first three quarters of 2022. Since consumption is 75% of GDP, this is an important driver of economic activity and we expect this to normalise to high single-digit growth in 2023,” it said.

This comes as the firm revealed that credit uptake by the private sector rose a meagre 2.6% year-on-year in January 2023 which was supported mainly by households.

Simonis Storm added that with improved economic growth rates and job creation that has taken place, it expects credit growth to continue on an upward trend throughout 2023.

“Indeed, we forecast credit uptake to average 4.7% in 2023, compared to 3.6% in 2022.”

According to the Bank of Namibia, corporates were net re-payers on their debt in January 2023, especially firms in the wholesale and retail sectors.

Meanwhile, credit growth expanded by 4.7% year-on-year in December and rose 0.1% month-on-month to bring the annual figure to 2.6% year-on-year in January 2023

In addition, household credit uptake grew to 4.9% year on year in January 2023 compared to 4.7% year on year in December 2022.

“Whereas corporate debt declined by 0.6% y/y in January 2023 compared to 3.5% y/y in December 2022,” Simonis Storm said.

The firm report showed that household debt now stands at N$65.1 billion which is about 36% of GDP, corporate debt is at N$45.5 billion and non-resident debt is at N$7.5 billion.

Simonis Storm said other loans and advances were the main drivers of household debt in January 2023, while corporates were net re-payers on all debt instruments except instalment and leasing credit and other loans and advances.

“Annual overdraft growth in January 2023 was the weakest since 2016 for households and 2012 for corporates. Indeed, corporates have been net re-payers on overdrafts since November 2021 and households have been repaying their overdrafts since March 2022.”

The firm added that credit extended to the private sector from microlenders has outpaced credit uptake from commercial banks for most of the post-pandemic period.

“Microlending credit extension averaged 4.6% for the first three quarters of 2022 reaching a high of 8.0% y/y in 1Q2022, whereas credit growth from commercial banks averaged 3.5% during the same time,” the firm said.

Simonis Storm noted that clients were net re-payers on their microloans during the pandemic.

At the same time that microlending credit uptake has been growing at a faster pace, the number of clients at microlenders has been declining,  Simonis Storm said.

“The average loan amount per client increased from N$26,091 in 1Q2019 to N$31,336 per client in 3Q2022. Since 3Q2021, the number of term lenders (i.e. longer-term loans) has decreased whereas the number of payday lenders increased,” the firm said.

Moreover, the report said of the N$69 billion government bond debt, commercial banks hold about N$7 billion.

“One argument might be that yields on short-term bonds are higher than interest rates and so this encourages investments into short-term bonds rather than advancing loans,” said Simonis Storm, adding that this is because banks typically invest in shorter-term bonds and not long-term bonds.

Justicia Shipena

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