Bank rate set to increase this week

SHORT-term interest rates in Namibia are set to increase by at least 50 basis points towards the end of this week, Johannes !Gawaxab, Managing Director of Old Mutual’s African Operations said yesterday.

The Monetary Management Committee sits this week and the Bank of Namibia will make an announcement on the repo rate tomorrow. According to !Gawaxab, regional macro-economic conditions, global energy inflationary pressures and interest rates are key drivers, set to push the local prime rate to at least 13,25 per cent.Further contributing factors include an increasing South African consumer price and producer price inflation, sustained strong domestic demand and a growing deficit in the current account (difference between imports and exports) in excess of six per cent of GDP for the first two quarters of 2006.!Gawaxab said the Namibian scenario is not significantly different from that of its southern neighbour, with the August Namibia Consumer Price Index growing by 5,4 per cent on a year-on-year basis.”Local inflation was mostly driven by food and transport-related costs, showing strong increases on a year-on-year basis.Whilst Namibia does not have a published producer price index, pipeline inflation pressure on imported goods and raw materials from South Africa seems strong.This is clearly negative for future inflationary developments and more importantly, inflation expectations,” he said.Similarly to the South African context, Namibian consumers seem to exhibit a growing appetite for credit, with the June private sector credit extension figures increasing 20 per cent year-on-year, from around N$22,1 billion (July 2005) to N$26,6 billion (July 2006).However, in contrast to South Africa, the Namibian current account recorded a surplus of N$825 million for the first quarter of 2006, largely as a result of transfers, and specifically, receipts from the Southern African Customs Union (Sacu).Namibia has recorded a trade deficit similar to its southern neighbour.The Namibian dollar has weakened by 23 per cent since May 2006.Said !Gawaxab: “The volatility in the currency is expected to continue over the next few months.Volatility in the external value of the currency holds potentially negative implications on local inflation in open economies that rely heavily on imported consumer goods, such as Namibia and South Africa.”He added that both economies are heavily reliant upon oil imports, resulting in a direct impact on local inflation.Whilst the weakening currency is positive for the export market, manufacturing sector and local tourism, the flipside is that importers will have to pay more for imported goods.Foreign direct investment plays an important role in supporting the external value of the currency of a net importer of goods and services.Volatility in this support will be a key component in the performance of the Namibian dollar in the short term, as imports slow with a weakening currency.!Gawaxab also reiterated that monetary authorities in the CMA area are targeting inflation and have minimal intention to intervene in the foreign exchange markets.From an investor perspective, a depreciating currency generally implies strong performance from offshore assets, all things being equal.Local short-term interest bearing assets should also perform strongly in an environment of volatility, characterised by an increase in short-term rates.According to !Gawaxab, regional macro-economic conditions, global energy inflationary pressures and interest rates are key drivers, set to push the local prime rate to at least 13,25 per cent.Further contributing factors include an increasing South African consumer price and producer price inflation, sustained strong domestic demand and a growing deficit in the current account (difference between imports and exports) in excess of six per cent of GDP for the first two quarters of 2006.!Gawaxab said the Namibian scenario is not significantly different from that of its southern neighbour, with the August Namibia Consumer Price Index growing by 5,4 per cent on a year-on-year basis.”Local inflation was mostly driven by food and transport-related costs, showing strong increases on a year-on-year basis.Whilst Namibia does not have a published producer price index, pipeline inflation pressure on imported goods and raw materials from South Africa seems strong.This is clearly negative for future inflationary developments and more importantly, inflation expectations,” he said.Similarly to the South African context, Namibian consumers seem to exhibit a growing appetite for credit, with the June private sector credit extension figures increasing 20 per cent year-on-year, from around N$22,1 billion (July 2005) to N$26,6 billion (July 2006).However, in contrast to South Africa, the Namibian current account recorded a surplus of N$825 million for the first quarter of 2006, largely as a result of transfers, and specifically, receipts from the Southern African Customs Union (Sacu).Namibia has recorded a trade deficit similar to its southern neighbour.The Namibian dollar has weakened by 23 per cent since May 2006.Said !Gawaxab: “The volatility in the currency is expected to continue over the next few months.Volatility in the external value of the currency holds potentially negative implications on local inflation in open economies that rely heavily on imported consumer goods, such as Namibia and South Africa.”He added that both economies are heavily reliant upon oil imports, resulting in a direct impact on local inflation.Whilst the weakening currency is positive for the export market, manufacturing sector and local tourism, the flipside is that importers will have to pay more for imported goods.Foreign direct investment plays an important role in supporting the external value of the currency of a net importer of goods and services.Volatility in this support will be a key component in the performance of the Namibian dollar in the short term, as imports slow with a weakening currency.!Gawaxab also reiterated that monetary authorities in the CMA area are targeting inflation and have minimal intention to intervene in the foreign exchange markets.From an investor perspective, a depreciating currency generally implies strong performance from offshore assets, all things being equal.Local short-term interest bearing assets should also perform strongly in an environment of volatility, characterised by an increase in short-term rates.