Debts, joblessness fuel latest rating downgrade

09 December 2019 | Economics

Rating agency Moody's downgraded Namibia's economy on Friday to a Ba2 rating but changed the outlook to stable, citing among other things rising government debt and waning job opportunities.

The country's debt burden has more than doubled over the past decade to 45.6% of GDP at the end of fiscal 2018 from 19.2% ten years earlier.

But, as could be expected, finance minister Calle Schlettwein criticised the latest downgrade of Namibia's creditworthiness, saying it demonstrated a “bias towards negativity” instead of recognising the positive progress the country has made to improve the economy.

On Friday Moody's stated that this downgrade reflected a further weakening in Namibia's debt position, despite ongoing fiscal consolidation, as growth remains weaker for longer than Moody's previously anticipated.

This generally means the government's long-term debt in foreign currencies, which is anything except debt in South African rand and Namibian dollar, are rated as two levels below junk.

According to Moody's, the stable outlook is underpinned by Namibia's relatively robust institutions and governance strength that supports creditworthiness.

It added that policymakers retain some capacity to respond to shocks, helped by moderate liquidity and external vulnerability risks.

Fitch Ratings in September also downgraded government's debt in foreign currencies to two levels below junk.

Speaking to Namibian Sun yesterday, Schlettwein said: “The rating is just a repeat. It shows a bias towards negativity and does not really take into account the positive progress.”

In a statement released later, the minister added that Namibia had demonstrated its resilience and ability to deal with shocks and to direct policy actions to addressing socio-economic development needs.

According to him, the government has made real progress to stabilise the macro-fiscal framework when Moody's downgraded Namibia to sub-investment grade in 2017.

“This progress includes the proportion of Gross Domestic Product (GDP) which has reduced from 8.1% in the 2015 and 2016 financial year to about 4.1% by the 2019 and 2020 financial while the year-on-year increase in public debt has sharply moderated to 11.2 % 2019/20, from the average of 30.1% three years ago.

“We are confident that these policy packages will place the economy on a firm positive and sustainable growth trajectory over the medium to long term. Throughout the years, Namibia has demonstrated its ability and resilience to deal with shocks and also to direct policy actions to addressing socio-economic development needs.”

“We, therefore, remain optimistic that growth prospects will gain traction as the implementation of the adopted measures is scaled-up.”

Highly ambitious

Rowland Brown, co-founder of Cirrus Securities, says the Moody's downgrade came as no surprise, adding that the “stable” outlook is highly ambitious.

Brown believes that Namibia's fiscal outlook is rather heavily weighted to the downside at present and that revenue will likely remain under pressure.

“It is also worth noting that both the ratings downgrades, as well as the current recession and depression, were completely avoidable.

“Moreover, it is worth noting that recovery is very possible, however increasingly complex. As far back as 2015, it was easy to see that Namibia was facing material macroeconomic challenges; however, a combination of poor advice and weak implementation of specks of good advice meant that the downgrading of the country was not avoided, and now the current economic recession has dragged out for three long years, with little imminent hope of meaningful recovery.”

According to Brown, rising unemployment will increase demands on finite government funds, the weak business environment will increase demands on the shareholder from state-owned enterprise (SOEs) and debt payments will continue to rise, from their current approximate N$7 billion a year.

According to Brown, it has become clear that after three years of no growth, and despite efforts to drive fiscal consolidation, a meaningful growth recovery and dramatic fiscal improvement are not forthcoming.

He pointed out that domestic economists in the past warned of an impending abrupt growth slowdown and ballooning fiscal deficit and debt.

“Yet Moody's reaffirmed our investment grade rating, thus allowing Namibia to issue its second Eurobond. It is our view that they remain behind the curve now, and that the 'stable' outlook is highly ambitious,” he said.

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