Research firm, Simonis Storm has released a report which shows that despite rising interest rates, both household and corporate credit is rising.
Household credit grew by 5.4% y/y in March 2023, compared to 5.0% y/y in February 2023. This was the fastest pace in household credit growth since May 2020.
According to the report, household credit uptake was mainly supported by growth in other loans and advances (up 18.2% y/y), mortgage loans (up 3.2% y/y), instalment and leasing credit (up 2.5% y/y) and overdrafts (up 0.8% y/y). Household overdrafts recorded a monthly annual expansion for the first time since February 2022.
Similarly, credit uptake by corporates posted its best monthly annual growth rate for the year thus far in March 2023, increasing by 1.8% y/y (compared to 0.4% y/y in February 2023 and -0.6% y/y in January 2023). Credit uptake was mainly supported by instalment and leasing credit (↑ 12.8% y/y) and other loans and advances (up 7.1% y/y) with the rest of the debt instruments all contracting. Overall credit growth was driven by businesses in the manufacturing and wholesale and retail sectors according to Bank of Namibia (BoN).
“Although our economic recovery is in early stages, credit growth will have to improve in order to support improved economic growth rates going forward. Of course, a myriad of other factors also need to change in order to support higher growth, but prolonged negative real credit growth can limit growth. Various factors would likely have to change, whether it’s the mathematics behind internal models used to assess credit risk by banks or local businesses and entrepreneurs coming forth with better ideas that are bankable.
“From the factors we have discussed, we do not necessarily see higher interest rates as a deterrence to credit demand. However, we do expect Bank of Namibia to hike its repo rate by 25bps at their next Monetary Policy Committee meeting on 14 June 2023. This will take the repo rate from 7.25% to 7.50% and we expect the repo rate to remain unchanged thereafter until year end,” the firm says in the report.
Private sector credit extension increased to 3.9% y/y in March 2023, compared to 3.1% y/y in February. For 1Q2023, annual credit growth averaged 3.2%, compared to 2.5% in 1Q2022. YTD, credit growth averages 3.2% and shows signs of improvement following a weak start to the new year when January recorded a meagre 2.6% annual growth in credit.
“Adjusting for inflation, real private sector credit extension paints a different picture. Since December 2020 to date, real private sector credit extension has been negative, indicating that less credit has been extended to the private sector. In other words, the nominal value of credit is growing at a slower pace than inflation and so the real value of credit is decreasing. Real credit growth can be negative due to low consumer demand for credit or if banks are unwilling to lend or experiencing difficulties to provide credit due to other factors.
“Based on our engagements, it seems a bit of both are at play. Some banks see demand for credit, but then their internal models have become very restrictive. Other banks do not see bankable projects and are unwilling to take on excessive risk, whilst other banks are keen to give loans but their head office in South Africa is not. These factors partly explain our low credit growth datapoints,” the firm explains.
The firm goes on to say that negative credit growth has consequences for economic growth as it could lead to a decrease in investment as businesses battle to obtain credit in this environment.
“Our economic recovery from the lockdown induced recession has not been broad based, with growth being focused in only a select few sectors. Only 42% of all the sectors in our economy have recovered back to pre-pandemic levels for example. This could partly explain why some banks do not see bankable or financially viable projects at the moment.”