Dampened corporate demand for credit

Private sector credit extension (PSCE) slowed to 5.4% year-on-year (y/y) in July, weighed down by the corporate credit segment, Investec economist Lara Hodes commented on Thursday.

The Nedbank Group Economic Unit pointed out that this was against the market’s forecast of 5.9%.

Credit growth was dragged down by the investment and bills category as well as slower growth in mortgages, according to the unit.

"After lifting notably in June to 5.7% y/y from May’s reading of 4.6% y/y, PSCE disappointed in July, moderating to 5.4% y/y. The result was weighed down by credit extended to the corporate sector and was below market expectations of a 5.9% y/y rise," said Hodes.

Overall, company credit extension slowed to 5.9% y/y in July, following June’s marked lift to 6.6% y/y.

According to Hodes, this "visible fall" was primarily underpinned by a deceleration in the general loans and advances category, together with mortgage advances and investments.

"The subdued economic growth backdrop, with a muted gross domestic product (GDP) outcome expected for the second quarter of 2018, coupled with depressed business confidence readings and lacklustre investment rates, have contributed to dampened corporate demand for credit," she said.
 
Although Investec expects the SARB to only commence its hiking cycle in January 2019, should domestic currency weakness persist, the risk of an earlier hike is not unlikely and would further inhibit credit growth, according to Hodes.

• READ: Don't be fooled, there is a credit problem

Nedbank expects credit demand to remain erratic, but improve slightly in the months ahead, supported by steady interest rates.

However, in its view, growth will partly be contained by rising inflation and higher taxes, as well as fragile confidence - due to the poor job market.

"Renewable energy deals signed earlier this year should also support corporate credit demand. Weak credit figures suggest that economic activity remains subdued," commented Nedbank.

It expects inflation to increase in the coming months, but not breaching the SARB’s upper target limit in the medium term.

"This, and the still weak economy, will probably convince the SARB's Monetary Policy Committee (MPC) to delay hiking rates for as long as possible," said Nedbank.

"We forecast that rates will remain unchanged for the rest of this year, before rising moderately late in 2019."

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