Windhoek
At the beginning of September this year, the outcome of Namibia’s credit ratings assessment by Fitch Credit Ratings Agency was published. Fitch had reaffirmed Namibia’s credit rating at BBB-, but revised the outlook from “stable” to negative. At the beginning of December, Moody’s Investor Services made public its assessment which not surprisingly mirrors the Fitch rating and outlook. Moody’s re-affirmed Namibia’s Sovereign Credit Rating at the investment grade notch of Baa3, which is the equivalent of a BBB- investment grade assigned by Fitch since 2005. Similarly, Moody’s revised the ratings outlook from “stable” to “negative”, reflecting a number of prevalent risk factors which need to be managed prudently and mitigated in the short to medium term.
“When I tabled the Mid-Year Budget Review in the National Assembly beginning of last month, I said that this Mid-Year Budget Review is being presented against the backdrop of the past expansionary fiscal stance and its consequences and significant developments in the global and regional economy, a challenging macroeconomic environment and the resultant unprecedented shocks to the domestic economy. The Namibian economy has never before been in such a precarious situation,” warned Calle Schlettwein, Minister of Finance.
Namibia is not only assessed by Fitch but also by Moody’s Investor Services since 2011. This membership to sovereign ratings agencies reflects the government’s commitment to fiscal transparency and responsible Public Finance Management. This is in addition to the Annual Surveillance Assessment by the International Monetary Fund (IMF), through the Annual Article IV Consultation, which for this year, was undertaken during September 2016 in advance of the tabling of the Mid-Year Budget Review.
Moody’s Investor Services undertook a Sovereign Credit Rating Review mission to Namibia during the period October 2016. As it is the annual tradition, the mission held discussions with various institutions including Ministries, Diplomatic Missions, Non-Governmental Organisations as well as public and private institutions.
“In both credit ratings assessments, we have been able to retain our investment grade rating, thanks to the firm commitment to credible policy measures to mitigate the downside risks weighing on the outlook. However, both agencies converge in revising the credit outlook from “stable” to negative, emphasising the need for consistent, firm and credible policy response measures to address the emerging weaknesses,” said Schlettwein.
The revision on the outlook is based on a number of factors, namely rapidly rising public debt and the risk of tighter domestic funding conditions; external vulnerability, evidenced by wide current account deficits and relatively low international reserves; high dependence on volatile South African Customs Union (SACU) receipts for foreign exchange earnings and government budget revenues; and very high and persistent unemployment.
According to Schlettwein, the government has already taken steps to address the identified weakness. “We were aware of these downside risks and hence consistently followed through on the fiscal consolidation stance to the economy I had introduced in the 2015/16 Budget. What has been underrated, was the severity of the cumulative effects of some of the domestic and externally-induced negative effects. In reaction to that, I have tabled the 2016/17 Mid-Year Budget Review alongside the Medium-Term Policy Statement which laid out the medium-term fiscal policy stance as well as the supportive policy interventions to mitigate the impact of an otherwise steeper consolidation path,” Schlettwein added.
He continued that as a small, open economy, the country has to contend with external shocks as a result of repeated downward revision in global economic growth, a sudden fall in regional economy to 1.6 percent with risks still on the
downside, and close to no growth in large trading partners such as South Africa and Angola.
“Domestically, we are faced with liquidity constraints to finance the elevated financing needs as a result of these shocks on public finance. As a result of these adverse developments, it was necessary and timely that we respond to these shocks in a timely manner with appropriate magnitude,” Schlettwein stated.
As part of the Mid-Year Budget Review and to mitigate risk factors, Schlettwein reduced expenditure by 2.8 percent of GDP or some N$4.5 billion, aligned operational budget activities for the remainder of the year to the new norm and development budget projects not started were deferred and those that recently started were slowed down.
He also adjusted budget revenue by N$6.3 billion in line with shocks to GDP and adjusted expenditure ceilings for the next Medium Term Expenditure Framework in line with revised economic and revenue outlook. In addition, implementation of structural reforms and policies such as reforms of public enterprises, public procurement and public, private partnerships, were accelerated.
“These reforms are necessary and we must follow through with our pro-growth consolidation fiscal stance, without which our hard-won macroeconomic stability and fiscal sustainability will be eroded. We are optimistic that the current difficulties are manageable and that they are transitional… As a first benefit of these concerted measures, we have been able to retain our investment grade rating. It is my expectation that asset managers who are responsible for managing the country’s vast institutional savings would equally recognise this concerted policy implementation through investment in government securities going forward in line with the announced deficit reduction stance,” Schlettwein added.
In regard to reserve adequacy, recent currency swap arrangements for Rand assets have resulted in boosting the stock of international reserves to an estimated 3.3 months of import cover, which is a much better position relative to 2.8 months of coverage in 2015. “We expect improvements going forward, as well as the current account balances as exports from recent real sector investments improve,” Schlettwein concluded.