NBFIs to absorb market risk
Non-banking financial institutions in Namibia are expected to absorb market risks associated with the Covid-19 pandemic, given their high demand for capital as it is mandatory.
14 May 2020 | Business
Overall risk associated with the Covid-19 pandemic to financial stability in Namibia may be more severe than projected given the growing uncertainty. - BoN
All risks to financial stability in Namibia emanated from the banking sector, payment and settlement system, as well as the non-banking financial institutions (NBFIs) sector, which increased in 2019, when compared to 2018 ,and was further worsened by the outbreak of Covid-19 earlier this year.
Going forward, the impact of the Covid-19 pandemic on the global and domestic economy, as well as financial stability will be a key factor, the Bank of Namibia (BoN) says in its recent Financial Stability Report.
The NBFIs are however expected to absorb this risk, given their high demand for capital as it is mandatory.
It should be cautioned, however, that the overall risk associated with the Covid-19 pandemic to financial stability in Namibia may be more severe than projected, given the growing uncertainty, the BoN warned.
Despite the worsening economic conditions, the NBFIs sector remained stable and continued to grow its assets.
The NBFIs total assets increased significantly by 9% to N$316.3 billion in 2019. The growth in assets was due to the improved performance in equity markets, particularly during the fourth quarter of 2019, the BoN says in their analysis.
According to the BoN, going forward, however, the performance of the NBFIs might be adversely affected by the outbreak of the Covid-19 pandemic. The long-term effects of the Covid-19 pandemic upon the global economy remain difficult to predict, due to ever-changing conditions, but in the short-term global economic growth is expected to severely decline.
The severe losses on the global financial markets are expected to also adversely affect the NBFIs asset position with possible negative ripple effects to the banking sector through the wholesale funding channel, if the current conditions persist, the BoN emphasised.
Insurance industries globally are likely to be adversely affected by Covid-19, depending on the specific classes of business underwritten by an insurer as well as the implications of the policies implemented.
The impact on insurance claims depends on the country, but could be incurred through claim costs, including death and disability claims as well as medical expenses.
The reaction of investors to the Covid-19 outbreak negatively affected movements in the financial markets, including bond prices and equity markets which will consequently result in reducing profitability of insurers, the central bank says.
Despite the persistent recessionary economic conditions, the pension fund industry remained financially sound during 2019, with funding levels above the prudential required limit of 100%.
The pension fund assets grew by 9.4% to N$173.4 billion, supported by positive performance in the financial markets during 2019. The industry accounted for 54.8% of total NBFIs assets at the end of 2019, the BoN pointed out.
Going forward, Covid-19 might lead to lower funding levels for the pension fund industry, if the prevailing downturn in financial market performance persists. Increased pressure will be on the pension funds, given that the industry funding levels were only slightly above the prudential limits, the BoN says.
There are high possibilities of retrenchments and unpaid leave of employees in some industries of the Namibian economy.
Nonetheless, the Namibia Financial Institutions Supervisory Authority (Namfisa) has started to engage the pension industry to ensure that pension fund funding levels remain above the prudential limits, the BoN added.