Namibia: Cost of Borrowing Unchanged

THE Bank of Namibia has decided that interest rates on loans should remain as is until the end of this year to allow for a reasonable economic recovery, and to accommodate the laxity in the economy.

In a statement issued by Bank of Namibia (BoN) yesterday, governor Johannes !Gawaxab, he said the monetary policy committee is of the view that the current 3,75% benchmark rate remains appropriate to support weak domestic activity.

"At this level the repo rate is deemed appropriate to safeguard the one-to-one link between the Namibia dollar and the rand, while meeting the country's international financial obligations," the statement reads.

Simonis Storm Securities analysts say this is in line with expectations, as there is no economic justification of an interest rate movement at this point in time.

"The BoN has adequate foreign currency reserves to maintain the currency peg with the rand, Namibia's inflation rate is below South Africa's, and we do not see excessive credit growth in the private sector," they say.

All these factors supported the decision of the central bank to keep the repo rate unchanged.

"We do not view the current low interest rate as a stimulant to economic activity, but rather as providing relief to indebted households and businesses," the bank says.

As a result of pegging the Namibia dollar to the rand, the BoN has to closely follow the repo rate in South Africa.

Given the expectation that the federal reserve would taper its bond-purchasing programme from December 2021, emerging markets in general are expected to increase interest rates and experience weakening exchange rates.

It is widely expected that the South African Reserve Bank (Sarb) will increase its repo rate by 25 basis points in November.

This would align Namibia's repo rate with that of South Africa.

In practice a degree of deviation in interest rates can be tolerated.

While inflation remains modest in Namibia, it is edging closer to Sarb's upper limit in their inflation target of 3% to 6%.

Year to date, inflation remains well below its long-time average of about 6%, and averages 3,5% in Namibia, where the latest print came in at 3,5% year on year last month.

It is widely expected that rising inflation would be one of the reasons prompting the Sarb to hike its repo rate at its November meeting.

!Gawaxab says Namibia's real gross domestic product improved in the second quarter of 2021, while economic activity remained subdued year to date.

The rate of inflation continued to increase, while growth in private sector credit extension (PSCE) declined.

"The stock of international reserves remained sufficient to support the currency peg and meet the country's international financial obligations," the BoN governor says.

According to Simonis Storm, Namibia has seen a steady increase in foreign currency reserves since February 2021, whereas reserves stood at N$40,9 billion in August this year.

Namibia has run a merchandise trade deficit since July 2020, which, together with a significant decrease in Southern African Customs Union revenue, have led to a deterioration in the current account balance.

During the third quarter of 2021, the financial account recorded net inflows in portfolio and direct investments.

The government currently has import cover for about 6,3 months.

The current levels of foreign reserves are adequate in maintaining the currency peg.

Demand for credit remains weak, where growth in PSCE continues to moderate.

In the absence of excessive borrowing placing upward pressure on asset price inflation and consumption spending in Namibia, the low interest rate environment does not pose any risk to financial sector stability or inflation.

PSCE has grown by 2,4% on average during 2021, compared to average growth of 7,8% recorded from 2016 to 2019.

Low interest rates rather provide indebted households and businesses with relief.

"Given the expectation of persistent weak credit demand, current low interest rates remain favourable, with no need to hike from a PSCE perspective," Simonis Storm's analysts say.

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