Credit draws a picture of future GDP expectations
In the absence of any significant local economic shifts, the Bank of Namibia chose to keep the repo rate unchanged at 5.5%. As usual the Monetary Policy Committee gave a brief overview of international, regional and domestic conditions. It is noticeable that these overviews have become brief and condensed compared to a year or two ago, which is also an indication that not much is happening on the local front. Personally, I think this is also an indication of the bank’s new leadership finding and maintaining its own level of confidence.
Nevertheless, the MPC overview is always a helpful tool to identify those economic issues that occupy the minds of the policy makers for that particular period. The committee’s views on international conditions reflect a healthy preoccupation with conditions in South Africa, which are perhaps not as irrelevant as the turmoil that is Europe and Japan.
South Africa determines the benchmark for regional interest rates, it determines the exchange rate of most economies in southern Africa, even those that trade in US dollars. It also determines regional inflation excluding rogue states, and finally, South African credit growth has a major impact on overall liquidity in at least the SACU members.
But it does not determine domestic growth rates although its own meagre growth tends to be a drag on the entire region. The MPC’s views on inflation are conservative but balanced. This does not require astute analysis. Our inflation is a function of South African inflation since we import more than 80% of everything from them. So it is easy to look at their inflation estimates and add a fraction of a percentage point, to come to a relatively reliable future view on local inflation.
Perhaps most noteworthy in the MPC statement is the observation that credit extension to the private sector moderated somewhat month on month from March to April. In my view, the committee rightly describes this as high although it must be remembered, there is a very direct transmission mechanism between government debt, credit extension and GDP growth.
The April reading of 13.96% is also not much above the historical mean which tend to run at about 13%. It was only in 2009 and 2010 that this fell below 6% but it was more than compensated for by the explosive 19% growth during 2007 and 2008.
When one compares the GDP forecasts as published by the Ministry of Finance as part of the budget process, to the Private Sector Credit Extension statistics, one finds the strong correlation between credit and GDP. To my mind, the forward view on GDP is the official expectation for growth, and it determines to a large degree, the final decision on exactly how much stimulation the economy requires in the current fiscal year.
It is very significant that nominal GDP growth is forecast at just short of 12% per annum for the next three years. All the projections in the Medium Term Expenditure Framework hinge on this one base calculation to set a benchmark for future growth. The implication of this is that the finance ministry actually wants a Private Sector Credit Extension reading slightly above 13%. It is perhaps the clearest signal to our financial policy makers that the broader economy is on track to achieve the projected GDP growth. Remember, the viability of all other calculations and projections, critically depend on how realistic GDP forecasts are.
This also reveals the intellectual reasoning behind setting interest rates. If Private Sector Credit Extension continues to grow at or just above 13%, interest rates will remain static. If it tends to go below 12%, the economy is not performing in line with projections and the repo rate will come down. In the wake will follow massive stimulation in the form of more government paper. If it blows out, reaching for 19% or even higher, the repo rate will be increased and some stimulation withdrawn.
And if you do not agree with my analysis, look at the second last paragraph in the MPC statement.
“The continued widening of the trade deficit may further affect the level of reserves, and warrants monitoring. Nevertheless, the official international reserve position, in May 2013, remained adequate to protect the fixed currency arrangement as well as meeting other international obligations.”
This brief reference to foreign reserves supports my notion that as long as we are able to maintain our currency peg and serve our international obligations, we shall remain in a low interest rate environment. If credit extension continues to moderate, expect a decrease in repo of 0.25 percentage points. Just don’t ask me when.