Households entangled in debt
GDP growth is likely to be affected by a decrease in spending as debt continues to constrict consumers.
STAFF REPORTER
Private-Sector Credit Extended (PSCE) increased at a slower pace of 5.2% year-on-year at the end of October 2017 compared to 10.1% recorded in the prior year.
Slowing PSCE can be attributed to sluggish appetite for credit by corporates, specifically through loans and advances, overdrafts and instalment credit facilities.
“We see high household and corporate debt as a warning signal for lower and slower Gross Domestic Product (GDP) growth. Furthermore, domestic public debt increased by 315.8% over a decade to N$45.9bn at the end of November 2017,” said Simonis Storm in a credit assessment released last week.
“This is forcing pressure on economic growth, employment and demand for goods and services. Meanwhile, it also explains why banking liquidity is directed to the capital market rather than reflected through PSCE. We expect PSCE to remain sluggish, and high levels of debt coupled with weaker disposable income of households to keep GDP lower,” Simonis Storm said.
According to them, corporate debt has increased by 298% over a decade to N$35.9 billion at the end of October 2017, while household debt has increased by 195% over the same period. On the other hand, per capita household income adjusted for inflation has been on a downward spiral since 2007, declining by 13.8%, while GDP per capita at market prices continued to grow by 24.4% over the same period.
“This is an indication that debt has been the grease to the wheels of the economy. Households are most likely to have difficulty repaying debt and sustaining consumption. We believe that the low consumer confidence is partly driven by highly indebted businesses and consumers coupled with overregulation of many industries,” said Simonis Storm.
Real GDP, consumption, employment and housing prices initially reacted positively to increases in household debt. However, after a number of years, the dynamic relationship between debt, GDP, consumption and employment turned negative. This would keep growth low, Simonis Storm believes.
“We believe that highly indebted households coupled with government consolidation will keep the GDP growth on a lower gear for the next two years,” Simonis Storm said.
Private-Sector Credit Extended (PSCE) increased at a slower pace of 5.2% year-on-year at the end of October 2017 compared to 10.1% recorded in the prior year.
Slowing PSCE can be attributed to sluggish appetite for credit by corporates, specifically through loans and advances, overdrafts and instalment credit facilities.
“We see high household and corporate debt as a warning signal for lower and slower Gross Domestic Product (GDP) growth. Furthermore, domestic public debt increased by 315.8% over a decade to N$45.9bn at the end of November 2017,” said Simonis Storm in a credit assessment released last week.
“This is forcing pressure on economic growth, employment and demand for goods and services. Meanwhile, it also explains why banking liquidity is directed to the capital market rather than reflected through PSCE. We expect PSCE to remain sluggish, and high levels of debt coupled with weaker disposable income of households to keep GDP lower,” Simonis Storm said.
According to them, corporate debt has increased by 298% over a decade to N$35.9 billion at the end of October 2017, while household debt has increased by 195% over the same period. On the other hand, per capita household income adjusted for inflation has been on a downward spiral since 2007, declining by 13.8%, while GDP per capita at market prices continued to grow by 24.4% over the same period.
“This is an indication that debt has been the grease to the wheels of the economy. Households are most likely to have difficulty repaying debt and sustaining consumption. We believe that the low consumer confidence is partly driven by highly indebted businesses and consumers coupled with overregulation of many industries,” said Simonis Storm.
Real GDP, consumption, employment and housing prices initially reacted positively to increases in household debt. However, after a number of years, the dynamic relationship between debt, GDP, consumption and employment turned negative. This would keep growth low, Simonis Storm believes.
“We believe that highly indebted households coupled with government consolidation will keep the GDP growth on a lower gear for the next two years,” Simonis Storm said.
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