Business’ bank credit dries up

Jo-Maré Duddy – Total credit granted to businesses by commercial banks in Namibia last month was 1.7% lower than in May 2019, the first contraction in corporate credit extension on an annual basis since December 2005.

“The Bank of Namibia (BoN) attributes this contraction to repayments made by corporates as some businesses restructured their credit exposure, coupled with write-offs during the period,” IJG Securities says in their analysis of the latest data.

The new statistics didn’t surprise the analysts, who commented that economic activity remained muted during May as a result of the lockdown.

Not only was May’s annual growth in total credit extended to businesses the “lowest observable growth” since the end of the 2005, but the monthly contraction of 1.5% is the first since March 2015, Cirrus Securities says.

“Moreover, on a monthly basis, net repayments were experienced across five line items, namely mortgage loans, other loans and advances, instalment credit, leasing transaction and other,” Cirrus says.

At the end of May, total corporate debt stood at nearly N$42.78 billion, about N$144.8 million less than the previous month and a drop of around N$748 million compared to May 2019.

Risk factor

Cirrus says the slowdown in credit granted to business was not unanticipated as supply side effects will dampen extension growth due to risk management.

“Given the weak balance sheets of businesses – having dealt with four years of zero to no economic growth, a dampened outlook for the economy in 2020 and increasing non-performing loans – banks will continually extend credit more stringently to creditors,” the analysts say.

Cirrus furthermore maintain that banks will continue to amend their asset management strategies and participate more in government debt auctions “as the spread between administered and market determined rates are at historic lows”.

IJG doesn’t expect businesses or consumers “to rush to commercial banks to take up large sums of debt any time soon” despite interest rates being at its lowest levels yet.

“Economic activity remains very low and a lack of demand means that growth opportunities for businesses remain extremely slim,” IJG says.

The analysts add: “Businesses that do make use of credit will likely mostly do so to keep their doors open, instead of investing in capital projects.”

Liquidity

Local commercial banks had to shortage of cash last month.

“Liquidity continued to improve into May, averaging above N$1 billion for the second time in 2020. Liquidity in May averaged N$3.9 billion as compared to N$3.2 billion in April,” Cirrus says.

Both Cirrus and IJG attribute the high liquidity level in May mainly due to fiscal operations during the month.

“The government made several other payments in May related to the Covid-19 stimulus package, such as the Emergency Income Grant and VAT [value-added tax] refunds thereby contributing to the observed spike in liquidity levels,” Cirrus says.

IJG says the balance of repos or repurchase agreements outstanding fell from N$147.4 million at the start of May to zero at the end of the month.

According to Cirrus, May saw significant drawdowns in the government’s balances with BoN.

“Over the period, government’s cash balances with the central bank moved down significantly by N$4.1 billion to N$4.3 billion.

“This is second instance of such an event, by this magnitude, in our time series since May 2002, Cirrus says.