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September 2018 inflation rate – high oil prices start to bite

The Namibia Statistics Agency has released the Consumer Price Index (CPI) for September 2018 on 11 October 2018. The CPI is being used to calculate the month-on-month (compared to the previous month) and year-on-year (compared to the same month in the previous year) inflation rates. The annual inflation rate rose from 4.4% in August 2018 to 4.8% in September 2018. It is the highest inflation rate so far this year, although it remained below the inflation rate in September 2017 of 5.6%.
On a month-to-month basis, inflation accelerated from 0.03% in August to 0.8% in September. This is the highest month-on-month inflation rate after a 1.6% rise in January 2018.
Below are some of the main highlights of the September inflation data:
 The inflation rates for both goods and services increased in September 2018, but price rises for goods remained the key driver for the higher inflation rate. Prices for goods rose by 4.9% in September compared to 4.6% in August, while prices for services increased by 4.7% compared to 4.1% in August. Prices for both categories accelerated at the fastest pace this year. While the inflation rate for goods exceeded the inflation rate a year ago (3.6%), the inflation rate for services remained below last year’s inflation rate of 8.4%.
 The strong increase in public transportation fares that resulted in an inflation rate of 18.0% compared to September 2017 was the main driver behind the rise in service inflation. The transportation fare increase contributed 0.4 percentage points to the increase in service inflation or two third of the overall increase.
 After a peak of 4.1% in June 2018, food price inflation continued to slow down to 2.6% in September from 2.7% in August. Bread and cereal prices, however, rose at the fastest pace in September (3.8%) after actual price reductions during the first four months this year. In contrast, meat prices increased by only 4.6%; the lowest increase not only for this year, but since November 2016, when prices rose by 4.4%. Bread, cereals and meat account for 51% of the food price inflation and have therefore a strong influence on the overall inflation rate for this category.
 After a decline by 2.7% in August, prices for milk, cheese and eggs eased by 0.6% in September. It is the third consecutive month of price declines; something Namibian consumers have not experienced since the end of 2010 and beginning of 2011. Fruit prices jumped by 15.3% in September 2018 compared to September 2017 after an increase by 7.9% in the previous month. It is the highest fruit price inflation since January 2017 (15.8%). Prices for vegetable rose by 5.2% after increases by 6.0% and 8.0% in August and July 2018, while prices for sugar, jam etc. continued the downward trend and dropped by 2.5% – the largest decline so far this year. These four category account for about a quarter of the food price inflation.
 Prices for alcohol and tobacco increased at different paces. While alcohol prices showed a stronger increase than in August – 6.3% in September compared to 5.8% in the previous month – tobacco prices rose by only 2.6% compared to 3.8% in August 2018. Overall, the inflation rate for this category increased from 5.4% to 5.6%.
 Price increases for housing, water and electricity slowed down to 3.8% after an increase by 4.4% in August. While price rises for rental payments and for the maintenance of dwellings remained unchanged at 2.6% and 3.4% compared to August, the inflation rates for water supply and for electricity dropped from 6.2% to 5.6% and from 13.2% to 9.0% respectively.
 Transport inflation provided the main push for the higher inflation rate. Transport inflation rose from 9.7% in August to 12.9% in September. It is the highest inflation rate for this category since 2010. Since transport contributes 14.3% to the overall inflation rate, this increase by 3.2 percentage points translates into on overall increase of the inflation rate by 0.5 percentage points. Without price declines or below average price increases in other categories, the inflation rate would have been even higher due to price rises for transport.
 Prices for vehicles increased faster in September (8.5%) than during any month since February 2017 (9.4%). The price for the operation of transport equipment, which refers mainly to fuel prices, rose by 13.3%, a level last seen in May 2012 (13.9%). As mentioned above, the taxi and municipality bus fare increases resulted in prices being 18.0% higher than a year ago.
 While price increases for health services slowed down to 5.0% – the slowest rise since May 2015 – the inflation rate for education remained slightly below double-digit figures at 9.9%.
 Prices for clothing and footwear remained on a downward trend (-3.2%), but did not drop as much as in August (-5.6%). Parents with children had to fork out less for children’s clothing, since prices declined by 8.4%, mainly driven by lower prices for girls’ clothing (-15.1%), while boys’ clothing became slightly more expensive than a year ago (1.0%).
 Prices for communication services were also lower in September 2018 compared to September 2017 (-1.2%) after they dropped by 1.4% in August.
As expected, the combined effect of higher fuel prices and fares for public transport services is exerting upward pressure on the inflation rate. Namibia currently experiences only the direct impact, but higher transportation costs will have an impact on the prices of other goods soon – so called second round effects. Furthermore, the weaker currency compared to a year ago, even so it has gained some ground again since  the middle of September, will result in higher prices for goods imported from outside the rand area. Sourcing goods to the extent possible locally will protect producers and consumers from increasing transportation costs and a weaker currency. Furthermore, both consumers and producers need to use transport equipment more efficiently. Moreover, motorists need to explore alternative modes of transport  (non-motorised transport, car sharing, etc.) and need to move to electric vehicles that can be charged from locally available, renewable energy sources. In the meantime, however, consumers have to tighten the belt, not only because of rising price levels, but also because of a tight labour market.

