Digging in central bank data revealed some unexpected signs of economic improvement
Liquidity in the banking sector has staged a remarkable comeback over the past month, to the extent that daily liquidity now approaches or exceeds N$4 billion.
It would be unreasonable to state that the local commercial banks were under a severe liquidity crunch during the second half of last year and into January and February this year, but the overall position was certainly precarious. I can just imagine how the trading desks must have eyed the daily figures, wondering where they will find opportunities to finance their own institutions’ short-term liquidity requirements.
At some point earlier this year, daily banking liquidity was down to a few hundred million. Granted it never turned negative, as was the case early in 2017 for a prolonged period, but the Namibian banking sector cannot operate efficiently when their available daily liquidity goes down to 300 or 400 million. The industry needs daily liquidity of around N$2.5 billion to function properly without bank leaders going into convulsions like they did in 2017.
So it was with some relief that I noticed liquidity improving from around the first week in March, but it still remained stubbornly subdued. And then suddenly, within a period of about two weeks, towards the end of March, it got out of the chocks and almost doubled. During the last few days of March it first exceeded the N$4 billion level, where it has stabilised so far during April.
The daily liquidity figures also show that the commercial banks are now less dependent on central bank funding for short term liquidity. Since the last day of March, all repurchases were retired, remaining at zero up to now. This is the money commercial banks borrow from the central bank.
On the investment side, it is noteworthy that so-called BoN Bills, the short term funds commercial banks invest with the central bank, have become very popular. Currently the commercial banks hold N$900 million in BoN Bills, the significance of which is demonstrated by the fact that only six months ago, the overall money market position was more or less the opposite.
It is too early to say that the economy is mending going only on banking stats, but it is certainly a very positive indication when local liquidity is sufficiently high that banks have the confidence to tie up a considerable portion of their short-term funds in central bank instruments.
Incidentally, the banks’ short-term liquidity is published by the Bank of Namibia on a daily basis, together with a hyperlink where this information can be accessed on the bank’s website but this link reveals that the last time this data was posted, was on 11 August last year. Perhaps the new broom also needs to sweep the corners in the offices where the data is processed.
This aside, the overall picture that emerges from the daily data is that there is a noticeable and sustained improvement in the operational side of the commercial banks. This is an early indicator that economic activity on ground level is improving and if daily banking liquidity remains above or near N$4 billion for the next two to three months, we should be seeing the first signs of a broad-based economic recovery in the second semester of this year.
Another macro-economic statistic that reveals a tentative consolidation of the broader economy, is the central bank’s own balance sheet. By law this must be published monthly and has been done surprisingly consistently over the past year.
The balance sheet for end of March 2021 was published recently showing a very respectable N$40 billion, but it must be pointed out that changes in the balance sheet were small over the past year, and only incrementally larger than two years ago.
Since the Bank of Namibia’s balance sheet tend to gyrate somewhat month to month, it is always a good strategy to compare recent monthly figures to the same figures a year ago. This provides a more reliable medium-term picture.
When I compared the balance sheets for the past nine years, a very interesting cycle emerged. The movement reflects three clearly distinguishable three-year cycles. At the end of March in 2013, 2014 and 2015, the Bank of Namibia’s balance sheets were in the order of just above N$ 15 billion.
This was a modest balance sheet. I had expected it to be much stronger following the stimulus of 2012 and 2013 but this hardly reflects in the data. But then in 2016 it more than doubled to N$32 billion and it stayed in that region for three years – 2016, 2017 and 2018.
It was only in 2019 that it increased significantly again, but nothing like the previous jump. At the end of March 2019, it has grown to just over N$37 billion, a level from which it has grown only marginally to the current N$40 billion.
The elements which make up the central bank’s balance are not necessarily tied directly to the broader economy, instead they pertain more to Namibia’s financial assets as a whole, both domestic and foreign. Yet, in a round about way, they are a lagging indicator of what has transpired in the economy for the preceding year. Without a commensurate uptick in the real economy, the bank’s balance sheet will not reflect the patterns discernible over the past nine years. There is a distinct correlation between economic activity and balance sheet growth.
It is not my intention to blow the bugle and announce that the economic revival everybody is hoping for, has finally arrived, but by comparing the available data over various intervals, I am confident to state that there is a noticeable improvement in the macro side, and I am cautiously optimistic that we will start seeing the results in the second half of 2021.
PS. Note the incorrect date in the image. These careless irritations abound in the Bank of Namibia’s data sets but I am sure they will be resolved with time.