Today we received news that the Monetary Policy Committee (MPC) of the Bank of Namibia (BoN) decided to cut the repo rate by a further 100 basis points (1%), a decision made largely due to the pandemic gravely affecting global, regional and local economic developments.
A friend asked me what this drop in repo rate ‘really’ meant, and I always think of the quote by the mastermind Albert Einstein, who said ‘If you can’t explain it to a 6 year old you, don’t understand it yourself.’ With this, I shall attempt to best simplify this 100 basis point reduction talk and how this affects your investments.
Firstly, the repo rate is the benchmark or standard interest rate at which the Bank of Namibia (our reserve bank) lends money to commercial banks (FNB, Nedbank, SBN, BWHK, Letshego Bank, Bank BIC, Banco Atlantico and Trustco Bank). A prime rate on the other hand is that which the above mentioned commercial banks will lend money to us as customers and businesses. A drop in the repo rate therefore directly affects the prime lending rate, which means that you now lend money from the bank at a ‘cheaper’ rate. The 1% drop takes our prime lending rate to 8%, which is the lowest it has ever been since our independence, according to Bloomberg.
In summary, the 100 basis point reduction was done to ease or rather soften the blow for households which are almost all lenders in one form or another. This decision was therefore taken with the noble attempt to stimulate economic growth. By reducing the cost of lending, this inspires purchasing power and encourages borrowing and investing. It is also done in earnest to get the current inflationary number of 2.4% up to the targeted 3% for 2020.
It is worth mentioning that approximately 22 years back in 1998, our prime interest rate stood at 24.20%, which is was a monster number. Therefore, with this 100 basis point drop being the third cut we have experienced in 2020, do not rely too heavily on this rate for the medium to long term. Interesting times await us.
What CORONA means to our investments
Namibia is in a recession and has been downgraded to Junk status by the credit rating agencies. Imposing this economic lockdown and social distancing measures is thus not helping measures at all. Can it get any worse? What could be worse you may ask? Our investments have been negatively impacted as well.
However, we only really realise a loss if we sell or switch, meaning if you accept the knock and cash out or move to a different fund. For some, this is a reality, but my sincere advice is to ride this Corona out! Whatever you do, do not act on the sentiment of fear and not realise the loss in your investment by selling or switching. That is admitting defeat and we as a Namibian people are not easily defeated – we are a resilient and robust kind of people who keep moving forward.
The short to medium term is subdued, definitely, with lockdown negatively affecting our GDP, as very little trade is taking place. Are we in a market crash you may ask, well, there is no numerically specific definition of a stock market crash but the term commonly applies to rather steep double-digit percentage losses in a stock market index over a period of several days. These crashes are often distinguished from bear markets by panic selling and abrupt, dramatic price declines. Investopedia defines a bear market as when a market experiences a condition in which securities’ prices fall 20% or more from recent highs amid widespread pessimism and negative investor sentiment-which mirrors what we are experiencing now. However, it is during times like these we urge investors not to act irrationally, but rather view this as an opportunity to ride out this wave to when the market turns as this is when value in markets is often found.
I digress, we must remain optimistic and hopeful, with a long term view for our investments. Our investment goals should have a plan attached to them, envision the 5 to 10 year goal. Consider the current state of affairs as a misty morning in Swakopmund, where you see through the mist and see the beauty of our Atlantic Ocean. Every cloud has a silver lining, and so do our investments, we will turn this around. How soon you may ask? No one knows, we can only look to history to tell us that all bear markets are followed by bull markets (upward trajectory).
Asset managers don’t always get it right, yet, our experience and calm foresight is what is needed to ride this out and to return stellar returns.
In conclusion, do not realise your current losses unless you have no other choice. Partner with trusted professionals that will navigate these stormy waters and remain calm headed. With the opposite of Sir Isaac Newton’s famous words ‘what goes up must come down, I would like to end with a quote by Lynwood L. Giacomini, who said, ‘Like a gardener, I believe what goes down must come up.’