Risks to Namibia’s financial stability have increased significantly – central bank
The latest Financial Stability Report (FSR) by the Bank of Namibia (BoN) shows that risks to Namibia’s financial stability have increased significantly since 2018 as a result of the economic contraction experienced in 2019, coupled with the expected impact of Covid-19 going forward. Since the central bank’s last FSR, the probability and impact of most risks increased, particularly in the macroeconomic environment.
The report states that on the back of relatively weak growth, Covid-19 poses a major threat to the already fragile global and domestic growth. According to the International Monetary Fund, global financial conditions have tightened abruptly since the outbreak of Covid-19.
“Since the beginning of 2020, global financial conditions have become very strained amidst the growing uncertainty around the Covid-19 pandemic. Similar to most other countries, Namibia has put in place measures to contain the spread of the pandemic as well as to mitigate its impact on the economy. These measures may mitigate the risks; however, should the risks materialise, the impact on both the global and domestic economy will be severe,” reads the FSR released this week.
Namibia’s credit rating was downgraded by both major rating agencies in 2019. Similarly, South Africa’s credit rating was downgraded by Fitch in March 2020. Fitch was the last international rating agency to issue a downgrade to below investment grade; therefore, BoN does expect this to have a limited impact on the overall economy.
Meanwhile, the FSR notes that risks to financial stability in Namibia emanating from the banking sector, payment and settlement system as well as the Non-Banking Financial Institutions (NBFI) sector, all increased in 2019 when compared to 2018.
“Banking sector risks have increased during the period under review when compared to December 2018 because the Covid-19 pandemic poses a threat to the liquidity of the banks and the income of households and businesses, rendering some of them unable to meet financial obligations. However, the relief measures put in place by the Ministry of Finance and the Bank of Namibia are expected to soften this impact to some extent and help manage the risk,” reads the FSR.
Meanwhile, BoN notes that payments system risks also increased during the period under review due to an increase in the total value of fraud across all systems, elevating the risks associated with the security of retail payments.
“The probability and impact of market risks to the NBFIs increased substantially due to the Covid-19 pandemic. The NBFIs are however expected to absorb this risk, given their high capital buffers. 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 in this report, given growing uncertainty,” the report cautions.
In addition to the reduction in the repo rate by 200 basis points since March 2020, the Bank of Namibia has implemented various policy relief measures in order to support the economy and manage the impact of the Covid-19 pandemic, however future Covid-19 induced economic developments remain largely uncertain.
The Central Bank reduced the repo rate by cumulative 225 basis points thus far in 2020, of which the last two reductions of 100 basis points each were intended to mitigate the impact of COVID -19 on the economy. The objective of the relief measures is to directly support individuals, farmers, small and medium-sized enterprises (SMEs) and corporates in managing the impact emanating from the Covid-19 outbreak as well as the impact of the recent drought.
The FSR also stated that on the individual borrower level, payment holidays, including the principal and interest, can be extended to clients for a period of six to 24 months based on their circumstances.
“On a banking institutions level, the liquidity relief measures of the capital conservation buffer, as well as the postponement single borrower limits and reduction of the concentration risk, adopted by the Bank of Namibia will enable banking institutions to support the economy. The implementation of relief measures will be based on a case by case assessment of clients by banks, while also taking into consideration their respective internal policies and processes. These measures provide banking institutions the necessary flexibility to respond to the needs of their clients, thereby enabling them to support the economy during these challenging times,” the FSR states.
Namibia’s household and corporate indebtedness increased moderately in 2019 underpinned by short-term credit facilities and may pose risks to financial stability given Covid-19. The report shows that annual growth in household indebtedness amounted to 7.3 percent during 2019 compared to 7.0 percent in the previous year, driven by a demand for short-term credit facilities. Household debt to disposable income rose from 92.9 percent in 2018 to 97.7 percent in 2019 as credit extended to individuals continue to increase, while disposable income moderated in the period under review
The slowdown in disposable income was due to the significantly slower growth in the compensation of employees, from 5.9 percent in 2018 to 1.9 percent in 2019. The total corporate debt stock increased marginally on the back of domestic debt. Total corporate sector debt edged higher by 0.8 percent to N$127.2 billion in 2019, up from N$126.1 billion in 2018, owing to a N$1.5 billion rise in domestic debt.
Going forward, policy responses to Covid-19 may support the cash flows of households and corporates in the short to medium-term with a probable softening of the threat to financial stability, although a portion may be utilised as contractual repayment of bank debt. Nonetheless, if the risks to financial stability emanating from the COVID-19 pandemic materialise, the impact on the financial system could be quite adverse.
2020-04-30 10:07:04 | 3 months ago