28/11/17

Namibia Downgraded

Namibia Downgraded

In collaboration with Nedbank: Nedbank Namibia CIB Newsletter – September 2017

On the 11 August 2017 Namibia joined the ranks of other Sub-Saharan African countries, with the exception of Botswana and Mauritius, when Moody’s reduced our long-term senior unsecured bond and issuer ratings to Ba1 and maintained their negative outlook on the country. Thus, Namibia’s investment status has been altered from an investment grade, Baa3, to sub-investment grade, Ba1, more commonly known as ‘junk status’.

The implications of this downgrade could potentially be fairly far reaching, but their basic message is that Moody’s sees increased risk of default associated with Namibia over the long term, than they did previously. As a result, in order to entice investors to take on the additional risk, the government and any government benchmarked issuers will likely have to accept higher interest rates when they issue debt going forward.

In order to come to the rating assessment, the rating agency looks at the Government’s ability to service its debt over the long term, and thus considers, amongst others, the volume of debt the country has issued, the cost of debt for the country, the currency in which the debt has been issued, the governments revenue and the outlook for revenue growth, the budget, and the budget balance. In essence, is the economy growing faster than its debt levels, and will it continue to be able to service its debt obligations over the long term.

Considering all these variables Moody’s provided three distinct factors as to why a downgrading was justified. These were;

1. Erosion of Namibia’s fiscal strength due to sizeable fiscal imbalances and an increasing debt burden
2. Limited institutional capacity to manage shocks and address long-term structural fiscal rigidities
3. Risk of renewed government liquidity pressures in the coming years

Following the downgrade, a number of Government officials raised concerns about the decision of Moody’s, showing particularly displeasure as to the timing of the downgrade. Given that some positive signs are currently being seen in the local economy, and given the efforts from Government to address the debt levels and deficit of the budget, this is certainly understandable, and Moody’s timing is, indeed, peculiar.

However, timing aside, it must be said that a rating should not have taken Namibia by surprise, as over the past few years, a notable deterioration in the country’s macroeconomic metrics has certainly been witnessed.

Firstly, it is evident that growth decelerated over recent years, as evidenced by the four consecutive quarters of contraction since Q2 of 2016. This growth slowdown was due to myriad of issues, from the drought, to a commodity price collapse, to the end of the construction boom, to liquidity constraints, to fiscal contractions, to policy uncertainty.

A second determining factor was observed in our current account. Our net export position worsened dramatically through 2016, largely due to reduced mineral output and depressed export prices, while imports remained high.

Finally, due to large budget deficits run since 2011 when Moody’s first issued our investment grade rating, public debt levels saw gradual increases, before exploding in 2015 and 2016 as revenue contracted and expenditure continued to climb. As a result, in an 18 month period, the Government debt stock doubled.

When Moody’s first issued Namibia a BBB- (investment grade) rating in 2011, the country had a debt to GDP ratio of approximately 20%, which increased to just over 25% shortly after the first Eurobond was issued following the credit rating. At the time, the government was also running small fiscal deficits, and the economy was on a strong growth trajectory.

Subsequently, the government debt stock has increased by approximately 250%, while the size of the economy has expanded by just 70%, the ultimate implication being a more than doubling of the debt to GDP ratio, which now stands at around 42.5%. At the same time, growth, which averaged 5.7% per year between 2010 and 2015, fell dramatically in 2016, and the growth outlook remains fragile.

Based on these metrics alone, it can’t be said that we have been short-changed by Moody’s, but rather that their assessment was behind the curve. However, with the steps taken to date, and with a slowly improving, but still fragile, growth outlook, Namibia could regain her rating in coming years if continued fiscal discipline is implemented. All, most certainly, is not lost.