BoN braces for ‘severe’ repo cuts
Although the repo rates in Namibia and South Africa are the same, the average Namibian has to bear with higher prime and home loans rates than his neighbour across the Orange.
Jo-Maré Duddy – Prime lending rates, already at historic lows, could fall by another 200 basis points should the impact of the Covid-19 pandemic intensify to the “severe scenario” of the latest stress test done by the Bank of Namibia (BoN).
The central bank has already decreased its repo rate three times this year: by 25 basis points in February, followed by 100 basis points in March and another 100 basis points last month. The significant last two drops were in response to Covid-19 and the lockdown ravaging the Namibian economy.
The current repo rate of 4.25% is the lowest in the history of an independent Namibia. The prime lending rate of local commercial banks is 8%, while the home loan base rate is 9%.
In its latest financial stability report, released last week, the BoN anticipates a further reduction in the repo rate in South Africa in the next 12 months. With the “global broad-based shift toward ultra-accommodative monetary policy, banks will be prompted to decrease their prime lending rates”, the central bank says.
“In order to main the currency peg [with the rand], the Bank of Namibia may opt to also cut the repo rate to align interest rates with those of South Africa,” the BoN adds.
In its baseline scenario, the repo will decrease by 25 basis points. The BoN’s intermediate scenario provides for a decline of 100 basis points. In its severe scenario, the repo could be dropped by 200 basis points. Should the latter materialise, the repo will be 2.25%.
Commercial banks in Namibia last year earned N$3.3 billion in total in net interest income, N$200 million more than in 2018, according to the BoN report.
In total, banks reported after-tax profits of N$2.7 billion, up 5.9% from 2018.
Prime versus repo
Although the BoN and the South African Reserve Bank (SARB) both has a repo of 4.25%, the spread between the repo and the prime lending rate here is bigger than across the Orange.
The spread in Namibia is 3.75 percentage points. In South Africa, the prime lending rate is 7.75%, resulting in a spread of 3.50 percentage points.
The deputy director of corporate communications at the BoN, Kazembire Zemburuka, told Market Watch the spread is largely explained by domestic macroeconomic fundamentals prevailing in Namibia in the long term. Similarly, spreads in South Africa reflects macroeconomic conditions there.
According to Zemburuka, these fundamentals include inflation, uncertainty, liquidity, political risk premium, and overall government fiscal sustainability.
“It is worth noting that the spread reflects risk perceptions and stability of macroeconomic fundamentals of the domestic economy,” he said.
Zemburuka continued: “Thus, because investors and lenders to South Africa and Namibia have different risk perceptions towards these economies there will be some level of spread prevailing in these countries.”
Namibia’s macroeconomic condition has been deteriorating for the past three years, he noted.
Home loans
In South Africa, the prime lending rate and the home loan base rate (HLBR) are the same. In Namibia, the HLBR is prime plus one, therefore 9% currently.
Asked why the HLBR is higher than the prime, Zemburuka answered: “In general, the home loan base rate and prime rate do not need to be the same, because the former is linked to government bonds while the latter is linked to the bank rate or interbank rate.”
The prime rate reflects the risk of extending a line of credit to businesses for investment in Namibia, he said. This rate also forms the basis for a credit card interest rate plus some individual risk premium, e.g. if the prime rate is 9%, a prime rate for an individual can be 9% plus premium to reflect the riskiness of the individual customer, Zemburuka explained.
On the other hand, he said, the HLBR reflects long-term lending which is more exposed to significant risks such as inflation, taxation and the political environment.
“All these risks should be reflected in a form of risk premium over and above government treasury bonds or bank rate in some cases,” he said.
Industry standard
“However, a more exact answer to why there is such a difference can be sourced from commercial banks to explain why on average home loan base rates are higher by 100 basis points in Namibia,” Zemburuka said.
The industry standard for the HLBR is 100 basis points above the prime lending rate.
“We all adhere to this as a base rate,” the chief marketing officer of FirstRand Namibia, Tracy Eagles, recently told Market Watch. FNB Namibia is part of FirstRand Namibia.
Home loan applications are assessed on an individual basis and the base rate pricing adjusted for risk to determine the individual client rate, the executive officer of marketing and corporate communication services at Bank Windhoek, Jacquiline Pack, said.