Inflation rate September 2018

Private sector credit extension August 2018 – strong demand by businesses

The Bank of Namibia has released selected statistical data for August 2018 that cover among others the extension of credit to the private sector (PSCE).
We cover some of the highlights:
 Total credit extended to the private sector rose by 1.5% from NAD93,409 million in July to NAD94,783 million in August 2018. This is the strongest month-on-month increase since almost three years. In November 2015 PSCE increased by 1.9% compared to October 2017. In absolute terms, PSCE grew by NAD1,375 million in August compared to July after an increase by NAD293 million in July compared to June.
 The overall increase in credit extension was driven by businesses. After a decline in credit extended to businesses by NAD159 million in July compared to June, demand by businesses increased strongly by NAD886 million or by 2.4% in August compared to July. It is the strongest month-on-month growth since November 2015 (2.6%).
 Credit extended to individuals grew by NAD452 million in August, which was slightly below the growth in July by NAD473 million. On a month-on-month basis credit extension slowed down from 0.9% in July to 0.8% in August.
 PSCE to businesses increased by 4.3% since the beginning of the year and to individuals by 3.5%. Both growth rates exceed growth experienced in August 2017 of 3.7% and 2.6% for businesses and individuals respectively.
 Credit extended to individuals accounted for 58.6% of total credit extended to the private sector compared to 40.1% extended to businesses.
 Mortgages absorbed 52.1% of total credit extended, which is below the average so far this year. Mortgages were driven by individual demand that increased by 1.1% month-on-month to NAD37,921 million, while demand by businesses dropped minimally by 0.01% to NAD11,481 million. Mortgages extended to individuals rose by 4.6% since beginning of the year, which is above the growth rate experienced over the first eight months of 2017 (2.4%). In contrast, mortgages extended to businesses grew by 9.7% until August 2017, but by only 2.2% until August 2018.
 On a year-on-year basis (August 2018 compared to August 2017), the value of mortgages increased by 7.2% – the second lowest growth rate since eight years. In August 2010 mortgages rose by just 4.9%, while in July 2018 they increased by 6.7%.
The overall stronger increase of credit extended to businesses than credit extended to individuals is good news, since credit to individuals is often used for consumption that does not yield an economic return. However, it remains to be seen, whether the demand for credit by businesses can maintain the momentum, since the economy is still facing headwinds in terms of rising fuel prices, depreciation of the currency and lower commodity prices (with the exception of oil).

Private Sector Credit Extension

Fuel price increase Oct. 2018 – Large under-recoveries result in price hikes

The Ministry of Mines and Energy announced on 28 September 2018 a fuel price increase of NAD0.50 per litre for petrol and diesel countrywide with effect of 3 October 2018 midnight.
Two factors continue to contribute to the upward price pressure: the depreciation of the Namibia dollar against the US dollar and rising global oil prices.
 Based on daily South African Reserve Bank exchange rates, the Namibia dollar weakened by 4.8% against the US dollar between August (monthly average of NAD14.063 per USD) and September 2018 (monthly average of NAD 14.7904 per USD). In addition, monthly average oil prices in US dollar for Europe Brent oil increased by 7.8% to USD78.09 per barrel between August and 24 September 2018. It is the highest monthly average oil price since November 2014 and 39.1% higher than a year ago.
 The combined effect of currency depreciation and higher global oil prices resulted in the cost of oil in Namibia dollar increasing in September 2018 by 13.0% compared to August 2018 and by 56.6% compared to September 2017.
 The steep increase in the cost of landing refined oil at Walvis Bay resulted in under-recoveries, meaning the actual cost of oil exceeded the pump price at Namibian service stations. The under-recoveries amounted to NAD131.505 cents per litre for petrol and NAD144.494 per litre for diesel 50ppm. These are the largest under-recoveries so far this year, bringing total under-recoveries to NAD440.507 cents per litre and NAD418.879 cents per litre for petrol and diesel 50ppm respectively since May 2018.
 The fuel price increases cover only 38% (petrol) and 34% (diesel) of the under-recoveries. The largest share of the under-recoveries is absorbed by the National Energy Fund that is amongst others funded by the NEF fuel levy and over-recoveries (see EAN Commentary 2018/06, 2 Aug. 18 for more details). Since May 2018, the NEF has subsidised the fuel price by NAD255.507 cents per litre and NAD233.879 cents per litre for petrol and diesel respectively. In other words, without the NEF petrol prices would be some NAD2.56 per litre and diesel prices some NAD2.34 per litre higher than they will be from 3 October 2018.
 Petrol prices will be 15.4% higher than at the beginning of the year and 24.7% higher compared to October 2017. The increases amount to 17.8% and 29.5% respectively for diesel 50ppm.
 While Namibians are facing the highest petrol and diesel prices so far, they are still below prices in South Africa. South Africans have to pay ZAR15.49 per litre at the coast and ZAR16.08 per litre in Gauteng for petrol.
The Namibia dollar has regained some ground against the US dollar since the first week of September and hold steady despite the interest rate hike on 26 September 2018 by 25 basis points in the USA. Further interest rate increases are expected on a quarterly basis, which will maintain pressure on in particular emerging market currencies.
Oil prices have exceeded USD80.00 per barrel towards the end of September, despite pressure by the US administration in particular through Saudi Arabia on OPEC to increase output in order to prevent prices to rise further. However, Saudi Arabia and Russia, a non-OPEC oil exporting country, are cooperating more closely and are withstanding the pressure. The USA might release some strategic oil reserves before the mid-term elections in order to please their motorists. The main root causes of rising oil prices are the withdrawal of the USA from the Iran deal and the re-implementation of sanctions against the country as well as the turmoil in Venezuela that resulted in a drop in oil production.
The strong price increases on the global market and the domestic market put substantial pressure on businesses due to cost increases and on consumers that have to spend more on fuel, unless they change their behaviour, and have therefore less disposable income. There are already concerns globally that the pace of oil price increases could result in a significant slow-down of the global economy, since both producers and consumers have little time to adjust production and consumption to these hikes.
As in the past months, the fuel price increase will push transport inflation higher into double-digit figures, which will ultimately contribute to rising inflation rates. Motorists need to explore ways to use transport equipment more efficiently in order to cushion against rising costs of transport.

