Namibians remain heavily indebted as the benefits of a financial clean bill of health fails to trickle down to households
By Mally Likukela
MD: Twilight Capital Consulting.
While the financial system is reported to remain healthy, sound and well-capitalized, many Namibians continue to sink deeper into economic hardships i.e. more debts, less buying power and weak saving rate.
These development could suggest that despite the financial institutions having experienced remarkable growth in assets and profitability, this growth has not translated tangibly into an improvement in the economic welfare of many as the majority remains deep in debt, 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 also to ensure that the benefits thereof are trickled down to the real economy and improve the livelihood of the households, particularly, households who depends on debts.
Heavy household debt are known to amplify slumps and weaken economic recoveries. Namibia is currently in a slump and if household debt are let to grow – the slump will be amplified and recovery will be weak. GDP growth slumped to 0.2% in 2016, from 6.1% in 2015, and it is expected to recover gradually to 2.9% 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 will 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 suspicions of possible exploitations. Furthermore, the financial sector as one of the engine 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, Vision 2030, the soon to be launched NDP5 all focus on lifting many people out of poverty. With so many people remaining deep into debts, 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 in order for it to be able to complement and support government’s quest for an inclusive and shared prosperity.
Banks/non-banks lucrative while Households sinks deeper into 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 report, the ratio of household indebtedness to disposable income remained high at the end of December 2016 despite a slight moderation. While the banking assets grew by 10.1% to stand at N$110 billion, Household debt also increased to N$ 50.1 billion, which represents an annual growth in indebtedness ratio of 9.3 % during the period under review. Many people are feared to remain in the debt trap as their debt servicing ratio remains high and virtually unchanged at 15.3% during the review period. What is more alarming is the fact that growth rate of debt servicing at 9.1% is faster than that of gross income which was reported at 8.2%.
Erosion of Household buying power and limited savings
While the banks continue to be adequately capitalized and maintaining capital positions above the minimum prudential requirements, Households on the other hand 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% 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% of their buying power from inflation thus having a low buying power and don’t 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% in 2015 to 12% percent in 2016, the rise in average prime interest rate from 10.1% to 10.7% 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, compound the problem. Because of weak buying power as a result of high interest rates and elevated inflation rates, Household are left with little funds to save or invest – a condition which will perpetuate high poverty levels and dependence on debts.
According to the report, savings deposits consisted only 4% percent of the non-banking funding compared to other balance sheet liability items. Meanwhile, banks remain liquid with ratios improving to 13%t in 2016 from 12.4% 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 for that matter will also be compromised – unless government steps in to directly finance these deals with its already exhausted fiscal budget.
Households’ remain exposed and unshielded to risks
While the banking/non-banking industry remains firmly secured and protected – adequately capitalized, households on the other hand remain broadly exposed and unprotected. The reports state clearly that banks remained adequately capitalized in order 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 side, remain exposed to any 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, investors’ confidence – shall be easily passed on to consumers (households).
Household indebtedness is 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, capitalized and profitable, it doesn’t 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 with severe consequences.
Imagine a small country like Namibia which is characterized with 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 to make 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.
Magnified 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 then cut back on their 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 impact on 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 do – a banking crisis could ensue, with an associated credit crunch hurting the economy even more.