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Downgrade is premature and unjustified – Likukela

2022-06-29  Edgar Brandt

Downgrade is premature and unjustified – Likukela

The decision last week by Fitch Ratings to downgrade Namibia reflects monumental bad timing, which is grossly premature and unjustified. 

This is according to local economist and managing director of Twilight Capital Consulting Mally Likukela. 

In a response to the latest downgrade in which Fitch Ratings on Friday downgraded Namibia to ‘BB-’ from ‘BB’, with a stable outlook, Likukela said: “This downgrade is probably the most painful one in the entire history of Namibia’s downgrades because it comes at a critical time, where Namibia, together with the rest of the world, remains under pressure from the economic meltdown induced by the Covid-19 pandemic. Simply put, this downgrade means more bad news piled on bad news”. 

Likukela continued that this will undoubtedly reverse all the economic recovery gains the country achieved so far since the advent of the pandemic-induced recession. 

“Since international rating agencies have tremendous power to influence market expectations and investors’ portfolio allocation decisions, crisis-induced downgrades like this will undermine Namibia’s macroeconomic fundamentals. Like a self-fulfilling prophecy, a country (even countries with strong macroeconomic fundamentals) will deteriorate so that it converges with model-predicted ratings. Credit ratings downgrade by Fitch will increase the country’s borrowing costs and constrain its fiscal options,” Likukela noted. 

The local economist explained that this downgrade increases the government’s cost of borrowing, as premiums investors demand to hold its debt will be raised. 

“With these ratings, the government will either have to cut back on public spending, particularly social spending or tax more. With Namibia’s already weakened social development indices (poverty, inequality, health etc.), this will have an immediate devastating impact on the poor and vulnerable groups in the country, who rely on government welfare programmes. The saddest reality about this downgrade is that this rating will impose a new wave of other problems, worse than Covid-19. The value of sovereign bonds as collateral in central bank funding operations will be cut, and this will drive interest rates higher,” said Likukela. 

As such, Likukela warned of a devastating chain reaction that will be set in motion. 

This includes sovereign bond values that will be grossly discounted – at the same time escalating the cost of interest repayment instalments, ultimately contributing to a rise in the cost of debt. 

He added a wave of corporate downgrades will also follow because of the sovereign ceiling concept. 

This is because a country’s rating generally dictates the highest rating assigned to companies within its borders. 

Despite the factors, Likukela said this latest downgrade calls for an urgent need for government to fast-track the implementation of ongoing structural economic reforms to avoid further harm to the country’s sovereign rating. 

“If these reforms are not implemented, downgrades will continue, and this will translate to unaffordable debt costs, deteriorating asset values as mentioned earlier (such as retirement, other savings and property) and reduction in disposable income for the many Namibians, whose incomes have remained unchanged and already decimated by the increase in inflation (the cost of living),” Likukela warned. 

Meanwhile, another economic analyst Klaus Schade yesterday said the latest downgrade did not come as a surprise, since neither economic nor fiscal prospects have considerably improved. 

“A downgrade implies that investors might face greater risks in lending to a country or company. Investors, domestic and foreign, have therefore most likely already factored in greater, perceived risks. However, the current domestic demand for Government Bonds and Treasury Bills indicates that there is still a strong appetite in the market,” said Schade. 

He added it will take time to reverse the trend and improve the rating since government feels the impact of higher inflation and higher interest rates that put additional pressure on government’s expenditure. 

“Steps need to be taken to improve government revenue. Auctioning a larger share of the total fishing quotas, reviewing the current income tax act and in particular tax-deductible allowances as well as reviewing the VAT zero-rating of certain food items could all support boosting revenue, while PSEMAS needs to be reformed to reduce the current subsidy of some N$2.3 billion annually. Reducing policy uncertainties could attract domestic and foreign direct investment, create jobs and in turn increase revenue through income tax and VAT,” Schade recommended. 

In its reports, Fitch noted key factors for the downgrade include the country’s elevated fiscal deficits. 

“Modest growth prospects and a rigid expenditure profile will maintain high fiscal deficits relative to ‘BB’ peers. Fitch estimates the general government fiscal deficit widened to 9.5% of GDP in the fiscal year ending March 2022, above the estimated ‘BB’ median 5% deficit for 2021, from-8.2% in FY20/21,” the Fitch report read. 

The ratings agency continued that international financing conditions have tightened, which they expect will lead to further increases in the government’s interest bill, which during the 21/22 financial year stood at 16% of revenue. 


2022-06-29  Edgar Brandt

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