FNB Namibia says private sector credit uptake is projected to average 2.9% in 2023 as consumers are anticipated to forgo luxuries and downsize their expenditures due to the declining spending power.
The bank forecast that the prevailing weak household consumption outlook in Namibia is expected to prompt significant changes in consumer behaviour as individuals strive to adapt to rising prices and interest rates.
FNB Economist Ruusa Nandago said the strategic shift aims to redirect spending from non-essential items like entertainment towards essential necessities such as food and prioritise debt repayments, reflecting a necessary adjustment in response to economic challenges.
“Given that inflation risks are tilted to the upside in South Africa, the risk of further rate hikes cannot be ruled out and the probability of rate cuts in 2023 is minimal.
Interest rates are therefore expected to stay higher for longer in both South Africa and Namibia. In the absence of substantial wage increases, this will further increase household indebtedness and debt servicing costs, weighing on consumers’ disposable income,” she said in FNB’s Namibia Household Consumption report for July.
As a result, Nandago said the weak outlook for household consumption will lead to changes in consumer behaviour.
“The pressure on disposable incomes has raised concerns about the future of private consumption, a key driver of economic growth, as it constitutes 78% of GDP. In the absence of substantial wage increases, an increase in household indebtedness and debt servicing costs can further weigh on consumers’ disposable income,” she said.
As a consequence, she projects a dampening effect on private sector credit uptake, which is expected to average 2.9% in 2023.
“Surprisingly, the 2022 Annual National Accounts revealed a resilient household consumption growth of 14.4%, the highest since 2016,” said Nandago.
She attributed this growth to a 7.2% increase in employee compensation, surpassing the inflation rate of 6.1%.
As a result, consumers’ disposable incomes grew by 6.7% in 2022 compared to 2.4% in 2021.
The Bank of Namibia, in its 2023 Financial Stability Report, also acknowledged the impact of salary increments awarded to government employees, according to Nandago.
In August 2022, the government implemented a 3% basic salary increment, a 14% transport allowance increment for all civil servants, and an 11% housing allowance increment for non-managerial civil servants.
However, the first-quarter GDP data for 2023 indicates a decline in consumption spending, averaging a three-year low of -4.4%, Nandago noted.
She believed this reflects the delayed impact of high inflation and interest rates on consumer behaviour.
Nandago suggested that based on various economic indicators, “including elevated inflation and interest rates, increased unsecured credit uptake, high levels of indebtedness, and a slump in residential property, weak consumption spending is likely to persist. While household consumption remained resilient in 2022, we believe the lagging effect of high inflation and interest rates will impede further growth.”
In the report, she pointed out that although inflation has slightly decelerated from its peak of 7.3% to 6.3% in May 2023, following the global disinflationary trend, it does not necessarily imply a significant reduction in the cost of living for consumers. “Prices remain high, eroding consumer disposable income and purchasing power.”
Nandago highlighted the currency risk and its impact on the inflation outlook.
“The 2023 Financial Stability Review highlights the risks associated with power outages, which could lead to higher input costs and food spoilage, ultimately resulting in increased inflation and shortages of food products,” she explained.
These dynamics are likely to impact Namibia’s inflation, and Nandago forecast it to remain unchanged at 6.1% in 2023.
Considering the upside risks to inflation in South Africa, Nandago emphasizes that the possibility of further interest rate hikes cannot be dismissed, and the likelihood of rate cuts in 2023 is minimal.
“Therefore, interest rates are expected to remain elevated for an extended period in both South Africa and Namibia,” she stated.
