International ratings agency, Fitch Ratings, has affirmed Namibia’s Long-Term Foreign-Currency (LT FC) Issuer Default Rating (IDR) at ‘BB’ with a Negative Outlook. The Negative Outlook reflects increased downward pressures on creditworthiness due to a continued rise in government debt, wide deficits and low growth aggravated by the prolonged Covid-19 pandemic. It also reflects challenges to fiscal consolidation in the context of a subdued growth outlook and high inequality.
Fitch Namibia’s ‘BB’ rating balances high levels of fiscal deficits and debt against a strong institutional framework and a well-developed non-banking financial sector (NBFS) that supports the sovereign’s financing capacity.
Fitch notes that the Namibian economy contracted by a record 8% in 2020, following stagnation since 2Q16, due to the pandemic’s hit to global demand and disruptions to global travel and trade especially hitting the gem supply chains.
“Domestic containment measures and reallocation of public spending to Covid-19-related emergency needs also hurt other sectors like construction, retail trade and tourism,” Fitch stated. The ratings agency projects domestic growth of 1.5% in 2021, amid some recovery in mining and improved global demand, but stressed that an ongoing third, particularly severe wave of infections poses a risk to growth, given the slow vaccine rollout.
“As of 9 July 2021, 5.1% of the population has received at least one dose. We expect a more broad-based rebound of over 3% in 2022 and 2023. However, medium-term growth potential is subdued at about 2%, constrained by structural factors, including high transport and labour costs, lack of skilled labour and development challenges arising from the country’s low population density,” the ratings agency stated.
Fitch estimates that the general government (GG) deficit rose to 11% of GDP in the fiscal year ending March 2021 (FY20/21), with Covid-19-related spending of about 3.6% of GDP in FY20/21, including wage subsidies, emergency income grants and health and education spending.
“The pandemic shock on public finances in FY20/21 was partly offset by a windfall from the Southern African Customs Union (SACU) transfers, a wage freeze in the public sector for the third consecutive year, and delayed capital spending”.
Fitch, therefore, forecasts the deficit to narrow slightly to 9.6% of GDP in FY21/22, and to 8.2% of GDP in FY22/23, stating: “The FY21/22 budget did not extend the Covid-19 support measures into FY21/22, and only set aside N$484 million (0.3% of GDP) for vaccine purchases. However, the effect of the expiry of economic relief measures on the budget balance will be offset by about a 5% of GDP drop in SACU transfers in FY21/22 and the likely effect of the third wave of the pandemic and containment measures on revenues”.
Fitch expects government to announce corrective fiscal measures that include the potential reallocation of resources in its mid-year budget review in October.
It added that government will redeem the US$500 million Eurobond due in November 2021 by withdrawing about US$100 million from its US dollar sinking fund, and the proceeds of N$6 billion (about US$400 million) debt issuance to the Government Institutions Pension Fund.
“The US dollar sinking fund will be depleted after the bond redemption and the settlement of Air Namibia leases. The government plans to replenish cash reserves to cover the upcoming Johannesburg Stock Exchange-listed bond maturing in November 2022 (about US$111 million equivalent), and the US$750 million Eurobond maturing in 2025,” the ratings agency continued.
“Policy initiatives to address high inequality such as the National Equitable Economic Empowerment Bill and land reform have generated regulatory uncertainty. However, the government has a record of striving to maintain a private sector-friendly business environment,” Fitch observed.