WINDHOEK – The risks to Namibia’s credit rating outlook are bound to increase considering last year’s fiscal developments coupled with the fact that government is unlikely to be able to consolidate this year’s budget deficit. This is according to FNB Namibia economist, Daniel Kavishe, who feels the debt to GDP ratio poses notable risks to Namibia’s credit rating, particularly by international ratings agencies, Fitch and Moody’s, who already have the country at speculative grade.
In his latest opinion piece, Kavishe points out that the proposed budget deficit will reduce from an estimated 4.1 percent of GDP in 2019/20 to 3.5 percent in 2020/21 and reach about 2.5 percent of GDP by FY2022/23.
“These figures seem unrealistic, with our current estimates projecting that it will hover around the four percent mark over the next few years simply on the back of revenue risk. The poor growth outlook, and the additional AfDB loan will result in a worsening debt-to-GDP ratio which is expected to breach 50 percent next year,” reads Kavishe’s statement.
He pointed out that when Finance Minister Calle Schlettwein tabled the 2019/20 Mid-Term Budget Review last week it came at a time when the local economy remains fully engrossed in recession, revenue collection risks remain tilted to the downside and with the pressure to resuscitate the economy through spending is mounting.
Said Kavishe: “This is the third consecutive year in which the minister has had to rebalance and recalculate his approach to the fiscus in the mid-term review, making significant changes to either expenditure or revenue from what was originally presented in the Budget.”
Kavishe continued that thus far this year, revenue collection seems be on target, with the Ministry of Finance reporting a preliminary revenue outturn of N$29.4 billion (the FY19/20 target is N$58.4bn), which was two percent better than the average half-year collection rate over the past years. However, the FNB economist emphasised that with consumer spending slowing, there is a likelihood that VAT receipts will underperform this festive season due to the overall slowdown in wholesale and retail trade. Consequently, he expects non-mining company expenditure to likely come under more pressure due to the weak business environment. Nonetheless, the minister expects an average annual increase of 3.1 percent despite the poor economy and fickle Sacu revenue estimates.
“Execution on expenditure was poor at only 46 percent in the mid-term review, compared to 50 percent last year. The poor execution rate is a sign of a bigger bottleneck in procurement processes which has become a perennial problem. The minister has opted to redirect spending of about N$1 billion from the development budget, to operational expenses — a bold move given public opinion and international scrutiny of operational cost matters. This redirection in spending from the development budget, which has large ripple effects in the overall economy, is likely to further limit the fiscal space needed to reinvigorate the economy,” read the statement.
Kavishe added that given the government is a significant player in the economy, this means that the prevailing recessionary pressures are likely to continue to weigh down on consumer demand and real growth in wages.
“Unperturbed by this, the minister proposed changes that allow for additional recruitment of teachers and doctors, further allocation towards drought relief and the bulk of the remainder towards social welfare costs. These measures will be well accepted by voters as they support the socialistic views engrained in the government’s current strategy,” Kavishe stated.
He pointed out that Namibia plans to invigorate the economy by borrowing an additional N$2.5 billion from the African Development Bank (AfDB) to be directed towards water infrastructure.
Said Kavishe: “It seems the approach at this stage is more debt, while the Ministry of Finance deals with internal procurement matters. The AfDB tends to run a separate procurement system process, which is likely what the minister is banking on given the state of internal affairs. The minister further announced that certain key energy projects, which have basically stalled at the procurement office but offer quick wins for the economy, will be accelerated.”
Namibia also plans to lift the threshold for unlisted investments in phases from five percent, 7.5 percent and ultimately to 10 percent, subject to performance criteria. This, said Kavishe, is undoubtedly a big move that will invariably release billions directly into the economy over the next few years, provided there are economically justifiable projects to match them, something that appears to be lacking given the low drawn down numbers from currently available funds.
In addition, the minister highlighted stimulus measures for small to medium enterprises to support economic recovery and facilitate job creation. The first is the rollout of the Credit Guarantee Scheme, the Mentorship and Training Programme, and the Skills-based lending facility for the youth through the Development Bank of Namibia’s SME financing strategy. The second is the investigation of the possibility of introducing a lower tax regime for SMEs, which will further encourage entrepreneurship and business activity. This is, however, yet to be approved.