21/11/17

Namibia Downgraded to “Junk” by Fitch

The downgrade of Namibia to sub-investment grade (“junk”) by Fitch follows the Moody’s downgrade of August, and has been expected since early 2016. The reasons for the downgrade are multi-fold, but largely stem from the major deterioration in the government fiscal position, driven by aggressive expenditure and expenditure increases, despite weak revenue collection. This has meant that government has had to borrow extensively in order to be able to fund its budget deficit, and has thus resulted in a more than doubling of the debt stock over the past 30 months.

The immediate implications for Namibia will not be too dramatic, largely due to the fact that changes to pension fund regulation are forcing large amounts of capital into the country, much of which is being invested in government debt. In the short term, this will provide support to the now-junk-rated sovereign. However, over the longer-term, the weaker rating is likely to see the cost of government funding increase, meaning more money will be spent on servicing debt and less will be available for other government projects and priorities. Further to this, the sub-investment grade rating is likely to negatively impact foreign investment inflows into the country, which may well result in lower and slower growth over the coming years, something very negative for the employment outlook for the country.

This downgrade is particularly concerning at the time when pension fund and life insurance assets are being forced to return to the country due to regulatory changes, as we are going to see increased concentration of these savings invested in junk-rated government debt. Thus, as well as responsibility for servicing an ever-larger and ever-more-expensive debt stock, Namibians are now starting to run the risk of weaker long-term returns on pension assets and a further cash-strapped government with ever-larger long-term liabilities.

The downgrade was both foreseeable and avoidable, but the lack of support provided to the fiscal consolidation efforts of the Ministry of Finance from the various line ministries, the major budget over-runs, the upward expenditure revisions in the mid-term budget, and the slow response time to the revenue decline, mean that this downgrade had become inevitable. However, the government has had ample time and opportunities since first warned to turn this situation around, but has failed to do so.

We no longer expect to see recovery to investment-grade rating in the next half-decade.