Is Namibia following in SA’s footsteps with downgrade?

Moody’s announced on August 11 that it downgraded Namibia’s long-term senior unsecured bond and issuer rating to junk status (i.e. from a Baa3 to Ba1 rating), while maintaining its negative outlook for the country’s economy. Moody’s has, however, maintained Namibia’s local currency rating at BBB-, or “investment grade” status. Therefore, the government’s secured debt obligations (long-term foreign currency bonds and deposits) are still of investment grade and long-term domestic bonds and deposits are of prime investment grade.

Both Moody’s and Fitch had previously warned that the country’s elevated debt levels and the sizeable deficit could potentially warrant a downgrade. Moody’s assessment came despite the Namibian government’s recent assurances that the country’s economy had stabilised and was on the road to recovery.

In the announcement, Moody’s cited the following key reasons for the downgrade:

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

Although Namibia’s Gross Domestic Product (GDP) has expanded on average by 4.7% per year since 1990, the country is currently going through a technical recession classified as two successive quarters of declining GDP. The Namibian economy has seen four consecutive quarters of falling GDP, starting in quarter two of 2016.

The downturn in the economy has coincided with various credit downgrades in Namibia, most notably the country’s long-term senior unsecured bond and issuer rating being downgraded to junk status (i.e. from a Baa3 to Ba1 rating). Other downgrades were made to the country’s long-term local and foreign currency bonds, as well as its long-term local and foreign bank deposits.

Some of the most worrying and important statistics quoted in Moody’s report is that the public debt to GDP ratio has increased from 26% in 2011 to 42%, that the wage-bill (after already being one of the highest in Africa) increased from 40% of fiscal spend in the 2016/2017 year to 45% in the 2017/2018 budgets, and that there is a complete over reliance on South African Customs Union (SACU) revenue which makes up more than a third of government revenues.

Moody’s also factored the possible financial and political risk of South West African People’s Organisation (SWAPO) leadership election (2017) and presidential elections (2019) into the downgrade.

Shortly after Moody’s statement was released, finance minister Calle Schlettwein issued an official response, stating: “The economic situation in Namibia does not warrant such downgrading.” Moody’s statements have been lamented by both the Namibian president, Dr. Hage Geingob, and the Schlettwein who was quoted saying, “We are also of the view that nothing material has changed since our last rating valuation, and this should be relied upon to justify our rating. It is therefore not true to say that there will be an increase in spending in the run-up to the SWAPO congress.”

Unlike South Africa, Namibia was able to avoid outright junk status. Moody’s downgrade only has bearing on Namibia’s outstanding long-term unsecured bonds that are not backed by government guarantees. However, a lack of investor appetite will effectively raise the cost of borrowing for the Namibia government in the international capital market. This could pose significant risk of financing the budget deficit in the future.

Fitch’s country review is up next, and there is a risk of another downgrade (also to junk status) if the government is not able to address the concerns raised during the Moody’s review.

On a positive note, the Namibian economy is making significant strides towards recovery during 2017. Some key sectors are performing well – most notably the agricultural and mining sectors. 2017 has already seen a sharp deceleration in inflation and, more recently, moderating interest rates.

While the currency peg to the South African rand will insulate Namibia from the most negative ramifications of the downgrade, positive trends in the economy, coupled with amendments to regulation 28 of the Pension Fund Act (which will require pension funds to hold 45% of their investments in Namibia), and rising import cover, will ease liquidity constraints and ensure that the economy remains adequately capitalised.

Monica Bohm, head of Bravura Namibia, concludes that: “On another positive note the recent shorter-term government bond issues had been oversubscribed by local investors, providing an indication that liquidity seems to be improving, although moderately.  This is also assisting in paving the road for improved economic growth for the remainder of the year – coming out of 0.2% economic growth during 2016 with an expected 2.9% growth for 2017.”

Duval van Zijl is an analyst at Bravura.

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