'Party's over,' Shiimi tells consumer

The central bank says lower interest rates will promote a more business-friendly environment, but that more reforms are crucial to spur investment and economic growth.

20 February 2020 | Economics

Whether it’s enough or not; there will be different views. – Iipumbu Shiimi, Governor: BoN

The latest cut in interest rates is to help create a conducive business environment to boost economic growth, not to encourage more consumption-driven borrowing among indebted consumers.

Commenting on the impact of the 25-basis point (bps) cut in the repo rate yesterday, the governor of the Bank of Namibia (BoN), Iipumbu Shiimi, said the central bank is not “complaining that households aren't borrowing”.

The BoN lowered its repo rate from 6.5% to 6.25%. As a result, local commercial banks will decrease their prime-lending rate from 10.25% to 10.0%.

According to FirstRand Namibia's calculations, this will result in an annual saving of N$328.60 on a vehicle loan of N$250 000. On a loan of N$1 million, yearly savings will be N$1 314.41.

Credit extended to individuals grew by 7.2% year-on-year in December and totalled nearly N$61.4 billion at the end of last year. The majority of this, about N$41 billion, was mortgage loans.

Annual credit growth to households in Decembers has been growing at single-digit level since 2016, Namibia's first year of economic contraction in the current cycle of recession. It also followed measures like required deposits on hire-purchase items, shortened repayment periods and loan-to-value ratios on certain mortgage loans which the BoN introduced to curb excessive borrowing.

“We had a party a few years ago,” Shiimi said yesterday referring to the double-digit growth in non-productive credit to consumers.

Consumers have borrowed up to the limit and are over-extended, he said.



Banks

Shiimi confirmed that non-performing loans (NPLs) now represent about 4.8% of the total loan book of the banking sector, up from 3.6% last year. It exceeds the industry norm of 4%.

The BoN is not “overly concerned” about this, Shiimi said.

Local commercial banks remain highly profitable, are well capitalised and can absorb the NPLs, he said. In addition, the BoN “has started the conversation with banks where NPLs are particularly high”, Shiimi said.

In view of higher NPLs, banks now are “extra careful” and only lend to those who are able to pay loans back, he said.



Impact

Analysts are sceptical about the impact of a rate cut, both on the consumer and corporate.

“Theoretically, interest rate cuts stimulate the economy through lower borrowing costs which induce borrowing and investment,” FirstRand Namibia's economist, Ruusa Nandago, reacted yesterday.

“While the recent rate cut brings moderate relief to indebted households and corporates, we do not believe it will be sufficient to drive meaningful economic growth in the current environment characterised by low confidence. This view is corroborated by real sector data releases following the repo rate cut in August 2019, which did not show signs of significant improvement,” Nandago said.

Robert McGregor, economist at Cirrus Securities, in anticipation of the cut on Tuesday said “cuts to the repo rate will do little to stimulate spending and growth in Namibia, as households are already heavily indebted”.

While a cut would provide some relief, the repo rate is already relatively low and a further 25bps cut would not provide enough relief to make a marked impact on growth, he said.

“Whether it's enough or not; there will be different views,” Shiimi said yesterday.

Interest rates are historically low, households are over-extended and the BoN doesn't want them to borrow to foot their consumption bill, he emphasised.

Whether lower rates will encourage the business sector to borrow more to spur investment, Shiimi noted that monetary policy cannot be relied on as the sole instrument to stimulate economic growth.

Other reforms are crucial, he stressed.

Monetary policy can create a conducive environment and is necessary, but “not sufficient”, Shiimi said.

Nandago said FirstRand Namibia is of the opinion “that the onus to stimulate meaningful economic growth does not lie in the repo rate adjustment alone, given the structural nature of the low growth environment”.

“Rather, complementary policies that support growth and employment creation should be put in place for demand growth to systematically respond to monetary policy action,” she said.

“For all intents and purposes, monetary policy has run its course; appropriate fiscal and economic policy are the tools needed to return Namibia's economy to meaningful growth,” Cirrus said.

[email protected]







Jo-Maré Duddy –

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