Consumers survive on short-term debt

Affordability concerns mount
The N$100 billion plus consumers owe commercial banks will become even more expensive should the central bank later this month hike interest rates for the fourth time this year.
Jo-Maré Duddy
At the end of June, households owed commercial banks in Namibia nearly N$12.63 billion in overdrafts and other short-term debt – nearly N$487 million more than the same month last year.
Compared to June 2019, the year before the Covid-19 pandemic, overdrafts and other short-term debt of households have increased by about N$2.6 billion or 26.2%. Measured against June 2016 - the first year of Namibia’s four-year recession – this debt has jumped by nearly N$5.4 billion or 74.2%. Short-term debt consists of credit card debt, as well as personal- and term loans.
Although only 4% higher than a year ago, June’s figures bode a challenge for consumers who already had to cope with three interest rate increases this year and will probably have to absorb a fourth later this month.
Local economists agree that the Bank of Namibia (BoN) will likely hike the rate by 75 basis points (bps) with the Monetary Policy Committee’s announcement on 17 August. Should this happen, it will mean a 175-bps bump since the beginning of the year. It will increase the current repo rate – the rate at which commercial banks borrow from the BoN – to 5.5%, while the prime lending rate of commercial banks will rise to 9.25%.
“This will weigh heavily on indebted households who already battle with higher living costs, as real disposable incomes deteriorate with rising inflation,” Simonis Storm (SS) said in their analysis of the latest private sector credit extension (PSCE) data.
Total PSCE – credit extended to households and businesses – at the end of June amounted to about N$115.86 billion, an increase of some N$10.5 billion or around 9% year-on-year (y/y).
The y/y growth is largely driven by the private sector, as the rebounding economy and need for short-term credit has driven larger uptake, Cirrus said in their take on the latest figures.
On an annual basis, households’ credit card debt, as well as personal- and term loans rose by 5.8%. This shows reliance on short-term debt to help sustain household consumption, Cirrus said.
However, overall PSCE to households, which also includes mortgage loans, was up a meagre 2% or N$1.2 billion y/y, totalling about N$62.48 billion. Mortgage loan growth was 1.5% y/y, while overdrafts shrunk by 3%.
“Credit extension growth to households remains subdued, unsurprising given the weak nominal wage adjustments over recent years, and the combined impact of higher inflation and interest rates reducing affordability for individuals,” Cirrus said.
Commenting on the subdued growth in mortgage loans, IJG Securities said: “Mortgage loans to individuals contracted by 0.5% month-on-month, but increased 1.5% y/y. This is the lowest year-on-year growth in mortgage loans observed since June 2019.
“Mortgage loan growth has been slowing since July 2020 on an annual basis, possibly indicating that the willingness of commercial banks to extend credit to individuals to buy, renovate or build new houses since the pandemic remains low.”
According to Cirrus: “Wage growth since 2021 (off the low 2020 base) is weak, particularly for civil servants who have not seen wage adjustments since 2017, while higher inflation (specifically some food items and fuel/transport) will decrease disposable income and thus leave less room for credit uptake.
“The affordability concern, particularly as banks incorporate higher future interest rates, will adversely impact tangible demand for credit from households,” the analysts said.
SS pointed out that growth in private sector debt has exceeded economic growth rates for the most past of the last 16 years.
“This implies that most of the private sector debt went towards consumption spending and not toward investments which enhance long-run productivity in the economy. While consumption spending fuelled growth in the short run, long-run economic sluggishness is likely to persist as the economy’s productive capacity is constrained,” SS said.