News Column

Consumers Hold the Key to Namibian Economic Fortunes

January 24, 2014

Lazarus Shigwedha

Hot off the heels of the US Federal Reserve's December meeting and the generally positive developed economy indicators in the past two quarters, the global environment has been consumed with the tapering of quantitative easing (QE) and tentative signs of a euro-zone recovery. Closer to home we believe the health of the consumer holds the key to the fortunes of the Namibian economy in 2014. Private consumption expenditure, as a percentage of GDP, is around 60 percent with a significant portion driven by households. While this is not necessarily a bad thing, it does make the economy vulnerable to changes in the consumers' spending abilities. In our view, what is worrisome is the way in which this expenditure is financed. While the US and Europe seem far removed (at least geographically) from Africa , policy actions aimed at resuscitating their economies, after the 2008 financial crisis, have had worldwide consequences. The influx of cheap money, instigated by monetary stimulus in developed economies, has resulted in historically low interest rates. Subsequently, consumers who struggled financially pre-crisis due to high interest rates, high inflation and overstretched balance sheets, felt the relief, as they were the beneficiaries of lower interest rates, as is the case too in Namibia . Private sector credit extension grew at 13.3 percent year-on-year to N$58.9 billion in November 2013 , ahead of nominal GDP growth of 10 percent. However, further scrutiny of credit data points to individual credit growth accelerating at 14.7 percent year-on-year. The surge in household debt has been fuelled mainly by marked increases in mortgage costs, demand for new vehicles and the uptake of unsecured credit - where credit costs, inclusive of charges such as administration, life cover, initiation fees etc., can be as high as 60 percent per annum. This has come at a cost: Namibian household debt to disposable income is running at 85 percent and according to the Bank of Namibia , the cost of servicing debt is approximately 20 percent of gross income. This, despite the fact that interest rates are at the lowest levels in the history of independent Namibia . What will happen when the proverbial 'punchbowl' is taken away? Credit risk, measured as a percentage of non-performing loans to total loans, has increased by 15 percent since 2012. This is worrisome given that this has occurred in a low interest rate environment. Non-performing loans are also rising in nominal terms. This begs the question: what will happen to credit risk in a scenario of normalised interest rates where there is an absence of cheap money and how will this affect the consumer? Credit extension is not necessarily negative. It plays an integral part in the development of financial services and provides an opportunity to achieve a standard of living that would not be possible in its absence. However, when consumers become over indebted, their future capacity to spend or acquire assets is reduced. Household balance sheets become heavily unbalanced, dampening consumer sentiment to the detriment of household consumption. Interest rates can only go up from here The problem facing consumers, who have kept the economy roaring thanks to credit-fuelled spending, is the changing environment due to improving global economic conditions. One of the biggest consequences is that interest rates will start to rise, perhaps not immediately, but definitely in the not too distant future. Developed markets, especially the US and Japan , are targeting inflation as part of their monetary policies. Additionally China , historically the world's factory, is now effectively exporting inflation to the rest of the world on the back of rising labour costs. A combination of persistently strong commodity prices (specifically crude oil) and a weaker currency (the Namibian dollar depreciated by 19 percent against the US dollar in 2013 and by 25 percent over the last two years) applies more pressure on the inflation basket and the disposable income of households. When measured in local currency, the price of Brent crude oil reached N$1 166.5 per barrel at the end of last year, an all-time high for our relatively small economy. As global economic recovery gains traction, we expect soft commodity prices to pick up with negative implications for consumers. Inflated assets The spillover from expansionary monetary policies has resulted in higher real asset prices around the world. In Namibia , the low interest rate environment is one of the drivers of the increase as evidenced by the surge in house prices over the last three years. The average house price has increased by 54 percent to N$514 670 according to the latest data from the FNB Housing Index. Consequently, mortgage costs on average have increased given the appreciation in house prices, resulting in higher interest cost sensitivities for those entering the market at these 'bubble-like' levels. All of these factors make the Namibian consumer vulnerable in the coming year. Upward price pressures will move into the broader economy decimating buying power and leading to higher average living costs. At the same time, interest rates will normalise putting even more pressure on households' disposable income. Therefore, while conditions are improving in the developed economies, a positive development for the global economic outlook and hence the local economy, local policymakers would do well to heed the possible threats lurking on the consumer's balance sheets. Credit drainage to more sustainable levels should be at the core of monetary policy in 2014.

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Source: AllAfrica

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