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22/01/19

Moody’s affirms Namibia’s Ba1 rating

In collaboration with Nedbank

On 07 December 2018, Moody’s Investors Service affirmed the Ba1 (Speculative grade – “Judged to have speculative elements and a significant credit risk”) long-term issuer and senior unsecured ratings of the Government of Namibia and maintained its negative outlook for the country. This means that, according to Moody’s, the country’s government remains the fifth highest rated sovereign in Africa, behind Botswana, Mauritius, South Africa and Morocco (same rating with stable outlook).

Moody’s rationale for the Ba1 assessment hinged on two factors, namely:

  • Gradually improving medium-term growth prospects, despite structural challenges;
  • Moderate institutional strength balances some areas of strength and weakness in institutional and policy effectiveness.

The reasons given for maintaining the negative outlook were:

  • Fiscal consolidation challenges persist despite lower liquidity pressures;
  • External vulnerability risks have diminished but remain.

Assessing the rationale for the rating, prior to the current recession-turned-depression the rapid expansion relied heavily on historically low interest rates, extensive Government expenditure and high commodity prices that led to strong investment flows into the mining sector. The outlook for several of these variables has deteriorated somewhat, with little sign of imminent recovery.

Interest rate pressures are increasing due to advanced economies embarking on a slow process of interest rate normalization, after a decade of historically low interest rates following the 2008 global recession. The Federal Reserve has continued its hawkish behavior throughout 2018, hiking the reserve rate four times during that year (the most since 2005) and is expected to continue with rate hikes into 2019. Coupled with this, the typically-dovish European Central Bank has also indicated that it will cease its bond purchase program – resulting in a ceased suppression of global interest rates.

The delicate balancing act of fiscal responsibility continues to present a challenge to the Namibian economy and government, with an ever-present risk of fiscal slippage, resulting in higher debt levels and lower credit ratings. Enormous pressure can be seen on the fiscus to increase expenditure along two major lines, namely personnel expenditure and transfers to state-owned enterprises. Efforts to normalize the wage bill, one of the largest in the world relative to GDP, through below-inflation wage adjustments for a period of three years, are likely to prove politically challenging, particularly in a recessionary environment and in an election year. Similarly, the challenging economic climate in the country has put substantial pressure on the country’s corporates, with many turning to shareholders for support. This is, of course, also true for state-owned enterprises, some of which struggled with profitability/loss minimization during the so-called “fat-years”. As a result, the shareholder is likely to be relied upon through these “lean-years” by many such entities, which in turn will put pressure on government spending.

With reference to liquidity, recent returns have shown bank funding growth fall to 15-year lows. As loans and advances growth requires growth in funding, the banking sector will be unlikely to see strong growth in these assets, resulting in lower tangible consumer demand in the local economy, resulting in weak growth at best. A further implication of this is that a weaker banking sector funding position will be detrimental to the fiscus, as demand for government debt instruments by the banks may well prove lackluster. This is a marked change from the past 18 months, where banks have been active net-buyers of short-term government debt instruments. Thus, further net issuance, and potentially the rolling these instruments will be more expensive than initially anticipated, further increasing debt serving costs, which are already breaching thresholds and stand as another red flag for the fiscus.

On the bright side, however, African Development Bank and potential Chinese loans may ease this situation to some extent, and while not the long-term solution to fiscal issues, their preferential terms may well provide breathing room for longer-term structural reform in the budget, such as gradual wage bill normalisation, as well as debt-to-GDP and debt servicing ratio stabilisation thanks to nominal growth.

Thus, while the Namibian fiscal situation is indeed precarious, continued cautious management of the economy and a slow return to growth can result in fiscal recovery, albeit a long road ahead. Moreover, as government spending represents over 1/3rd of Namibian GDP, this process of fiscal normalization will undoubtedly remain a drag on growth, as government is simply too big a player in the local economy for such consolidation not to act as a break on growth. That said, with sound investment-relayed policy, Namibia could recover from contractionary territory in 2019, and start a strong growth recovery.