Fuel price hike October2018

Second quarter 2018 Gross Domestic Product growth – strong headwinds prevail

The Namibia Statistics Agency has released the Gross Domestic Product (GDP) figures for the second quarter 2018 on 20 September 2018. GDP in real terms dropped by 0.2% during the second quarter 2018 compared with the second quarter 2017. It is the ninth consecutive quarter of economic contraction. The last positive economic growth was recorded in the first quarter 2016 at 4.4%.
Herewith a brief summary of the second quarter data:
 The revisions for the first quarter 2018 resulted in a slightly stronger contraction than initially estimated. Economic growth was revised downward from -0.1% to -0.2%, which is mainly due to a stronger contraction in the wholesale and retail trade sector (-1.6% instead of -1.3%) and lower growth in the real estate sector (0.5% instead of 1.1%). In contrast, the tourism sector performed slightly better and contracted by 4.8% instead of 5.3%.
 The agricultural sector contracted by 1.1% in the second quarter 2018 after positive growth of 1.4% in the first quarter. The contraction is caused by the base effect – agricultural production increased by 21.2% in the second quarter 2017. Compared to the first quarter 2018, agricultural output in constant 2010 prices rose by 20.7%. The poor performance of the agricultural sector in the second quarter was caused by a decline in livestock marketed, since farmers decided to restock their herds due to better rainfall than in the first quarter. This decline was also reflected in the second quarter trade statistics as the value of cattle exported to South Africa on-the-hoof dropped.
 The fisheries sector contracted by 8.0% in the second quarter compared to a decline by 13.6% in the first quarter 2018 and a contraction by 4.0% in the second quarter 2017. The decline was caused by two factors: lower landings and rising fuel costs.
 The mining sector, on the other hand, showed strong growth of 22.4% compared to growth of 4.7% in the first quarter 2018. It is the strongest quarterly growth since the fourth quarter 2012 (31.4%). Diamond mining (30.5%) and uranium mining (62.3%) were the driving forces behind the strong performance of the mining sector. However, uranium mining benefited from a strong increase in output during June that could not be maintained in July.
 The manufacturing sector suffered from the strongest contraction (-12.5%) of all economic sectors in the second quarter. Despite the increase in output of diamond mining, value added by diamond processing declined by 7.8%. Meat processing (due to re-stocking of herds) and fish processing (due to lower landings) declined by 12.2% and 8.1% respectively. Value addition in other processing activities of commodities, such as basic non-ferrous metals (-33.3%) and non-metallic minerals (-26.0%) also dropped strongly as did value addition of the beverage industry (-12.9%).
 The construction sector maintained the momentum in the second quarter that it gained during the first quarter 2018 and expanded by the same growth rate of 23.8%. It is the strongest growth in the
sector since three years. During the second quarter 2015, the construction sector expanded by 29.6%. However, real value added of NAD973 million in the second quarter 2018 remains one of the lowest since the end of 2012.
 The sector ‘Hotels and restaurants’ experienced the worst first half year since 2013. The sector – usually used as a proxy for the tourism sector – contracted by 4.8% and 2.6% in the first and second quarter 2018 respectively compared to contractions of 6.2% and 1.6% during the corresponding quarters of 2013. The sector contracted despite the increase in tourist arrivals at Namibian airports by 14% in the first half of 2018 compared to the first half of 2017 and despite a depreciation of the Namibia dollar against the Euro by 4.3% and 3.6% in the first and second quarter 2018, which should usually support tourist spending.
 Value added of the transport sector grew by 1.9% in the second quarter 2018 after an expansion by 2.5% in the first quarter. However, the transport sector recorded the slowest second quarter growth in the past decade. The sector faced declines in the railway and air transport sub-sectors, while cargo handled at Namibia’s sea ports increased. Increased outputs of the uranium mining sector as well as the construction sector were apparently not strong enough to offset a drop in demand from other sectors, such as the transportation of livestock.
 Fiscal consolidation is reflected in a decline in value addition in the education (-6.2%) and health (-4.9%) sectors, while the output of public administration grew by 1.2%.
 Revenue from taxes on products showed a strong decline of 5.5% after a contraction in the first quarter 2018 by 0.4%. Revenue amounted to NAD1,979 million, the lowest amount since the second quarter of 2014, when it stood at NAD1,845 million. Unless revenue from other tax sources and non-tax sources has increased, the figures suggests that it might be challenging to achieve the fiscal targets.
Quarterly data is preliminary and always up for revision, when more data is collected. However, it provides a first glimpse of the performance of the economy. GDP growth for the first quarter 2018 as well as all quarters for 2017 was revised downward, which indicates that the contraction was stronger than initially estimated. Despite the low base, value added in the first half of 2018 of NAD53.4 billion has remained below value added in the first half of 2017 (NAD53.5 billion) and the first half of 2016 (NAD53.7 billion). Although we were slightly optimistic after the release of the first quarter data, the second quarter data suggests that the economy continues to face strong challenges.
Global events, such as the imposition of tariffs by the US administration on ever more products imported from China – and China’s retaliation –, the threat by the US to impose tariffs on imports from Canada if the country does not agree on the proposed revised NAFTA agreement as well as threats to impose tariffs on imports from the EU are not at all supportive of a speedy recovery of Namibia’s economy, since these ‘trade wars’ dampen the demand for and prices of commodities. In addition, financial investors moved assets to safe havens, such as the US dollar, which resulted in currencies of emerging markets coming under pressure. Furthermore, US sanctions against Iran have resulted in rising oil prices, even before direct US sanctions against Iranian oil exports are put in place. The rising oil prices have resulted in increasing fuel prices and inflation, which will impact negatively on consumer demand and will increase production costs.
Namibia, therefore, needs to continue to improve the business and investment climate in order to attract domestic and foreign direct investment into manufacturing activities and into the service sector, since Government’s fiscal space is limited to stimulate the economy. Investment in these sectors is also needed to reap the benefits from the ongoing investment in Namibia’s infrastructure.

