Expected rising interest rates to benefit investors

PHILLEPUS UUSIKULocal individual and corporate savers who want to invest in money market unit trust funds such as fixed deposits and treasury bills can expect to see a rise in returns as interest rates rise, Simonis Storm economist Theo Klein said.Klein foresee the Bank of Namibia (BoN) increasing the repo rate by 125 basis points (bps) in 2022, taking it from its historic low level of 3.75% to 5.00% by the end of the year.With the South African Reserve Bank’s hike in January, Robert McGregor, head of research at Cirrus Capital expects the central bank to increase the repo rate as well. “Theoretically, we can only deviate from South African monetary policy to the upside,” he said. This implies that Namibia’s repo rate can only be on par or higher than South Africa’s repo rate. South Africa’s repo rate currently stands at 4.00%, 25 basis points higher than Namibia’s rate.In addition, earlier this month, First National Bank (FNB’s) economist Ruusa Nandago, expected interest rates to end the year at 4.50%, 75bps higher than current levels.Meanwhile, IJG Securities in their recent private sector credit extension report expected the BoN to hike interest rates by 25 basis points at the first monetary meeting.Klein notes that both individuals and banks stand to benefit from higher interest rates. It is worth noting that commercial banks were already fairly risk averse given the terrible economic environment. “Now that they can potentially earn higher rates on short-term money market securities, it can make banks even more risk averse as the risk-return trade-off to lending money to clients has increased. For locals who are not saving and investing, of course rising interest rates are a negative, but for savers it is a positive provided they do not have high levels of debt,” he pointed out.CREDIT UPTAKEMcGregor notes that credit extension is coming from a weak base, with real credit extension that is adjusted for inflation being negative for many periods now. “We expect credit uptake to improve gradually, particularly as the general economy recover,” he said.However, credit risk remains high and large government deficits being funded by domestic issuances are inhibiting factors. At this stage, the large domestic borrowing requirements are severely limiting monetary policy. In other words, currently fiscal policy is hampering monetary policy. Despite administered interest rates being at record lows, credit extension growth remains exceptionally weak given the combination of substantial credit risk, duration, and low deposit growth. “While these aforementioned factors play a role in the low private sector credit extension figures we have seen, this is exacerbated by the large domestic borrowing requirements resulting in crowding out as government is competing for the limited pool of funds available,” MCgregor pointed out.Klein said indebted households and businesses will face higher monthly interest repayments, adding pressure to already stretched budgets. Households will have to implement budget reallocations given higher interest payments, especially those who are still enduring salary cuts. “During 2021, we saw high demand for overdrafts and car loans.” “We believe that the worst of the lockdown induced recession is behind us, it could be that households and businesses have reached their limits on overdrafts and we could therefore see a downward trend in overdrafts in 2022. We are aware of high demand for new vehicles, especially with higher end brands, so we could see some growth in instalment credit growth in 2022. However, overall, we expect private sector credit extension to average 1.7% in 2022, far below its long run average of about 7%,” Klein added.CAPITAL OUTFLOWIt is widely expected for the Federal Reserve to start hiking interest rates by March 2022, with other central banks across the developed world to follow. The fear is that foreign investors will want to withdraw portfolio investments from emerging markets who are deemed high risk, and return their savings to safer markets such as the US amongst. This will lead to significant depreciations in emerging market currencies, which is inflationary as certain emerging markets are net importers of merchandise goods. Namibia is vulnerable in the sense that we import most of our consumption goods, Simonis Storm economist said.Therefore, if the Rand weakens as foreign investors withdraw their investments, Namibia faces higher import prices. Emerging markets will therefore want to increase interest rates to make it more attractive for foreign investors to remain and thereby attempting to minimise currency depreciations. “Given that we do not have monetary policy independence, due to the Rand/Namibian dollar currency peg, Namibia will have to follow suite in hiking interest rates,” Klein added.Cirrus Capital head of research said Namibia cannot deviate to the downside of the South African monetary policy. This is because higher rates in South Africa theoretically see an outflow of funds from Namibia to South Africa as people are taking advantage of high returns, thereby resulting in an outflow of hard currency reserves.-phillep@nmh.com.na

Expected rising interest rates to benefit investors

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Republikein 2025-06-27

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Expected rising interest rates to benefit investors

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