… As benefits of healthy financial system fail to trickle down
By Mally Likukela
WHILE the financial system is reported to remain healthy, sound and well-capitalised, many Namibians continue to sink deeper into economic hardships i.e. more debts, less buying power and a weak saving’s rate. These developments could suggest that despite the financial institutions having experienced remarkable growth in assets and profitability, this has not translated tangibly into an improvement in the economic welfare of many Namibians, as the majority remains deep into debt, with shattered balance sheets and weak buying power. While it is fundamentally important for the financial system to be sound and stable, because of its role in supporting sustainable economic growth, it’s equally important also to ensure that the benefits are trickled down to the real economy and that these improve the livelihood of the households, particularly, households who depend on debt. Heavy household debt is known to amplify slumps and weaken economic recoveries. Namibia is currently in a slump, and if household debt is left to grow, the slump will be amplified and recovery will be weak. GDP growth slumped to 0.2 percent in 2016, from 6.1 percent in 2015, and it’s expected to recover gradually to 2.9 percent in 2017. However, this recovery will be challenged by the huge debt held by both corporates and households, despite the clean bill of health of the financial sector.
Imbalance will warrant govt
The stability, soundness and profitability of the financial system should be evaluated against social and economic value and the benefits to the households (borrowers), and any mismatch can give rise to the suspicion of possible exploitation. Furthermore, because the financial sector as one of the engines of economic growth, its inability to impact the real economy, in a tangible manner, places tremendous pressure on government, as it will eventually be forced to intervene, in line with its fiscal policy’s social responsibility – prosperity for all. The Harambee Prosperity Plan (HPP), Vision 2030 and the soon-to-be-launched NDP5 all focuses on lifting many Namibians out of poverty i.e. debt, hunger, and unemployment etc. With so many Namibians remaining deep in debt, while experiencing weak buying power and low savings, this will be a daunting challenge. The clean bill of health of the financial system must translate into the effective improvement of general welfare, in order for it to be able to complement and support government’s quest for an inclusive and shared prosperity.
Banks/non-banks lucrative, while households sink deeper into debt
While banks and non-banks continue to report strong growth in assets and profits, households continue to sink deeper into debt. According to the Namibia Financial Stability (NFS) report, the ratio of household indebtedness to disposable income remained high at the end of December 2016, despite a slight moderation. While banking assets grew by 10.1 percent, to stand at N$110 billion, household debt also increased to N$50.1 billion, which represents an annual growth in the indebtedness ratio of 9.3 percent during the period under review. Many Namibians remain in the debt trap, as their debt servicing ratio remains high and virtually unchanged at 15.3 percent during the review period. What is more alarming, is the fact that growth rate of debt servicing, at 9.1 percent, is faster than that of gross income, which was reported at 8.2 percent.
Erosion of household buying power and limited savings
While the banks continue to be adequately capitalised and maintained capital positions above the minimum prudential requirements, households on the other hand continued to lose buying power, as a result of a combination of higher interest rates and inflation. Inflation rose by 3.3 percentage points to 6.7 percent during 2016. Household buying power refers to the capacity of an individual customer to buy certain quantities of goods and services. Ideally, in an environment of a sound and stable financial system, households should possess sufficient buying power, meaning households should have high incomes and purchasing power, relative to the supply and prices of goods available. Unfortunately, households have lost 6.7 percent of their buying power, due to inflation, and thus have low buying power, and don’t have enough money to purchase goods and maintain a decent standard of living. According to the report, although the growth of disposable income rose from 10.5 percent in 2015 to 12 percent in 2016, the rise in average prime interest rate from 10.1 percent to 10.7 percent, coupled with elevated inflation, weakened the buying power of many households. For non-banking institutions, high intermediation costs, as evidenced by large and rising interest rate spreads, compounds the problem.
Because of the weak buying power, as a result of high interest rates and elevated inflation rates, households are left with little funds to save or invest – a condition which will perpetuate high poverty levels and a dependence on debt. According to the report, savings deposits consisted only 4 percent of the non-banking funding, compared to other balance sheet liability items. Meanwhile, banks remain liquid, with ratios improving to 13 percent in 2016, from 12.4 percent in 2015. Moreover, banks hold liquid assets well in excess of the statutory minimum liquid assets requirements. Given the little savings of households, government’s empowerment efforts, either via the NEEEF, tenders or any other scheme for that matter, will also be compromised, unless government steps in to directly finance these deals, with its already exhausted fiscal budget.
Households remain exposed and unshielded to risks
While the banking/non-banking industry remains firmly secured and protected and adequately capitalised, households on the other hand remain broadly exposed and unprotected. The reports states clearly that banks remained adequately capitalised, in order to cushion against the risks associated with institutional growth, and to protect themselves against unsecured risk that can result in operational losses, amongst other things. Households on the other hand, remain exposed to any interest rate changes, exchange rate fluctuations, credit shocks, as well as liquidity risks. Since the banks are heavily fortified, any costs associated with risks, such as downward ratings, interest rate changes, capital outflows, Brexit and investor confidence, shall be easily passed on to consumers (households).
Household indebtedness is a national problem
The primary focus on the state of health of the financial sector, and subsequent silence on the high indebtedness of households, is worrisome. It is as if to say that as long as the sector is capitalised and profitable, it doesn’t matter at what cost. Household indebtedness has become secondary. High levels of household debt, sooner or later, will create problems for the entire economy, with severe consequences. Imagine a small country like Namibia, which is characterised by many changes, most of which are sudden. A sudden change in circumstances, such as losing a job, will make it more difficult for an individual to keep up with the repayments of their outstanding debt, which they will still be required to pay, despite the loss of income. In order to continue to make these repayments, the individual may cut back on their spending. Other factors, such as rising debt repayments, due to higher interest rates, may also lead to reductions in spending.
Magnified to the whole economy, an economic downturn or recession can cause many individuals to face this problem, and lead to reductions in consumer spending. In turn, companies faced with reduced revenues, or perhaps the prospect of going out of business entirely, will then cut back on their costs, including labour costs, either by lowering pay or reducing their workforce. There is some evidence that rising debt levels, before a recession, can make it worse, by making the business cycle more volatile. Another way that high household debt can negatively impact on the economy is via the financial sector itself. This can be a result of more relaxed lending standards, as banks compete for new customers, leading to riskier lending and more defaulting, when the good times end and individuals default on their loans. If enough of the financial sector is exposed to these bad loans – either directly or via having lent money to institutions that do – a banking crisis could ensue, with an associated credit crunch hurting the economy even more.
Twilight Capital Consulting MD, Mally Likukela
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