Rising interest rates to weigh on credit growth

May 02, 2022

Namibia’s rising interest rates will weigh heavily on the country’s demand for credit, economic advisory firm Simonis Storm warned.

This comes as the local think-tank has forecasted another 75bps hike in the repo rate before the end of 2022.

“Rising interest rates will likely weigh on demand for credit, given that we are in an inflationary environment as well. It seems business confidence remains low as credit growth has not materially improved despite interest rates being below long run levels. We expect another 75bps hike in the repo rate before the end of 2022, which would lift the prime rate from 8.00% to 8.75%,” Simonis Storm Economist Theo Klein said.

He indicated that household budgets continue to be challenged by rising debt repayments in the face of rising fuel and food prices.

“Household and corporate debt stock as a percentage of GDP is recorded at 45% and 33% respectively according to preliminary National Accounts. Households face a challenging environment as rising expenses and costs add to budgetary pressures. From the demand side, we see healthy levels of demand for credit from the small and medium sized enterprises (SMEs), however banks remain wary and perceive high risk in the SME space,” Klein said.

“From the supply side, despite interest rates rising, certain banks have become more risk averse, owing to mediocre economic growth, an inflationary environment and perceived debt sustainability risks. We forecast private sector credit extension to average 2.9% in 2022 (compared to 2.4% in 2021).”

The Bank of Namibia (BoN) raised its repo rate by another 25 basis points in April to 4.25%, the second hike in a row as it seeks to reduce second-round effects from sharply rising inflation.

The BoN hike drove up the prime lending rates for local commercial banks from 7.75% to 8.0%.

According to latest figures from the Reserve Bank, credit extended to the private sector grew by 2.1% y/y in March compared to 2.8% y/y in February, with the net household debt increasing by 2.3% y/and net corporate debt by 1.9% y/y.

“Corporate credit growth was dragged lower by repayments and lower demand by businesses in the health, fishing and commercial property sectors.”

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Last modified on Friday, 06 May 2022 12:34