Cheap interest no bait for new debt

PHILLEPUS UUSIKU - Although interest rates are at historical lows, business and consumer confidence remain extremely weak.

Since interest rates is the cost of borrowing, it was expected that businesses will have more borrowing appetite to boost their activities as it has become attractive to access credit.

Economic activity, which was slow before the pandemic, has been hit hard by global lockdowns, and recovery may take years to materialise. As a result, corporates continue to repay debt and de-lever their balance sheets.

According to IJG Securities, credit extended to businesses contracted by 0.8% month-on-month and 2.2% year-on-year in October, following similar contractions in September.

Except for the other loans and advances (OLA) category, all other segments contracted on a monthly basis. Mortgage loans to corporates declined by 0.8% month-on-month and 7.8% year-on-year.

Instalment credit extended to corporates, which has been contracting since February 2017 on an annual basis, remained depressed, contracting by 1.5% month-on-month and 16.7% year-on-year in October the lowest level since early 2019.

Overdrafts to corporates declined by 2.6% month-on-month but increased by 3.6% year-on-year, IJG pointed out.

Cirrus Securities noted that short-term debt facilities continue to be utilised by businesses, although at a lower rate, with growth in overdrafts and OLA of 3.7% and 3.4%, respectively.

Strong reliance on these facilities in the current environment is understandable yet worrying, as the initial supply shock and latent demand shock mean the operating environment will remain suppressed, Cirrus said.

INDIVIDUALS

Credit extended to individuals moved down in October to 4.2% from 5.2% in September. This was due to a slowdown in lending growth across all lines, especially mortgages which decreased by 0.5 percentage points to 4.3%.

Moreover, there was a significant slowdown in lending growth in short-term credit facilities which have been a primary motivator for growth over the year as households continue to face troubling times.

Overdrafts increased by 3.6% (N$80.4 million), down 0.6 percentage points from the previous month, and other loans and advances grew by 11.0%, or N$961 million, IJG pointed out.

Growth in OLA has remained elevated with double-digit growth. However, net repayments have been made on a monthly basis since April this year, although this trend has stopped over the past two consecutive months.

Over the month OLA grew by 1.1%. The extreme reliance on short-term debt facilities is worrying, particularly given the duress household incomes have come under this year, IJG added.

Mortgage loan extension growth slowed to 4.3%. This category it is the primary driver of growth in credit extension as it accounts for 69.3% of total extensions.

“However, we maintain that very little of this growth is organic,” IJG said.

OVERALL

Total credit extended to the private sector (PSCE) increased by N$71.6 million or 0.1% month-on-month in October, bringing the cumulative credit outstanding to N$102.95 billion.

On a year-on-year basis, private sector credit extension increased by only 1.0% year-on-year in October, compared to 1.5% growth recorded in September, IJG pointed out.

“This represents the lowest level of annual growth on our records dating back to 2002 as issuance continues to slow,” IJG said.

N$2.39 billion worth of credit has been extended to individuals on a 12-month cumulative basis, while corporates and the non-resident private sector decreased their borrowings by N$975 million and N$369.4 million, respectively.

“If these trends continue, we are likely to see private sector credit extension contract on an annual basis in the coming months,” IJG said.