EAN Commentary – 2Q2018 GDP growth

Second quarter 2018 trade statistics – some worrying trends

The Namibia Statistics Agency (NSA) has released the trade statistics for the second quarter 2018 on 13 September 2018. The trade statistics refer to trade in goods only and exclude the trade in services. Namibia usually achieves a surplus in the trade of services.
Herewith a few highlights:
 The value of exports increased by 19.6% from NAD19.1 billion in the first quarter of 2018 to NAD22.8 billion in the second quarter. However, the increase is caused by an increase in re-exports from NAD8.0 billion to NAD12.4 billion over the same period, most notable the re-export of a vessel to the UK valued at NAD5.4 billion. Re-exports are goods that were imported into the country and then exported again. Excluding re-exports, Namibia’s exports dropped from NAD11.0 (Q1 2018) billion to NAD10.4 billion (Q2 2018).
 The value of imports dropped by 15.4% from NAD28.4 billion to NAD24.0 billion (Q1 2018) in the second quarter 2018. The import figure for the first quarter includes the importation of an oil rig valued at NAD3.7 billion for drilling purposes in the Walvis Bay basin, while a vessel worth NAD2.2 billion (most likely another oil rig) was imported in the second quarter. This equipment will be re-exported once the drilling is completed. Excluding these two items from the import data, the value of imports dropped by 11.5%.
 The trade deficit declined substantially by 86.6% from NAD9.3 billion to NAD1.2 billion in the second quarter 2018. As explained above, excluding the vessels from the import and export data, the trade deficit would be 20.5% lower.
 Except for the vessel that pushed up the value of exports, the export of diamonds increased by 8.0% to NAD4.6 billion and the export of fish by 1.2% to NAD2.5 billion. Furthermore, the exports of beverages rose by 13.8% to NAD280 million and of meat by 71.6% to NAD314 million. In contrast, the export value of copper ore declined by 11.9% from NAD2.2 billion to NAD2.0 billion, the value of copper cathodes from NAD5.3 billion to NAD4.1 billion and of zinc by 65.2% from NAD1.2 billion to NAD0.4 billion. While the value of meat exports increased, the value of live animals dropped by 8.1% to NAD671 million.
 Diamonds accounted for 20.3% of total exports followed by copper cathodes (17.8%), fish (11.0%) and copper ore (8.7%).
 The value of re-exports grew by 54.6% from NAD8.0 billion to NAD12.4 billion in the second quarter of 2018 owing to the re-export of the vessel. Otherwise, copper cathodes dominated the list of re-exports with 29.9% (NAD3.7 billion), followed by diamonds with 11.7% (NAD1.5 billion).
 The total value of imports declined due to a sharp reduction in the importation of mineral fuel that dropped by 48.1% to NAD1.7 billion and of ores and concentrates that dropped by 48.3% to
NAD0.7 billion. The value of imported boilers and machinery declined by 28.0% to NAD1.7 billion. In contrast, the value of imported electrical machinery rose by 37.6% from NAD1.0 billion to NAD1.4 billion, while the value of imported copper cathodes increased by 6.2% from NAD3.6 billion to NAD3.8 billion.
 Copper cathodes lead the list of imports accounting for 15.9% of total imports followed by vessels (9.2%) ,vehicles with 8.0% (NAD1.9 billion), mineral fuels (7.0%), boilers (6.9%), electrical machinery (5.6%) and diamonds with 5.3% (NAD1.3 billion).
 The EU claimed the top position of export destinations due to the export of the vessel to the UK with 46.1% of total exports. SACU ranked second with 24.1% and BRIC countries (Brazil, Russia, India, China) third with 13.8%. Non-SACU SADC member states accounted for 6.9% of all exports and Comesa member states 5.9%. These two categories are to a large extent overlapping since most non-SACU SADC member states also belong to Comesa.
 SACU member states (mainly Botswana and South Africa) remained the main source for Namibia’s imports accounting for 53.3% of total imports in the second quarter (up from 44.3% in the first quarter). Comesa and Non-SACU SADC member states accounted for 16.6% and 16.5% respectively (see our note above). 14.9% of imports were sourced from the EU and 7.3% from BRIC countries.
The quarterly trade deficit dropped to the lowest level over the past couple of years only second to the first quarter of 2016 when a deficit of NAD448 million was recorded. The increase in the value of exported fish and of imported fish that is further processed in Namibia is encouraging. The value of fish exports was the second highest over at least the past five years. Likewise, the increase in the export value of meat, while the value of live animal exports dropped suggests that more value was added to livestock in Namibia.
However, there are some worrying trends as well: Based on monthly data, exports are on a downward trend, which could be a reflection of declining commodity demand and prices, although the depreciation of the Namibia dollar should result in higher commodity prices in the local currency. Moreover, a large and increasing share of exports consists of re-exports, meaning these are goods that were imported and then exported either during the same or a later quarter. These are not goods produced in Namibia and exported. In fact, the share of goods produced in Namibia over total exports is declining. In the fourth quarter of 2017, re-exports accounted for 32.3% of total exports. This share increased to 42.1% in the first quarter 2018 and 54.5% in the second quarter 2018. It is not only the share that is declining, but also the value of domestically produced exports. In the fourth quarter of 2017, exports excluding re-exports amounted to NAD12.4 billion, in the first quarter 2018 to NAD11.0 billion and in the second quarter 2018 to NAD10.4 billion. Only these exports will increase Namibia’s foreign exchange reserves.
The strong depreciation of the Namibia dollar in particular at the end of August and beginning of September will increase the value of imports, in particular of mineral fuels, but also the value of exports in the domestic currency. The overall impact on the trade deficit depends on the elasticity of demand, i.e. whether the demand for imports drops faster than the price of imports increases and whether the demand for Namibian exports increases. Rising oil prices supported by looming US sanctions against Iran’s oil exports will put further pressure on the trade balance. The demand for commodity exports is relatively inelastic, since commodities are traded mainly in US dollar. It remains to be seen, whether Namibia could gain a competitive advantage for other export products (processed and manufactured goods) due to the more favourable exchange rate.
EAN Commentary – 2Q2018 trade statistics

