WINDHOEK - The latest assessment of the Namibian economy by international ratings agency, Fitch Ratings, on Monday affirmed a sub-investment grade rating of BB+ with a stable outlook. Local economists believe that this assessment is a confirmation for continued fiscal consolidation efforts, which have thus far been slow as government struggles to balance consolidation with adequate economic growth, poverty alleviation and a necessary reduction in income inequality.
“We believe that fiscal consolidation remains a ‘necessary evil’ and alternative methods to fund the fiscus must be engaged in order to reduce public debt re-financing risks between 2020 and 2025 when the bulk of internal registered stock matures,” said Ngoni Bopoto, Research Analyst at Namibia Equity Brokers.
He added that while public enterprise reform is underway, with the necessary legislative reform imminent, he believes that this process should focus on the transition of state owned enterprises towards sustainability, which is not only central to resolving the fiscal situation but will also have a number of positive spin-offs. These include supporting increased domestic asset requirements, spurring the development of domestic capital markets, increased foreign direct investment flows as well as addressing government’s crowding out of private investment.
Also commenting on the latest assessment, Research Associate at the Economic Association of Namibia, Klaus Schade, said Fitch also considered the high wage bill as well as transfers to public enterprises, which remain major challenges.
“Public and net external debt ratio is below the current BB median. Modest economic recovery in 2018 by a projected 0.6 percent, compared to a contraction of 0.8 percent in 2017. The recovery is expected to be driven by the mining sector (and in particular increased production at the Husab uranium mine) and other export-oriented sectors, while domestic demand is expected to remain subdued. Fitch regards Namibia’s long-standing political stability as a major credit strength. However, the upcoming land conference as well as the revised NEEEF could create some policy uncertainties,” said Schade.
He noted, however, that the country’s medium-term growth prospect remains weak due to vulnerability of external risks (i.e. global commodity demand) and structural bottlenecks such as low education outcomes and a weak business climate.
“In addition, government lacks the fiscal space for counter-cyclical fiscal policy, while the Bank of Namibia’s monetary policy is constrained by the currency’s peg to the South African rand. The budget deficit remains high compared to other countries in the same category.”
Fitch projects Namibia’s budget deficit to exceed the target and reach 4.9 percent, which is slightly below the 5.1 percent for the 2017/19 financial year. As a result, said Schade, public debt is likely to increase further to 51 percent by 2020 while high debt of public enterprises pose an additional risk to government’s finances.
“Fitch expects a partial privatisation of MTC, but not of any other commercial public enterprises at this stage. While short-term refinancing risks are considerate to be moderate, the maturity of substantial amounts of debts after 2020 could increase risks. External (trade) deficit remains high. While the current account deficit having dropped to 3.3 percent in 2017 from 15.7 percent a year earlier,” Schade explained.
Fitch expects the country’s deficit to widen again, owing to increased costs of energy imports. The import cover of foreign exchange reserves is projected to decline to 3.2 months by 2020.
Fitch Ratings downgraded Namibia from an investment grade to non-investment grade in November 2017. The current review maintains this rating, which remains one notch below the investment grade of BBB-. Earlier, in May and July, Fitch affirmed the ratings for the Development Bank of Namibia at BB+ with a stable outlook as well as the rating for NamWater respectively. In general, institutions cannot be rated better than the overall country rating.
“There are no quick-fix solutions and it usually takes countries a couple of years to regain an investment grade,” Schade noted.