New Era Newspaper

New Era Epaper
Icon Collap
Home / Consumers face credit crunch…as BoN increases repo rate by 50 basis points

Consumers face credit crunch…as BoN increases repo rate by 50 basis points

2022-06-16  Edgar Brandt

Consumers face credit crunch…as BoN increases repo rate by 50 basis points

Mortgages charged at 9% will increase to 9.5%

Home Loan Old instalment New instalment Difference

N$1 million N$8 997.26 N$9 321.31 N$324.05

N$1.5 million N$13 495.89 N$13 981 N$486.08

N$3 million N$26 991.78 N$27 963.94 N$972.16


Car loans charged at 10% will increase to 10.5%

Car Loan Old instalment New instalment Difference

N$250 000 N$5 311.76 N$5 373.48 N$61.71

N$500 000 N$10 623.52 N$10 746.95 N$123.43

N$1 million N$21 247.04 N$21 493.90 N$246.86

Consumers who tightened their belts during the last couple of months due to the devastating financial impact of Covid-19, coupled with a persistent domestic recession as well as escalating fuel and food prices, now must reduce their spending even further as the Bank of Namibia yesterday increased the repo rate with 50 basis points from 4.25% to 4.75%. 

The repo rate is the level at which commercial banks borrow money from the central bank, and in turn, determines interest rates for consumers.

In economic terms, a hike in the repo rate increases the cost of borrowing in the economy for domestic consumers and businesses. This in turn reduces purchasing power and investment capacity, thereby, in theory, the move should help reduce inflation. However, the repo rate increase pours more misery on Namibian consumers, most of whom rely heavily on debt to survive.

The latest repo rate increase has economists concerned about a possible credit crunch, which is basically a decline in lending activity by financial institutions. A credit crunch often occurs in recessions, making it nearly impossible for companies to borrow because lenders fear bankruptcies or defaults.

Weighing in on yesterday’s rate increase, head of research at High Economic Intelligence Salomo Hei, said the move would negatively impact those who have loans or facilities with banks as they will pay more on their instalments.

“If you had a liability of N$1 million with the bank for 20 years and your cost was prime, you would have paid around N$8 400 per month but with the 50 basis points, you would be paying now around N$8 700 per month. We also know banks usually charge more based on risk profiles which could be prime plus two. The increase for this segment could be close to N$700 and that’s massive on household’s budget,” calculated Hei.

Similarly, an existing home loan of N$1.5 million with a 9% interest rate with a N$13 495 installment will now see the interest charged at 9.5% and the monthly repayments increased to N$13 981. 

According to Hei, Namibia is now fully in the midst of an interest rate hike cycle.

Meanwhile, Theo Klein from stock brokerage Simonis Storm Securities (SSS) noted that indebted households and corporates will see an increase in their monthly interest repayments on existing debt. 

“This will add pressure on budgets as less disposable income is available for consumption spending on basic necessities and merchandise goods. In addition to rising debt repayment costs, households are also faced with high food and fuel prices, with general merchandise goods prices also higher due to a weaker Rand. This places consumers in a difficult position, where consumption spending is likely to be subdued,” Klein explained in response to questions from New Era. He added that lower consumption spending will weigh on economic growth given that private consumption spending is about 70% of the domestic economy. 

In an SSS report on the Monetary Policy Committee’s (MPC) announcement, Klein noted that initial expectations were for a total of 125 basis points hike in 2022. However, now Klein believes a 200-basis point increase is more likely given recent developments. 

“With an increase of 100 basis points for the year-to-date and three MPC meetings left for 2022, this implies a 50bps hike in the repo rate in BoN’s August and October meetings and potentially keeping the repo rate unchanged in their December meeting,” the SSS report reads. In comparison, the South African Reserve Bank only has two meetings left for 2022, in July and September.

Also weighing in, local economist Mally Likukela noted that the usage of the monetary policy, which he said by design was not created to control inflation in Namibia, will further heighten economic hardship on the already devastated Namibian households. 

“The further tightening of the monetary policy not only is a punitive measure against struggling households but a negative drag on the entire economy as this will stifle businesses of the much-needed cash flow to facilitate economic activities. The repo rates will have a cooling off effect on the already frozen economy thus destroying every single opportunity of growth the economy might have had,” Likukela warned. 

When announcing the rate increase yesterday, BoN governor Johannes !Gawaxab affirmed the monetary policy committee considered elevated global and domestic inflationary pressures, the fragile economic recovery and the need to safeguard the one-to-one link between the Namibian dollar and the South African rand, while meeting the country’s financial obligations.

“This monetary policy stance is also a step towards normalising the current negative real interest rate environment, and establishing a positive real interest rate that is conducive to long-term economic growth,” said the governor.

He noted domestic economic activities rebounded in the first four months of 2022 compared to 2021. The increase in economic activities was observed in major sectors such as mining, wholesale and retail trade, communication, agriculture, transport and tourism. On the contrary, the positive performance was offset by a continued decline in construction activities over the same period, as both public and private construction work slackened further.

Going forward, !Gawaxab said the domestic economy is expected to grow around 3% in 2022.

Meanwhile, domestic inflation accelerated to 4.9% during the first five months of 2022, compared to 3.2% in the corresponding period of 2021. The increase in inflation was mainly driven by higher prices for the food, transport and housing categories. This was on account of supply-side constraints for certain food categories, a rise in international oil prices and an increase in dwelling rent, respectively.

On a monthly basis, overall inflation moderated to 5.4% in May 2022, from 5.6% registered in the previous month.

“Namibia’s overall inflation is projected to average around 5.9% for 2022. Overall inflation remains within a reasonable range, inflation risk to the domestic outlook persists and mainly lingers around supply disruptions, which may continue to put pressure on food and oil prices,” !Gawaxab added.

The governor said food and transport components are expected to remain and may continue to have a disproportionate effect on the low-income segment of society, and therefore require close monitoring.

Moreover, he observed that private sector credit extension increased to 2.9% during the first four months of 2022, higher than the 2.3% registered during the same period in 2021. The increase was due to increased demand for credit uptake for both businesses and households.

For the year 2022, the MPC of the bank increase the repo rate by 25 basis points to 4% on 16 February 2022, it further increased the repo rate by 25 basis points to 4.25% on 13 April 2022 and on 15 June 2022 it was increased by 50 basis points to 4.75%. The next monetary policy announcement is expected on 17 August 2022, 19 October 2022 and 7 December 2022.




2022-06-16  Edgar Brandt

Share on social media