August 2018 inflation rate – inflation eases slightly

The Namibia Statistics Agency has released the Consumer Price Index (CPI) for August 2018 on 13 September 2018. The CPI is being used to calculate the monthly (compared to the previous month) and year-on-year (compared to the same month in the previous year) inflation rates. The annual inflation rate eased slightly from 4.5% in July to 4.4% in August 2018, but dropped by one percentage from 5.4% in August 2017. However, it is the second highest inflation rate so far this year only exceeded by price increases in July. On a month-to-month basis, inflation slowed down from 0.5% in July to 0.03% in August.
We summarise the main highlights of the August inflation data:
 After accelerating every month this year with the exception of March, the inflation rate for goods remained unchanged at 4.6% in August 2018. Contrary to the overall inflation rate, the inflation rate for goods was 1.2 percentage points higher than in August 2017 (3.4%).
 Prices for services increased at the slowest pace not only for this year, but since December 2015. The inflation rate for services stood at 4.1% in August 2018, almost half of the inflation rate in August 2017 (8.1%). Services account for 42.3% of the consumption basket and goods for 57.7%.
 Food price inflation slowed down from 3.2% in July to 2.7% in August 2018 and remained below food price inflation in August 2017 of 4.6%. Price increases for bread and cereals accelerated in August compared to July to 2.6% from 1.5% resulting in the second strongest price increase this year. It is in part caused by the base effect, since prices dropped by 0.5% in August 2017 and hence prices have increased from a low level. Although meat prices rose faster (6.0%) in August than in July 2018 (5.1%), prices increased at a slower pace than during the first half of this year. These two categories account for almost 51% of the whole food basket and therefore strongly influence the overall food inflation. However, the price increases in these two categories were levelled out by lower prices for milk and dairy products as well as for sugar, jam etc. Prices for milk dropped by 2.7% compared to August 2017, which is the strongest price decline since April 2011. Prices for sugar etc. declined by 1.9% in August compared to a decline by 0.6% in July. Fruit prices increased (7.9%), but at a slower pace than in July (12.7%), like prices for vegetables that rose by 6.0%, which was below the inflation rate for vegetables in July (8.0%) and June (6.1%). These four categories account for some 26% of the food consumption basket.
 Price increases for alcohol and tobacco slowed down during August to 5.4% from 6.8% in July caused by lower price increases for alcoholic beverages (5.8% in August compared to 7.5% in July), while price for tobacco products rose faster in August (3.8%) than in the previous month (3.6%).
 Prices for housing, water and electricity rose at the fastest pace so far this year (4.4%), because of a substantial increase in the cost of electricity, gas etc. Electricity prices went up by 13.2% in August
– the strongest increase since more than five years. In June 2013, electricity prices rose by 16.6%. The inflation rate for the maintenance of dwellings was slightly below that of the previous month (3.4% compared to 3.6% in July), while costs of water supply and sewerage went up slightly stronger in August (6.2%) than in July (6.1%).
 Transport inflation has continued its upward trajectory accelerating to 9.7% in August from 8.9% in July. It is the fastest increase since more than four years. In June 2014, prices for transport rose by 10.7%. The fuel price increase was the main driver for the higher transport inflation. Fuel prices are the major item in the category ‘operation of transport equipment’ that accounts for almost two thirds of the transport inflation. Prices increased by 12.6% in August after an increase by 11.8% in July, the strongest increase since six years (September 2013: 13.0%). Despite taxi fare increases for Windhoek, the inflation rate for public transport services (1.7%) was lower than over the preceding six months. In contrast, vehicle prices accelerated at the fastest rate (7.9%) since April 2017 (8.2%).
 Prices for clothing and footwear remained on a downward trend (-5.2%) and dropped even faster than in July (-5.0%) extending the period of actual price declines to a full year. Prices for children’s clothing dropped by double-digit figures (10.9%). Prices for communication were also lower in August 2018 (-1.4%) than in August 2017.
 Price increases for health services remained the lowest since May 2015. The inflation rate for this category was recorded at 5.1% in August; the same as in July. In contrast, costs for education are up by 9.9% compared to August 2017, driven by double-digit price increases for primary and secondary education (14.6%).
We expect inflation to pick up again owing to fuel price increases by NAD0.40 per litre in September, which translates into a price increase of 23.4% compared to September 2017. Fuel price increases contribute almost 9% to the overall inflation rate. Fuel price increases have a direct impact on transportation costs and over time on the costs of other products that have to be transported. Furthermore, the depreciation of the Namibia dollar against other currencies such as the US dollar and Chinese Yuan will push up prices for other imported products in the coming months.

