Rising interest rates are likely to discourage households from borrowing in the short-to-medium term due a challenging environment as expensive living costs combined with tighter monetary policy during 2022 add to budgetary pressures, economic advisory firm Simonis Storm has warned.
Higher interest rates increase the cost of borrowing, reduce disposable income and therefore limit the growth in consumer spending.
The research firm added that average monthly credit growth is expected to be around 3.6% given that the fourth quarter will be coming off a low base where credit growth averaged only 1.9% in 4Q2021.
“We expect another 100bps hike in the repo rate before the end of 2022, which would lift the prime rate from 9.25% to 10.25%,” said Simonis Storm.
This was after credit extended to the private sector grew by 4.0% y/y in July, compared to 3.4% y/y in June. Net household debt increased by 2.1% y/y in July compared to 2.0% y/y in the prior month, whereas net corporate debt increased by 6.5% y/y in July compared to 5.3% y/y in the prior month.
Corporate credit growth was supported by higher demand from businesses in the transport, mining, health and services sectors according to Bank of Namibia (BoN).
YTD, 2022 has recorded the worst annual growth rates in household credit, whereas the year has been better than recent years for corporate credit.
Improved credit growth in 2022 stems mainly from corporate credit growth. YTD credit extension averages 3.3% compared to 2.4% in 2021.
“Disaggregating the data, we see that household credit growth was mainly driven by other loans and advances up 7.9% y/y in July 2022 and mortgages rising 1.9% y/y in July 2022 which collectively account for 86.1% of household credit growth.
“Accounting for 45.8% of corporate credit growth, other loans and advances up 15.7% y/y in July 2022 and installment and leasing rising 14.9% y/y in July 2022 were the main drivers of growth in corporate credit.”
Overdrafts for both households and corporates dropped 10.7% and 6.1% respectively y/y in July 2022.
Last year, net investment was focused on the mining (32.3%), financial services (17.6%), manufacturing (15.9%), service providers of government (14.4%) and agriculture (7.9%) sectors of the economy.
In addition, most of the net investments in 2021 were spent on machinery and equipment (34.7%), buildings (24.5%) and construction works (18.0%).
Whereas excess credit growth above GDP growth indicates most loans were used for consumption purposes, excess gross fixed capital formation (GFCF) growth above GDP growth could potentially indicate that an inefficient allocation of resources has largely been taking place.
This is due to net investment not translating into higher economic growth rates over the last 10 years. Indeed, GFCF averaged annual growth of 20.4% but GDP only averaged 7.4% between 2011 and 2021.
