The Bank of Namibia’s (BoN, the central bank) Monetary Policy Committee (MPC) held its latest meeting on April 16. The BoN decided to keep the repo rate unchanged at 5.5%. In justifying its decision, the MPC noted that the “global economy improved somewhat during the fourth quarter of 2013” and that it expects the recovery to gain further traction this year. The Namibian economy also continued to perform satisfactory, while the growth outlook remained encouraging, expected to reach 5.3% in 2014. In addition, the MPC expects inflation will remain below 6% y-o-y for the remainder of the year, which is still considered a “sustainable level.” However, although still deemed adequate to maintain the fixed exchange rate to the South African rand, the BoN acknowledged that foreign reserves have come under pressure due to a rapid increase in the import bill and that this situation warrants monitoring going forward.
WHY DO WE CARE? We have shared the BoN’s concern in relation to foreign reserves for some time. The BoN’s recently published Annual Report for 2013 indicated foreign reserves amounted to N$15.7bn at the end of 2013. By our calculations, this translated into an import cover ratio of only 2.64 months last year, well below the International Monetary Fund’s (IMF) three month international benchmark. However, the MPC notes that foreign reserves increased to N$17.5bn by April 11, which suggests the risk in this regard has eased slightly. Nonetheless, we expect a widening current account deficit will keep foreign reserves under pressure for the remainder of the year. Also, due to the comparatively low level of foreign reserves, our baseline scenario sees the BoN matching any interest rate hikes by the South African Reserve Bank (SARB) to prevent the possibility of capital outflows, or at the very least, not allow the real interest rate differential to become too large.
Analyst: Cobus de Hart
