Dramatic downswing expected in Q2

The first quarter GDP figures confirmed that the Namibian economy was already beset by several wide-raging difficulties even before the nationwide lockdown that took effect in April.

23 June 2020 | Economics

We do not expect the government to give in to any radical/market unfriendly policy demands … - Eloise du Plessis, Research chief: PSG Namibia

Phillepus Uusiku



The economic downswing is set to deteriorate dramatically in the second quarter due to a sudden stop in domestic economic activity and international trade and travel caused by the Covid-19 pandemic.

Gross domestic product (GDP) declined by 0.8% year-on-year in the first quarter of 2020.

“We continue to forecast a 7.8% contraction in real GDP for this year compared to the government's slightly more optimistic expectation of -6.6%,” says the head of research at PSG Namibia, Eloise du Plessis, in their recent quarterly economic update report.

The budget deficit is forecast to widen from an estimated 4.7% of GDP in the 2019/20 fiscal year to a gaping 12.5% of GDP in the 2020/21 fiscal year.

Fiscal slippages are also expected in the medium term, given the challenging and uncertain road to economic recovery, the tepid pace of fiscal reforms and probable pushback against efforts to reduce the bloated public wage bill.

The volatility of the Southern African Customs Union (SACU) revenue flows, and continued financial losses at major state-owned enterprises (SOEs) are also expected to contribute to the loss of revenue for the government.

The goods trade deficit narrowed to N$19.4 billion in 2019 from N$20.4 billion in 2018, due to less goods imported and higher current transfer inflows.

However, this masked large declines in leading exports such as diamonds, processed fish and livestock.

The current account deficit is expected to widen sharply from 2.3% of GDP in 2019 to 5.8% of GDP in 2020, due to the adverse impact of lockdowns on global trade and travel.



Inflation

The average inflation rate is expected to remain subdued in 2020, due to lower oil prices and dismal domestic demand, while passthrough from the weaker exchange rate and food price pressures is expected to be muted.

Transport price inflation has decelerated steadily after oil prices hit a peak of US$86 per barrel in October 2018, and the average oil price is forecast to decline to US$37.8 per barrel this year from US$64.4 per barrel in 2019.

Despite the Namibian dollar losing 8.4% of its value in 2019, the annual consumer price index (CPI) inflation rate fell to a four-year low last year. Moderating inflation took place amid a slump in global oil and food prices as well as negative domestic economic growth.

It has become evident that the Covid-19 crisis would lead to a sharp fall in domestic activity and following similar moves by the South African Reserve Bank (SARB).

The monetary policy committee (MPC) decided to cut the repo rate by a further 25 bps to continue supporting domestic economic activity while at the same time safeguarding the one-to-one link between the Namibia dollar and the South African rand.



Risk

Over the past quarter, economic risks have increased, while political risks have remained broadly stable.

Namibia performed worse in several chosen economic performance indicators than the median of its Southern Africa peers.

The country is a notable underachiever in terms of GDP growth as the economy battles the effects of the Covid-19 pandemic, a lack of fiscal space, prolonged drought, and disinvestment following the boom years of 2010 to 2015, PSG says.

On the political side, the government have not been short of scandals such as the Chinese customs fraud case, the SME Bank-VBS Bank scandal, the Areva corruption case and the controversial Fishrot scandal which have dabbled with populist policies over the past few years, the analysts continue

The government is further facing pressure to implement populist demands from pressure groups such as the Landless People's Movement (LPM), PSG says.

“Nevertheless, we do not expect the government to give in to any radical/market unfriendly policy demands, given that the country is in dire need of more foreign investment amid the current economic malaise,” PSG says.

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