12/12/19

Namibia’s Credit Score

In association with Nedbank

The Government of Namibia has had its sovereign credit rating further downgraded during the course of 2019 by both ratings agencies assessing her credit risk. Namibia is now rated at two levels below ‘investment’ grade, after the Fitch downgrade on 01 October 2019 and the more recent Moody’s downgrade on 06 December 2019. Both agencies have put the Government of Namibia on a stable outlook. The rationale for the stable outlook is underpinned by robust institutions, strong governance standards, and moderate liquidity – according to Fitch and Moody’s.

In their assessments, both agencies cited similar concerns for Namibia. The ratings decisions were driven by prolonged weak growth (compared to prior expectations of economic recovery), continued fiscal consolidation, the precarious fiscal debt situation, and further risks stemming from SOEs. The current fiscal consolidation measures are cited as insufficient, as both agencies believe fiscal strength will further weaken and stabilization of the fiscal position will only occur towards the middle of next decade with a debt-to-GDP ratio above 50%.

Several core risks to public finances were also specified by the ratings agencies, namely transfers to SOEs and the unsustainable civil services wage bill (on the expenditure front) coupled with SACU receipt volatility and depleting mineral reserves such as onshore diamonds (on the revenue front). Public debt levels are expected to breach 50% of GDP in FY2021/22, with much of the debt set to mature in coming years including two Eurobonds – one for US$500 million in 2021 and a second for US$750 million in 2025.

A credit rating essentially looks at Government’s ability to service its debt over the long terms, thereby taking into account factors such as the volume of public debt, the cost of this debt (i.e. interest payments), the currency issuance of the debt, government revenue and the growth outlook for this, Government’s budget and the budget balance, as well as the general macroeconomic environment.

While a lot of fuss is made about ratings decisions (especially downgrades), do they bear any real consequences? The impacts are often far removed from the average citizen, however this does not mean that there are no consequences. A downgrade in sovereign credit rating indicates that the rating agency believes Government’s ability to service its debt is looking riskier. This, in turn, can make debt more expensive in order to compensate for the additional risk. For country’s such as Namibia, where budget deficits are likely to run for the medium term, it may make it more difficult to finance these deficits.

As is the case in Namibia, Government runs a primary budget deficit while the majority of the overall deficit goes towards covering interest payments. Should debt issuance become more expensive and there are no cuts to non-interest expenditure or above-forecasted revenue, there will be an additional borrowing requirement to fund the now more expensive debt. This is an unsustainable situation, necessitating commitment to fiscal consolidation in order to close the gap between revenue and expenditure.

Taking into consideration the various factors examined by the ratings agencies, as well as the extensive assessment released by the IMF in their Article IV consultation earlier this year, it comes as no surprise that Namibia has sunk lower into ‘junk’ status. However, all is not lost. These assessments should serve as warnings for what may lie ahead and, coupled with critiques and suggestions from within the country, pave a clear path for making some difficult decisions now to stave off dire consequences further down the road.