The trend in non-performing loans hints at an avalanche bearing down on the private sector
The economic picture that emerges from an analysis of first calendar quarter data is not very encouraging. The graph above, non-performing loans at commercial banks, sums up best the general state of economic malaise, showing both the trend and the current state (Q3-20) of the private sector.
The graph comes from the Institute for Public Policy Research’s first quarter 2021 economic review, released just this week. It includes data sets from the 2020 National Accounts, various other statistical summaries, and an extensive analysis of the 2021/22 budget.
Among the myriad of data sets and indicators, there are three key issues that come to the fore. The first is that the economy has been in a 4-year long decline before Covid-19 struck. The second is that last year was calamitous from an economic perspective, particularly the second quarter and the third is that the elephant in the room, government expenditure and consequently government debt, is now out of control.
At several places in the review, the authors mention that government debt is now in uncharted waters and that is will probably exceed 70% of estimated Gross Domestic Product by April next year.
After reading this extensive piece of research, I came away with a sense of foreboding, wondering where and when will the economic vehicle turn, and whether it will ever turn? Describing our economy as a slowly-unfolding train smash is not an exaggeration. It has been happening right in front of our eyes since the second semester of 2016, gaining full momentum during 2020.
Looking at all the review’s graphs, it was difficult to pick one that reflects best the current situation we are in. Then I came to the graph showing the commercial banks’ non-performing loans as reported to the Bank of Namibia, and immediately realised this single graph is the best representation of where the private sector stands.
Before the recession, Namibian banks were proud to publish the figures for their non-performing loans. These were typically below 2% of loan book and was used widely by analysts as a comparative benchmark to judge the soundness of any individual bank’s loan book. It was a statement of the quality of a bank’s assets.
Commercial bank are very reluctant to classify a loan as non-performing. It is something they try to avoid at all costs, for the very simple reason that not a single bank’s want to admit that a substantial portion of its loan book is impaired. Relegating a loan to the non-performing class also does not happen willy nilly at the discretion of a credit manager. No, there are fairly strict criteria from the Bank of Namibia that defines the status of loans, and when a loan is indicated as non-performing, it must be in line with the set criteria.
This does not mean that such loans are unsalvageable, but the mere fact of being moved to this category, activates a chain of legal actions, which banks try to avoid at all costs.
So when a respectable piece of research work shows me a graph of non-performing loans and it is obvious that the trend if following a sharply rising tangent, then I know there is trouble brewing in the private sector, and there is more trouble on the horizon for the banks who hold these loans.
The graph covers the period up to the end of last year’s third calendar quarter. It means that there are two more quarters to follow and going by the clear trend, I will not be surprised if the current NPL ratio is now close to 8%.
The government and its offices, ministries and agencies do not borrow from commercial banks, so the implication is that this graph is a reliable representation of the financial temperature in the private sector’s kitchen. It does not require some expert skill to see that the temperature is very hot, and rising.
I share the concern of every other Namibian who is involved in the private sector regarding the broader underlying economic picture when one specific metric paints such a bad scenario. In this regard I want to commend the Institute for Public Policy Research for an excellent review that reflects a solid understanding and appreciation of the dire situation we find ourselves in.
The obvious question is: How long can this continue before the whole system breaks down? I mean, companies can only carry on for so long without profits before they implode, and the government can only borrow for so long before the capital market turns punitive.
The Ministry of Finance can either choose to take the review very seriously or it can, as has often happened in the past, choose to kill the messenger instead.
The full IPPR Q1 Economic Review can be read here: