Business credit demand still dropping
Repaying debt a priority
Whereas overall business credit contracted by 2% in August, credit extended to households surged by 5.4% year-on-year.
Overall credit extended to businesses by local commercial banks in August contracted for the fifth consecutive month, posing a risk to already sluggish economic growth.According to the latest data released by the Bank of Namibia (BoN), domestic businesses owed commercial banks nearly N$45.32 billion at the end of August – about N$915.2 million or nearly 2% less than the same month in 2022. Compared to July this year, the figure dropped by N$230.3 million or 0.5%.
“Low credit extended to businesses is worrisome for investment purposes, as businesses are rather focusing on paying off their debt than taking out new debt to invest in better infrastructure,” Simonis Storm (SS) said in their analysis of the latest statistics.
Whereas overall business credit contracted by 2% in August, credit extended to households surged by 5.4% year-on-year (y/y).
Cirrus Capital noted that overall business credit outstanding is fairly unchanged from January 2022 – N$45.8 billion then versus N$45.3 billion in August.
“The relatively weak uptake is likely due to a combination of factors, including the increase in corporate debt post-pandemic and then subsequent material increase in interest rates, which will have resulted in substantial increases in finance costs for firms,” Cirrus said.
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In August 2023, businesses continued to be net repayors of their mortgage loans for the 12th consecutive month, experiencing a negative growth rate of -4.4% y/y. In contrast, household mortgage loans saw a year-over-year increase of 3.1% during the same period, SS said.
Since May this year, there has been a persistent decline in other loans and advances by businesses, with a negative growth rate of -5.5% y/y in August 2023. In contrast, households have consistently fuelled double-digit growth in other loans and advances for the third consecutive month, with a 14.9% y/y increase in the month under review.
Nevertheless, on a monthly basis, both business and household other loans and advances experienced a 2.0% month-on-month increase. This uptick was primarily attributed to increased demand from businesses in the construction and building as well as the wholesale and retail sectors, SS said.
According to Cirrus, “these are typically reflective of short-term cashflow needs, including working capital”.
In August, there was a 0.4% y/y decrease in overdraft credit extended to businesses, while household overdraft credit saw a 3.5% y/y increase. Interestingly, both businesses and households made larger net repayments toward their overdraft credit during the same month, SS pointed out.
Cirrus noted that the only business category to show growth was instalment and leasing, increasing 17.7% y/y and 2.3% m/m.
“This is driven by increased vehicle and asset financing, particularly as firms (including mines and logistics companies) renew or expand their vehicle fleets, further boosted by the ongoing rebuilding of the national rental vehicle fleet as the tourism recovery continues,” the analysts explained.
Interest rates
In the second quarter of 2023, gross domestic product (GDP) showed a y/y growth of 3.7%.
This growth will be at “risk of remaining at these low levels if businesses continue this trend of being net repayors,” SS maintained.
The high repo rate exacerbates the situation, as both businesses and households show less interest in borrowing and are more inclined to dip into their savings, SS added. While households contribute significantly to the private sector loan portfolio, their loans are typically small and short-term, primarily utilised to cover essential expenses.
SS said they remain steadfast on their expectation that the BoN will hike the repo rate by at least 25 basis points (bps) in December, as higher oil prices have unlocked uncertainty for future inflation rates.
Cirrus has the same expectation.
“Federal Reserve officials have indicated they expect to hike once more before year-end, with similar expectations now reflecting in South Africa with the forward rate agreement (FRA) curve pricing in another 25bps hike in the next few months,” they said.