Mally Likukela
While the financial system is reported to remain healthy, sound and well-capitalised, many Namibians continue to sink deeper into economic hardships. For many this involves more debt, less buying power and weak saving rate.
These developments could suggest that despite the financial institutions having experienced remarkable growth in assets and profitability, the growth has not translated into any tangible improvement in the economic welfare of many Namibians, as the majority remains deep in debt, with shattered balance sheets and weak buying power.
While it is fundamentally important for the financial system to be sound and stable, because of its role in supporting sustainable economic growth, it’s equally important to ensure that the benefits thereof trickle down to the real economy and improve the livelihood of the households, particularly, households that depends on debt.
Heavy household debts are known to amplify in times of slumps and weaken economic recoveries. Namibia is currently in a slump and if household debt is allowed to growthe slump will be amplified and recovery will be weak.
GDP growth slumped to 0.2 percent in 2016, from 6.1 percent in 2015, and is expected to recover gradually to 2.9 percent in 2017. However, this recovery will be challenged by the huge debts held by both corporates and households, despite the clean bill of health of the financial sector.
Imbalance warrants government intervention
Stability, soundness and profitability of the financial system should be evaluated against social, economic value and benefits to the household (borrowers) and any mismatch can give rise to the suspicion of possible exploitation.
Furthermore, the financial sector as one of the engines of economic growth, its inability to impact the real economy in a tangible manner places tremendous pressure on government, as it will eventually be forced to intervene in line with its fiscal policy’s social responsibility – prosperity for all.
The current Harambee Prosperity Plan (HPP), Vision 2030 and the soon-to-be-launched NDP5 all focus on lifting Namibians out of poverty, i.e. debt, hunger, and unemployment, etc. With so many Namibian remaining deep in debt, with weak buying power and low savings – this will be a daunting challenge.
The clean bill of health must translate into effective improvement of the general welfare for it to complement and support government’s quest for inclusive and shared prosperity.
Banks lucrative while households sink in debt
While the banks and non-banks continue to report strong growth in assets and profits, households continue to sink deeper into debt. According to the Namibia Financial Stability (NFS) report, the ratio of household indebtedness to disposable income remained high at the end of December 2016, despite a slight moderation.
While banking assets grew by 10.1 percent to stand at N$110 billion, household debt increased to N$50.1 billion, representing an annual growth in indebtedness ratio of 9.3 percent during the period under review.
Many Namibians are expected to remain in the debt trap as their debt servicing ratio remains high and virtually unchanged at 15.3 percent during the review period. What is more alarming is the fact that the growth rate of debt servicing at 9.1 percent is faster than that of gross income, which was reported at 8.2 percent.
Erosion of household buying power and limited savings
While the banks continued to be adequately capitalised and maintaining capital positions above the minimum prudential requirements, households continued to lose buying power as the result of a combination of higher interest rates and inflation.
Inflation rose by 3.3 percentage points to 6.7 percent during 2016.
Household buying power refers to the capacity of an individual customer to buy certain quantities of goods and services. Ideally, in an environment of sound and stable financial system, households should possess sufficient buying power meaning households should have high incomes and purchasing power relative to the supply and prices of goods available.
Unfortunately, households have lost 6.7 percent of their buying power from inflation, thus having a low buying power and do not have enough money to purchase goods and maintain a decent standard of living.
According to the report, although the growth of disposable incomes rose from 10.5 percent in 2015 to 12.0 percent in 2016, the rise in the average prime interest rate from 10.1 percent to 10.7 percent, coupled with elevated inflation weakened the buying powers of many households.
For non-banking institutions, high intermediation costs, as evidenced by large and rising interest rate spreads compounds the problem. Because of weak buying power as a result of high interest rates and elevated inflation rates, households are left with little funds to save or invest – a condition which will perpetuate high poverty levels and dependence on debt.
According to the report, savings deposits consisted only 4 percent of non-banking funding, compared to other balance sheet liability items. Meanwhile, banks remain liquid with ratios improving to 13.0 percent in 2016 from 12.4 percent in 2015. Moreover, banks hold liquid assets well in excess of the statutory minimum liquid assets requirements.
Given the little savings of households government’s empowerment efforts either via NEEEF, tenders, or any other scheme will also be compromised unless government steps in to directly finance these deals with its already exhausted fiscal budget.
Households remain exposed to risks
While the banking/non-banking industry remain firmly secured, protected and adequately capitalised, households on the other hand remain broadly exposed and unprotected. The reports states that banks remained adequately capitalised to cushion against risks associated with institutional growths and to protect themselves against unsecured risk that can result in operational losses amongst other things.
Households on the other hand, remain exposed to interest rate changes, exchange rate fluctuations, credit shocks as well as liquidity risks. Since the banks are heavily fortified, any costs associated with risks, such as downward ratings, interest rate changes, capital outflows, Brexit and investors’ confidence can be easily passed on to consumers.
Household indebtedness a national problem
The primary focus on the state of health of the financial sector and subsequent silence on the high indebtedness of household is worrisome. It is as if to say as long as the sector is making profit, capitalised and profitable, it does not matter at what cost – household indebtedness has become secondary and almost non-existing.
High levels of household debt sooner or later will create problems for the entire economy. Imagine a small country like Namibia, characterised by many changes, most of which are sudden. A sudden change in circumstances, such as losing a job, will make it more difficult for an individual to keep up with repayments on their outstanding debts, which they will still be required to make, despite the loss of income.
In order to continue making these repayments the individual may cut back on their spending. Other factors, such as rising debt repayments due to higher interest rates may also lead to reductions in spending.
Extended to the whole economy, an economic downturn or recession can cause many individuals to face this problem and lead to reductions in consumer spending. In turn, companies faced with reduced revenues, or perhaps the prospect of going out of business entirely, will cut back on costs, including labour costs, either by lowering pay or reducing their workforce.
There is some evidence that rising debt levels before a recession can make it worse by making the business cycle more volatile. Another way in which high household debt can negatively affect the economy is via the financial sector itself.
This can be a result of more relaxed lending standards, as banks compete for new customers, leading to riskier lending and more defaults when the good times end and individuals default on their loans.
If enough of the financial sector is exposed to these bad loans – either directly or via having lent money to institutions that are exposed – a banking crisis could ensue, with an associated credit crunch hurting the economy even more
* Mally Likukela is the MD of Twilight Capital Consulting.