What goes up, may need levelling
The latest estimates of household debt to disposable income have provided a benchmark for acute analysis within the local financial markets. According to Emma Haiyambo, Acting Director of the Department of Strategic Communications and Financial Sector Development at the Bank of Namibia, the ratio is calculated according to set standards.
“In the October 2012 Financial Stability Report, the Bank of Namibia estimated two measures of household indebtedness. The first is the household debt to disposable income ratio; and the second is the debt servicing ratio which measures the percentage of an individual’s disposable income that he or she uses to debt consisting of interest and principal.
The figures are based on an annual average, and are thus not illustrative of every person individually but it provides an understanding for analysts to estimate the overall level of indebtedness of private households. The calculations are based on figures from the National Budgets and Annual National Accounts, indicating that the figures are based on an End-of-Year calculation of income and debt.” The household indebtedness figure is but one estimate that portrays activity in the credit market as it incorporates one of the major credit accounts: mortgages. The last estimate shows that household debt stands at 89.6% with mortgage and instalment credit as the two major contributors.
Haiyambo helps explain the consequent implications on the credit market and her future expectations of credit market trends. “Under the current accommodative interest rate regime, it is likely that households will continue to take up debt in the form of instalment sales and mortgages, predominantly. However, the market is becoming fairly debt saturated, so this uptake is not expected to be as pronounced as has been the case in previous years, before 2009. As stated in the Monetary Policy release of December 2012, instalment credit growth, for instance, slowed between September and October 2012, from 19.5% to 15.2%. If this trend is sustained, it could help to stabilise the high levels of indebtedness of individuals in the near to medium term.”
Capricorn Asset Management’s analysts, however, forecast an increase in the household debt to disposable income ratio based on the upward trend of credit extension to the private sector.
They draw caution to the current growth in private sector credit and sees an increase in interest rates as inevitable. “We feel that the next interest rate (repo) move will be upward based on the high levels of credit growth (and as a result, increasing levels of indebtedness) seen over the last year or so. If credit growth were to continue at these high levels, which we anticipate, we see no other alternative but for the Bank of Namibia to increase the repo rate to try nd curb the levels of credit growth- and subsequently trigger some form of household debt deleveraging. At the same time, the Monetary Policy Committee of the Bank of Namibia will have some concern over the growth prospects of the economy in light of the headwinds from the low growth environment plaguing much of the developed world. This is a downside risk to our view and any significant deterioration in the global economic outlook could delay the hiking of the repo rate past our third quarter forecast,” said Patrick Britz, Assistant Portfolio Manager at Capricorn Asset Management.