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Risks to Financial Stability in Namibia Intensify Amidst COVID-19 Uncertainty

The Financial System Stability Committee (FSSC) has released its latest report, highlighting the significant increase in risks to financial stability in Namibia. The analysis, conducted at the end of March 2020, identified external macroeconomic environment, household and corporate debt trends, and financial soundness indicators of domestic banking and non-banking institutions as key areas of concern.

Factors Contributing to Financial Stability Risks

The COVID-19 pandemic has been a major factor in assessing the risks to financial stability going forward. Despite the global uncertainty, the FSSC analyzed the risks and rated them from low to high risk based on their probability of occurrence and potential impact on financial stability in Namibia.

Macroeconomic Environment

  • The macroeconomic environment has become increasingly fragile, with a global economic slowdown posing a major threat to domestic growth.
  • The International Monetary Fund’s (IMF) Global Financial Stability Report (GFSR) highlighted that global financial conditions have tightened abruptly since the outbreak of COVID-19.

Credit Rating Downgrades

  • Namibia’s credit rating was downgraded by major rating agencies in 2019, while South Africa’s credit rating was downgraded by Fitch in March 2020.
  • The report noted that these downgrades pose a risk to financial stability in Namibia.

Banking Sector Risks

  • Banking sector risks have increased due to the COVID-19 pandemic, which poses a threat to bank liquidity and household and business income.
  • Relief measures put in place by the Ministry of Finance and the Bank of Namibia are expected to soften this impact to some extent.

Payment System Risks

  • Payment system risks have also increased due to an increase in fraud across all systems, elevating security concerns for retail payments.

Non-Banking Financial Institutions (NBFIs) Risks

  • Market risks to NBFIs have increased substantially due to COVID-19, but they are expected to absorb these risks given their high capital buffers.

Warning to Policymakers and Financial Institutions

The report serves as a warning to policymakers and financial institutions to remain vigilant and take proactive measures to mitigate the risks to financial stability in Namibia.

Figure 1a: Risks to Financial Stability in Namibia

Direction of Risk

  • Macroeconomic Environment:
    • Global economic slowdown
    • Domestic economic slowdown
    • Sovereign credit rating downgrade (Namibia and South Africa)
    • Decline in international reserves
    • NAD/ZAR depreciation
  • Household Debt: Increase in household debt
  • Corporate Debt: Increase in corporate debt
  • Banking Sector: Liquidity constraints, asset quality deterioration (non-performing loans)
  • Payment System: Security of retail payments

Conclusion

The report highlights the need for policymakers and financial institutions to remain vigilant and take proactive measures to mitigate the risks to financial stability in Namibia.