Fitch downgrades Namibia to BB- from BB
Vulnerability to default risk
This will make it even more expensive for the government to service and repay its debt.
Fitch Ratings downgraded Namibia’s long-term foreign currency credit rating to BB- and changed the outlook from negative to stable on Friday, June 24.
In order for Namibia to get a sovereign credit rating upgrade, the ratings agency wants to see either progress on fiscal consolidation that leads to a reduction in the government debt-to-gross domestic product (GDP) ratio over the medium term, or stronger medium-term growth prospects which supports fiscal consolidation efforts.
According to Fitch, “the fiscal deficit will remain elevated at 7.6% of gross domestic product (GDP) in 2022 – above the government's forecast of 5.6% and our projection of 6.0%.”
The ratings agency says modest growth prospects, a rigid expenditure profile, and a tightening of international financing conditions will weigh on the overall deficit. Despite fiscal consolidation efforts, Fitch expects that the wide deficits, rising interest costs, and the expected gradual nature of the economic recovery will result in the government debt-to-GDP ratio climbing to 75% in 2024/25.
Fitch forecasts GDP growth of 2.8% in 2022 and 3.1% in 2023, driven mainly by increased mining output and continued recoveries in secondary and tertiary industries. However, the ratings agency believes that real GDP will not recover to the pre-pandemic level until 2024 – which is in line with our growth outlook.
Risk
According to the head of research at IJG Securities, Danie Van Wyk, the downgrade effectively means that Namibian government debt is viewed as being a riskier investment and that it has an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.
The reasons given by Fitch for the downgrade, namely, elevated fiscal deficits, weak economic growth prospects and high and rising debt levels, are not new concerns and have been highlighted several times in the past, he added.
While the country might not feel an immediate impact of the downgrade, the lower rating will play a role once the time comes for the government to replace its foreign debt. Investors taking on new government debt will take the lower rating into consideration, and will require a higher risk premium (rate of return) as they are lending money to an institution that has a higher credit risk. This will make it even more expensive for the government to service and repay its debt, something Fitch is already concerned about, Van Wyk said.
Investors
Also commenting on Namibia’s downgrade is independent analyst Josef Sheehama, noting that when Namibia needs to borrow more money, as it inevitably will, investors will demand a higher interest rate because of the lower creditworthiness of the country. This will translate into higher interest costs which leave less money to be spent on running and developing the country.
It is therefore vital for monetary and fiscal authorities to address the concerns raised by rating agencies in downgrade reports before they become more apparent and magnified to trigger more negative rating actions. It is important the government to create an environment that enable business confidence by engaging key economic players in addressing structural rigidities, declining competitiveness, policy uncertainty and bargaining power of labour, Sheehama [email protected]
In order for Namibia to get a sovereign credit rating upgrade, the ratings agency wants to see either progress on fiscal consolidation that leads to a reduction in the government debt-to-gross domestic product (GDP) ratio over the medium term, or stronger medium-term growth prospects which supports fiscal consolidation efforts.
According to Fitch, “the fiscal deficit will remain elevated at 7.6% of gross domestic product (GDP) in 2022 – above the government's forecast of 5.6% and our projection of 6.0%.”
The ratings agency says modest growth prospects, a rigid expenditure profile, and a tightening of international financing conditions will weigh on the overall deficit. Despite fiscal consolidation efforts, Fitch expects that the wide deficits, rising interest costs, and the expected gradual nature of the economic recovery will result in the government debt-to-GDP ratio climbing to 75% in 2024/25.
Fitch forecasts GDP growth of 2.8% in 2022 and 3.1% in 2023, driven mainly by increased mining output and continued recoveries in secondary and tertiary industries. However, the ratings agency believes that real GDP will not recover to the pre-pandemic level until 2024 – which is in line with our growth outlook.
Risk
According to the head of research at IJG Securities, Danie Van Wyk, the downgrade effectively means that Namibian government debt is viewed as being a riskier investment and that it has an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.
The reasons given by Fitch for the downgrade, namely, elevated fiscal deficits, weak economic growth prospects and high and rising debt levels, are not new concerns and have been highlighted several times in the past, he added.
While the country might not feel an immediate impact of the downgrade, the lower rating will play a role once the time comes for the government to replace its foreign debt. Investors taking on new government debt will take the lower rating into consideration, and will require a higher risk premium (rate of return) as they are lending money to an institution that has a higher credit risk. This will make it even more expensive for the government to service and repay its debt, something Fitch is already concerned about, Van Wyk said.
Investors
Also commenting on Namibia’s downgrade is independent analyst Josef Sheehama, noting that when Namibia needs to borrow more money, as it inevitably will, investors will demand a higher interest rate because of the lower creditworthiness of the country. This will translate into higher interest costs which leave less money to be spent on running and developing the country.
It is therefore vital for monetary and fiscal authorities to address the concerns raised by rating agencies in downgrade reports before they become more apparent and magnified to trigger more negative rating actions. It is important the government to create an environment that enable business confidence by engaging key economic players in addressing structural rigidities, declining competitiveness, policy uncertainty and bargaining power of labour, Sheehama [email protected]
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