EAN Commentary – August inflation rate

Fuel price increase Sep. 2018 – National Energy Fund continues to subsidise motorists

The Ministry of Mines and Energy announced a fuel price increase of NAD0.40 per litre for petrol and diesel countrywide on 3 September 2018 with effect of 5 September 2018 midnight.
 The reason for the price hike is the depreciation of the Namibia dollar against the US dollar. The Namibia dollar depreciated by 6.6% from NAD13.43 per US dollar in July to NAD14.11 per USD in August (calculated on daily exchange rates of the South African Reserve Bank). The depreciation outweighed the drop in average Brent Crude oil prices from USD74.25 per barrel in July to USD71.69 per barrel in August (US Energy Information Administration daily data) and resulted in an increase of oil prices in Namibia dollar from on average NAD997.17 in July to NAD1,011.33 per barrel in August.
 It is the fourth consecutive monthly fuel price increase for the country except for Walvis Bay, which was spared the adjustment in the transportation cost in July.
 Petrol prices are up by 11.2% and diesel prices by 13.6% since the beginning of the year. Petrol is 20.2% and diesel 25.0% more expensive than in September 2017.
 Since June 2018, fuel prices in Namibia have exceeded previous price peaks experienced four years ago. Motorists had to pay NAD12.51 per litre for petrol and NAD13.05 per litre for diesel 500ppm in June 2014. However, taking inflation into account over the same period real fuel prices are below levels in September 2014.
 Since April 2018, the National Energy Fund incurred under-recoveries (pump prices were below actual costs) of Namibia cent 324.63 per litre for petrol and of Namibia cents 310.51 per litre for diesel 50ppm. Fuel price increases recovered only Namibia cents 100.00 per litre for petrol and Namibia cents 130 per litre for diesel 50ppm. Resulting in a subsidy of Namibia 224.63 and Namibia cents 180.51 per litre respectively.
The continuation of the depreciation of the NAD against major currencies as well as oil supply-side uncertainties owing to the sanctions threatened by the US administration on Iranian oil from November onwards are likely to exert further upward pressure on domestic fuel prices. So far, the National Energy Fund (NEF) has absorbed the bulk of under-recoveries in recent months. However, the NEF only smooths strong price fluctuations, but will not avoid price rises if import costs of oil exceed pump prices over a longer period. Motorists therefore need to prepare for further fuel price increases.
The fuel price hike combined with the increase in taxi fares will push up transport inflation in September and hence the overall inflation rate.
The price increases can encourage a more efficient use of transport equipment, the switch to more fuel-efficient equipment or the shift to equipment fuelled by other forms of energy, such as batteries.

Fuel price increase Sep 2018

Private sector credit extension continued to increase in July 2018

The Bank of Namibia has released selected statistical data for July 2018 that cover among others the extension of credit to the private sector (PSCE).
Herewith our main findings:
 Total credit extended to businesses and to individuals amounted to NAD93,409.2 million in July 2018. Overall credit extension grew by 0.3% compared to June 2018 or by NAD292.8 million. It is the 13th consecutive months of increased credit extension after a drop by 0.5% in June 2017 compared to May 2017.
 The overall increase in credit extension was driven by growth in credit extended to individuals. Credit extended to individuals increased in July 2018 to NAD55,087.7 million representing an increase of 0.9% compared to June 2018 after a slight decline of 0.1% in June compared to May 2018. This is the strongest monthly growth so far this year.
 Credit extension to individuals rose by 6.7% on an annual basis compared to July 2017, which is weaker than the annual growth of credit extension during the months of January to May 2018. It remains also below the double-digit growth during almost all months between January 2011 and August 2016. Annual growth in credit extended to individuals peaked at over 15% during the first few months in 2014.
 In contrast, credit extension to businesses dropped by 0.4% compared to June 2018 and amounted to NAD37,092.7 million. Credit extended to businesses has seen contractions in three of the seven months this year, but remains overall 2.2% above the level at the end of 2017.
 Annual growth in credit extension to businesses dropped from 4.2% in June 2018 (compared to June 2017) to 3.4% in July 2018 compared to July 2017. Although it is the second strongest annual growth rate since September 2017, it remains substantially below growth rates experienced since January 2006. During the decade of January 2006 to October 2016, credit extension to businesses grew by double-digit figures peaking at 23.9% in January and March 2007.
 Credit extended to individuals accounted for 59% of total credit extended to the private sector compared to 39.7% extended to businesses. During 2006, credit extended to individuals made up two-thirds of total credit extension to the private sector, but the share has declined since then.
 Mortgages accounted for 52.4% of credit extended. The bulk of mortgages are taken up by individuals (NAD37,502.5 million) compared to NAD11,482.8 million by businesses in July 2018. While mortgages to individuals increased by 1.0% compared to June 2018, mortgages to businesses declined by 1.9% over the same period. Mortgages’ share of PSCE has remained fairly stable over time even during the construction boom.
The slow growth compared to previous years of credit extension to the private sector reflects the subdued sentiments in particular in the business sector and indicates that the economy is still facing headwinds. This is particularly true for the construction sector that does not receive much of a boost from the private sector as the slow, month-on-month increase in mortgages suggests.