Factors such as creditworthiness, affordability, property values and loan tenure are considered as part of the assessment, she added.
According to Pack, home loans are priced below the prime lending rate in many cases.
The central bank has already decreased its repo rate three times this year: by 25 basis points in February, followed by 100 basis points in March and another 100 basis points last month. The significant last two drops were in response to Covid-19 and the lockdown ravaging the Namibian economy.
The current repo rate of 4.25% is the lowest in the history of an independent Namibia. The prime lending rate of local commercial banks is 8%, while the home loan base rate is 9%.
In its latest financial stability report, released last week, the BoN anticipates a further reduction in the repo rate in South Africa in the next 12 months. With the “global broad-based shift toward ultra-accommodative monetary policy, banks will be prompted to decrease their prime lending rates”, the central bank says.
“In order to main the currency peg [with the rand], the Bank of Namibia may opt to also cut the repo rate to align interest rates with those of South Africa,” the BoN adds.
In its baseline scenario, the repo will decrease by 25 basis points. The BoN’s intermediate scenario provides for a decline of 100 basis points. In its severe scenario, the repo could be dropped by 200 basis points. Should the latter materialise, the repo will be 2.25%.
Commercial banks in Namibia last year earned N$3.3 billion in total in net interest income, N$200 million more than in 2018, according to the BoN report.
In total, banks reported after-tax profits of N$2.7 billion, up 5.9% from 2018.
Prime versus repo
Although the BoN and the South African Reserve Bank (SARB) both has a repo of 4.25%, the spread between the repo and the prime lending rate here is bigger than across the Orange.
The spread in Namibia is 3.75 percentage points. In South Africa, the prime lending rate is 7.75%, resulting in a spread of 3.50 percentage points.
The deputy director of corporate communications at the BoN, Kazembire Zemburuka, told Market Watch the spread is largely explained by domestic macroeconomic fundamentals prevailing in Namibia in the long term. Similarly, spreads in South Africa reflects macroeconomic conditions there.
According to Zemburuka, these fundamentals include inflation, uncertainty, liquidity, political risk premium, and overall government fiscal sustainability.
“It is worth noting that the spread reflects risk perceptions and stability of macroeconomic fundamentals of the domestic economy,” he said.
Zemburuka continued: “Thus, because investors and lenders to South Africa and Namibia have different risk perceptions towards these economies there will be some level of spread prevailing in these countries.”
Namibia’s macroeconomic condition has been deteriorating for the past three years, he noted.
Home loans
In South Africa, the prime lending rate and the home loan base rate (HLBR) are the same. In Namibia, the HLBR is prime plus one, therefore 9% currently.
Asked why the HLBR is higher than the prime, Zemburuka answered: “In general, the home loan base rate and prime rate do not need to be the same, because the former is linked to government bonds while the latter is linked to the bank rate or interbank rate.”
The prime rate reflects the risk of extending a line of credit to businesses for investment in Namibia, he said. This rate also forms the basis for a credit card interest rate plus some individual risk premium, e.g. if the prime rate is 9%, a prime rate for an individual can be 9% plus premium to reflect the riskiness of the individual customer, Zemburuka explained.
On the other hand, he said, the HLBR reflects long-term lending which is more exposed to significant risks such as inflation, taxation and the political environment.
“All these risks should be reflected in a form of risk premium over and above government treasury bonds or bank rate in some cases,” he said.
Industry standard
“However, a more exact answer to why there is such a difference can be sourced from commercial banks to explain why on average home loan base rates are higher by 100 basis points in Namibia,” Zemburuka said.
The industry standard for the HLBR is 100 basis points above the prime lending rate.
“We all adhere to this as a base rate,” the chief marketing officer of FirstRand Namibia, Tracy Eagles, recently told Market Watch. FNB Namibia is part of FirstRand Namibia.
Home loan applications are assessed on an individual basis and the base rate pricing adjusted for risk to determine the individual client rate, the executive officer of marketing and corporate communication services at Bank Windhoek, Jacquiline Pack, said.
Factors such as creditworthiness, affordability, property values and loan tenure are considered as part of the assessment, she added.
According to Pack, home loans are priced below the prime lending rate in many cases.
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