02 Juni 2021 | Wirtschaft

'Billions outstanding in private sector credit'

Private sector credit extension growth remains at historically low levels due to the persistent sluggish domestic economic activity.

The low administered rates do not provide a sufficient risk versus return trade-off for lenders, causing them to exercise more caution. Cirrus Capital

PHILLEPUS UUSIKU

Despite the repo rate being at its historic low of 3.75% to make borrowing attractive in order to boost economic activities, private sector credit extension (PSCE) growth remain weak. Currently, total outstanding private sector credit stands at N$105.2 billion.

For the month of April this year, PSCE growth increased to 3.1% year-on-year compared to 2.0% in March, a slight increase of 1.1 percentage points. In April last year, private sector credit extension growth stood at 6.1%.

According to the Bank of Namibia (BoN), the rise in the growth rate was mainly explained by a slightly higher uptake of credit by households during the year to the end of the of April 2021.

Nonetheless, growth in PSCE remains at historically low levels due to the persistent sluggish domestic economic activity, reinforced by the Covid-19 pandemic.

According to Cirrus Capital (CC), the collapse in household incomes in the wake of the Covid-19 pandemic and subsequent regulations has resulted in weak tangible demand, while lenders face a materially riskier credit environment than before 2020.

As a result, the low administered rates do not provide a sufficient risk versus return trade-off for lenders, causing them to exercise more caution. Given the significant impairments to banks assets and net repayments observed over the period, PSCE growth is expected to remain low for 2021, CC pointed out.

Households

Credit extension growth to households improved by 3.9% year-on-year to N$2.3 billion compared to 2.6% in March, an increase of 1.3 percentage points.

The growth was largely due to growth in mortgages to individuals which accounted for 74.4% of total extensions. However, as the property market continues to come under pressure, with deflationary pressures and lower consumer activity, growth in this line will remain subdued moving forward. “As the relatively high risk of mortgage defaults remains, we expect to see mortgage growth remaining low moving forward. This is underpinned by mortgages accounting for 61% of non-performing loans in Dec ‘20. There remains the risk that loan growth is marred by the refinancing of existing loans, as well as the likelihood of further properties coming to market in Windhoek and keeping housing prices subdued, CC said.

Overdraft extension increased by 4.2% to N$100.3 million, up 2.7 percentage points from the previous month. Similarly, other loans and advances growth moved into positive territory in April, moving up 1.2 percentage points to 0.8% year-on-year.

Finally, instalment credit and leasing posted positive growth for the first time in 40 months, with annual growth of 0.5%. This was likely to happen as vehicle sales in 2021 have outperformed sales witnessed last year, given the incredibly low base and release of some pent-up demand, CC said.

Businesses

Growth in credit extended to businesses rose by 2.0% year-on-year to N$879.9 million in April 2021, compared to 1.2% in March. The increase reflects base effects emanating from a sharp decline observed in April 2020, following the then stringent measures instituted to curb the spread of Covid-19, BoN said.

The outstanding value of business advances amounted to N$43.8 billion. Short-term debt facilities remain the primary credit service businesses are utilizing. Overdraft extension growth was again in double digit territory, with growth of 13.5% year-on-year to N$1.3 billion, CC pointed out.

Other loans and advances growth moved up 2.0 percentage points to 1.4% year-on-year to N$221.6 million. All other business extension lines saw contractions over the period, with mortgage loans and instalment and leasing with respective annual growth rates of -2.0% and - 11.3%, CC added.

Short-term credit facilities will remain a primary source of financing for businesses in the current economic climate, particularly given the low nominal interest rates. However, the risk for many entities is that demand remains suppressed for an extended period, meaning that the reliance on debt facilities could be unsustainable particularly if interest rates were to begin rising, CC said.

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