Public Sector Credit Extension July 2018

National Accounts 2017 – Economic contraction slightly stronger

The Namibia Statistics Agency released the final National Accounts for 2017 on 15 August 2018. Gross Domestic Product (GDP) contracted slightly stronger than estimated in the Preliminary National Accounts released in March 2018 – 0.9% rather than 0.8%. It is only the second drop in real GDP since Independence after a contraction by 1.6% in 1993.
Herewith our summary of the main highlights:
 GDP refers to the value addition by all entities in Namibia. Gross National Income refers to the value addition by Namibian nationals whether in the country or abroad. GNI showed a slightly different trend compared to GDP. It already contracted strongly in 2016 by 5.8%, but slightly less in 2017 (3.5%). The figures indicate that Namibian entities were already strongly affected by the economic downturn in 2016, when GDP growth dropped to 0.6% from 6.1% in 2015, while value addition by foreign entities prevented a contraction of GDP in 2016. Between 2011 and 2015, GNI growth outperformed GDP growth. While GNI increased by 41.2% over the period, GDP increased by 25.2%.
 The share of compensation of employees (labour) over GDP dropped slightly from 45.7% in 2015 to 45.4% (2016) and 44.8% in 2017. It is the lowest share since nine years. In 2008, compensation of employees accounted for 43.9% of value added.
 Consequently, net operating surplus (profits) increased from 42.6% to 42.9% and 44.0% over the same period. Net operating surplus’ contribution to GDP accounted for less than compensation of employees’ contribution since 2008 (45.0%).
 Per-capita income contracted for the second consecutive year. After a decline by 1.2% in 2016 it dropped by 2.8% in 2017, since population growth exceeded GDP growth. The per-capita income decline in terms of GNI was even more pronounced. It decreased by 7.5% in 2016 and 5.3% in 2017.
 Labour productivity improved between 2012 and 2016 (based on the National Accounts and the Labour Force Surveys) from NAD159,000 to NAD221,000 per employee. It, however, decreased in the manufacturing sector from NAD459,000 to NAD399,000. The drop in productivity was caused by a sharp increase in employment that was not matched by a similar increase in value addition in the sector. Since manufacturing is one of the priority sectors in NDP5 some more in-depth analysis of the trend is needed. The establishment of a productivity centre, envisaged under the Harambee Prosperity Plan, could play an important role in increasing labour productivity and hence increase the competitiveness.
 The agricultural sector rebounded strongly after years of drought. Value added in the sector grew by 12.6%, albeit from a low base. Although value addition exceeded the values over the previous four years, it remains below value addition in 2011 and 2012 indicating the effects of the droughts. Livestock farming increased by 13.7%, while crop farming grew by 11.0%.
 The mining sector also showed a strong performance and expanded by 12.8% after three consecutive years of contraction. All sub-sectors showed strong and positive growth, led by uranium mining (23.4%) and diamond mining (12.0%).
 Value added in the primary sector overall increased by 10.6% after four years of contraction.
 The strong performance of the primary sector did not completely benefit the secondary sector. Value added of the manufacturing sector grew by only 1.3%, down from 5.6% a year earlier. Meat processing activities decreased by 14.4%, mainly because of increased livestock exports to South Africa (up from NAD1.1 billion to NAD2.6 billion in 2017). The grain milling sector grew by 15.5% owing to a much better harvest, while value added of other food products and beverages declined by 4.6% and 0.8% respectively. Except for diamond processing that expanded by 14.6%, other mineral processing sub-sectors expanded only slightly.
 Value added of the construction sector contracted sharply for the second year by 25.6% compared to a contraction of 26.3% in 2016. Value addition in real terms, however, remained higher than in any year before 2013, when the boom started caused by the development of new mining sites and public infrastructure projects.
 Overall, value addition in the secondary sector contracted by 6.7% in 2017 after a contraction by 6.8% in 2016.
 Value addition in the tertiary sector decreased by 1.4% after growth of 3.2% in 2016. The decline was caused by a strong decrease in the wholesale and retail trade sector (7.5%) and a contraction in the hotel and restaurant sector by 1.1%. The transport and communication sector was negatively affected by the contraction of the construction and wholesale and retail trade sectors, but benefited from increased outputs in the agricultural and mining sectors and grew by 0.9% after a strong performance in 2016 (7.0%). The real estate and business services sector almost maintained its performance of 2016 (1.0% growth) in 2017 (0.9%).
 The decline of the hotel and restaurant sector was not only caused by fewer workshops organised by Government. The drop in spending by foreign tourist from NAD4.5 billion to NAD2.5 billion also contributed to the decline.
 Tax revenue decreased by 5.5% in 2017, after a slight increase of 0.9% in 2016. The decline reflects the strains on the national budget (see also the EAN Commentary on the Fitch rating).
 Gross Fixed Capital Formation (investment) dropped from a high of NAD50.0 billion in 2015 to NAD28.3 billion in 2017, mainly because of the completion of new mining projects. Investments in the mining sector declined from NAD20.6 billion in 2014 to NAD4.9 billion in 2017, the lowest level since 2011. Likewise, public investment decreased from NAD9.5 billion in 2015 to NAD6.4 billion. Furthermore, investment in transport equipment dropped to one of the lowest levels (NAD3.2 billion) over the past decade. On the other hand, investment in the electricity sector more than doubled from NAD0.6 billion in 2015 to NAD1.3 billion and NAD1.1 billion during the next two years owing to investment in renewable energy sources and into water supply in particular in Windhoek during the droughts. This investment is in line with the priorities of NDP5.
 Investment into mineral exploration dropped to the lowest level since 2007. NAD585 million were invested in 2017 compared to NAD3,153 million in 2013. Low oil and mineral prices contributed to the decline. In contrast, investment into buildings not only increased to NAD7.9 billion in 2017, but reached the highest level since a decade, only exceeded in 2015 with NAD8.0 billion.
A lot of attention is always paid to the overall economic growth rate. However, what matters more is, which sector has grown or declined and how growth is distributed, since growth is not an end in itself, but a means to achieve a better standard of living for all. Furthermore, growth has to be sustainable in line with the Sustainable Development Goal number 8 (Decent work and sustainable economic growth) and in support of our National Development Plan.
The re-bound of the agricultural sector has certainly reversed the job losses incurred during 2016 in particular in the communal agricultural sector, but the continuous contraction in the labour -intensive construction sector has resulted in job losses that will negatively affect the performance of the wholesale and retail trade sector. The introduction of Conservation Agriculture and Smart Agriculture has the potential to increase the output of the communal agricultural sector and hence contribute to household food security and poverty reduction. Other priority sectors in NDP5 include fisheries that grew by just 1.3% and faces challenges with some fish species as well as mining that showed strong growth. However, the decline in investment in mineral exploration indicates that growth in this sector might not be sustainable unless new mining deposits are being explored and developed.
Tourism is another priority sector in NDP5. It has not performed well over the past two years. It is doubtful that the increase in tourist visa fees to NAD500 will increase Namibia’s tourism competitiveness and support the objectives of NDP5. Namibia could consider following the example of Rwanda and abolish visa requirements. This move would position the country well to become a preferred destination also for business and in particular conference tourism, which would require the construction of a convention centre in an urban setting such as Windhoek.
Although the Blue Economy is another priority sector in NDP5, except for fishing and aquaculture, shipping and transport and tourism not much has happened to derive more value out of the ocean. More concerted efforts are required to attract research into the use of the ocean for marine renewable energy such as wave power, for pharmaceuticals, biotechnology and sea-based products. Since these are, if well managed, renewable resources investment in this sector is more sustainable than investment in the extraction of finite resources.
The declining share of labour compared to capital (profits), suggests that economic growth is not contributing to the reduction of income inequality. The right balance is needed between profits that are necessary for investment and hence future growth on the one hand and remuneration of labour that determines the level of demand for domestically produced and imported goods and services on the other.
Much emphasis is placed on regular economic statistics, such as quarterly GDP figures, quarterly trade statistics, etc. However, economic statistics have to be complemented by social statistics, such as regular labour force surveys that are currently not even conducted on an annual basis, let alone even more frequently. Only then would we be in a position to evaluate whether economic growth translates into social gains such as employment creation and a reduction in income inequality and poverty. And only then would we know whether our National Development Plans, policies and strategies work and whether we achieve our objectives.

