NAMIBIA’s economy is expected to fare better in 2022 with a growth rate of 3.6%, after another year of weak growth in 2021 of just over 1%.
According to the outlook of the Capricorn Asset Management newsletter for October 2021, this is based on expected normalization in most sectors, given the very low numbers for Covid-19, and the end of the slowdown in fiscal consolidation over the course of the year. year ending in March. 2022.
“This means spending levels will not contract further after having to be reduced following the deficit spending induced by Covid-19 in 2020,” Capricorn said.
The bulletin predicted that global inflation would be problematic over the next 12-18 months, driven by supply chain disruptions and soaring prices for energy, including oil, which would push prices higher. fuel prices.
He said consumer inflation in the United States is expected to remain above 5% until the second quarter of 2022, after which it is expected to decline sharply enough to reach around 3% by the end of the year.
In South Africa, it also looks set to exceed 5% over the next six months and then drop to the midpoint of the target range by the end of next year.
“The trend in Namibia will be somewhat different, with inflation rising from 3.5% currently to over 5% by the end of 2022, when it is expected to peak.
“This environment of growth and inflation appears to provide an opportunity for policy-determined interest rates to be increased slightly in 2022,” said Capricorn.
Markets now clearly expect the US Federal Reserve to raise rates from the current target of 0.25% to something like 0.5% or 0.75%, and the South African Reserve Bank followed suit by raising its repo rate. from the current record level of 3.50% to 4.0%.
“This means that the prime rate in South Africa will be 7.50% and in Namibia 8.0% by the end of 2022.
“We are highlighting this as a possibility as the South African Reserve Bank appears determined to raise rates following the review of its mandate undertaken in conjunction with the National Treasury,” the outlook report said.
However, this can pose challenges in an economy with an unemployment rate of 40%, no demand for private sector credit, and a weak housing market.
The extension of credit to the private sector (PSCE) in Namibia increased by 1.7% year on year, while in South Africa it was 1.1% year on year with little prospect of significant acceleration.
Also, around the same time next year, we are likely to face lower inflation and a slowing economy in 2023.
Either way, money market return expectations remain around 5% to 6% for the foreseeable future, Capricorn said.
“We are a far cry from the nearly double-digit returns that have been achieved in the past, which have far exceeded inflation, making the investment decision fairly easy and virtually risk-free.”
Money market funds have returned 4.6% to 6.3% over the past 12 months. For a higher potential return, this means that investors need to consider the bond market.
“We reiterate our point of view expressed last month. Domestic bonds, ie Namibian and South African bonds offer an attractive yield in these uncertain times.
“Namibian inflation-linked bonds are also very attractively priced and protect the investor from the danger of future inflation. Therefore, we are fully invested in them.
The key factor to watch out for is the counterparty risk or fiscal outlook of the Namibian and South African governments.
Financing needs will remain high, keeping yields high.
“However, we do not expect to default on domestic debt for the foreseeable future. The bond fund returned 14.3% for the 12 months to September 2021, ”said Capricorn.