EAN Commentary – National Accounts 2017

July 2018 inflation rate – strongest increase so far this year

The Namibia Statistics Agency has released the Consumer Price Index (CPI) for July 2018 on 15 August 2018. The CPI is being used to calculate the monthly (compared to the previous month) and year-on-year (compared to the same month last year) inflation rates. The annual inflation rate increased from 4.0% in June to 4.5% in July 2018. On a month-to-month basis, inflation accelerated from 0.2% in June to 0.5% in July. The inflation rate for July 2018 is the highest so far for 2018, but remains below the inflation rate of 5.4% in July 2017 and overall below the inflation rates for 2016 and 2017.
Herewith are some highlights of the annual inflation rates for July 2018:
 Contrary to previous month, the inflation rates for both goods and services moved upward. The main driver of inflation was, however, the price increase for goods. The inflation rate for goods rose to 4.6% from 3.8% in June and exceeded for the first time since December 2016 the inflation rate for services that rose from 4.2% in June to 4.3% in July.
 Food price inflation slowed down from 4.0% in June to 3.2% in July 2018, which was also below food price inflation in July 2017 of 4.3%. Price increases for bread and cereals halved from 3.1% in June to 1.5% in July and the inflation rate for meat dropped from 6.9% to 5.1%. These two items account for 51% of the food inflation and hence determine the direction. Prices for dairy products actually contracted in July by 0.6% compared to an increase by 0.8% in the previous month. It is the first time since June 2012 that prices for dairy products decreased. Prices for fruits and for vegetables rose faster than in previous months, namely by 12.7% and 8.0% respectively compared to 12.4% and 6.1%. Prices for sugar, jam etc. continued to contract in July by 1.1% compared to a contraction by 1.2% in June.
 Prices for alcohol and tobacco products continued their climb and increased by 6.8% in July – the highest inflation rate since two years. The rising inflation rate was caused by price increase of 7.5% for alcoholic beverages, while the inflation rate for tobacco products eased from 4.1% in June to 3.6%.
 The inflation rate for housing, water and electricity – the items that account for the largest share in the consumption basket (28.4%) – accelerated to 3.7% in July from 3.2% in June. The higher inflation rate was driven by price increases for electricity and gas of 8.4% as compared to 4.9% in the previous month. Prices for the maintenance and repair of buildings also rose faster than in June – 3.6% compared to 2.3%. It remains to be seen whether it is an indication for a recovery of the construction sector. In contrast, costs of water supply slowed down from 7.2% to 6.1% in July.
 As expected, transport inflation has been the main driver of inflation in July. Price increases accelerated by 24% from 7.2% in June to 8.9% in July. Transport services account for slightly more
than 14% of the total consumption basket and have, therefore, a strong influence on the overall inflation rate. It is the highest inflation rate for this category since four years. Prices increased by 10.7% in June 2014. The fuel price increase in July translated into an 11.8% increase in the costs of operating transport equipment. The costs of purchasing vehicles rose only slightly faster (6.7%) than a month earlier (6.6%).
 Prices for clothing and footwear remained on a downward trend. They decreased by 5.0% in July – the eleventh month of consecutive price reductions. Prices for clothing dropped by 4.2% and for footwear by 6.9%. Costs for health services have increased at the slowest pace since more than three years. Health inflation dropped to 5.1% representing the lowest inflation rate since May 2015 (5.0%).
We expect continuous upward pressure on inflation owing to rising fuel prices that were increased by NAD0.25 per litre because of the adjustment of the fuel tax in August. Although international oil prices have eased slightly, the depreciation of the Namibia dollar will increase the cost of oil in domestic currency. This could result in further under-recoveries (meaning the actual costs of fuel are higher than the pump price). If not fully or partly absorbed by the National Energy Fund as in the previous months, under-recoveries will lead to fuel price increases. In addition, the municipality has increased bus fares, which will add further pressure on transportation costs.
Future maize prices have eased slightly in July compared to June on a monthly average, but are on the increase again, while wheat prices continue to increase. However, monthly average wheat prices are below prices a year ago. Maize prices, on the other hand, exceed price levels last year. Hence, food price inflation is expected to remain at the current level.

EAN Commentary – CPI July 2018