Junk here to stay
Fitch says Namibia’s rating is weighed down by weak medium-term growth prospects and wide budget and external deficits relative to rating peers.
Jo-Maré Duddy – Namibia’s creditworthiness is likely to remain junk for the foreseeable future, analysts have said in reaction to Fitch Ratings’ affirming the country’s Long-Term Foreign-Currency Issuer Default Rating (IDR) at BB+.
“The outlook for improved credit ratings is definitely not on the near-term horizon,” commented Dylan van Wyk, senior analyst at Cirrus Capital, on Fitch’s announcement on Monday.
Eloise du Plessis, research head at PSG Namibia, said: “We expect that a positive rating action from either Fitch or Moody’s [where Namibia also has junk status] is unlikely in the coming 12 months and that risks to the sovereign credit rating are skewed to the downside.”
Klaus Schade, research associate at the Economic Association of Namibia (EAN), said there are “no quick-fix solutions and it usually takes countries a couple of years to regain an investment grade”.
Fitch said Namibia’s rating is “weighed down by weak medium-term growth prospects and wide budget and external deficits relative to rating peers”. The international credit rating agency is not convinced that drastic expenditure cuts will alleviate government’s debt problem. “The fiscal consolidation measures set forth by the government will not be sufficient to achieve the official goal of stabilising and eventually reducing public debt/GDP, in Fitch's view.”
This is the most important sentence in Fitch’s latest report, Van Wyk said. “Although Fitch has recognised the efforts made towards fiscal consolidation their report, they certainly feel that more measures should be put in place. Furthermore, Fitch also recognises that fiscal consolidation will be a long and arduous process,” he said.
Budget documents tabled by finance minister Calle Schlettwein in March targets a debt-to-GDP ratio of 46% in 2019/20. Fitch forecasts it will rise to 51% of gross domestic product – up from 43% in 2016/17 and 2017/18.
Growth
Fitch believes the economy will only recover “modestly” this year. Where the agency expected growth of 2%, it now forecast 0.6% in 2018. This is due to a deeper than expected contraction in domestic demand in 2017, renewed delays in the ramping-up of the Husab uranium mega-mine production to full capacity and low rainfall at the start of the current season, Fitch says.
“The economy's susceptibility to external risks and weather hazards is compounded by the lack of fiscal space to cushion exogenous shocks while monetary policy is constrained by the exchange rate peg. Moreover, medium-term growth prospects are constrained by structural bottlenecks, including low education outcomes and a business climate that is somewhat weaker than rating peers,” Fitch continues.
“Against this backdrop, fiscal consolidation is advancing only slowly as the government strives to protect economic growth amid pressures to tackle high inequality and unemployment,” the agency says.
Fitch says short-term refinancing risks are moderate. However, it could intensify from 2020 should the budget deficit remain wide, as substantial amounts of market debt reach maturity.
“Nearly two-thirds of public debt is held domestically by a captive investor base and liquidity has been bolstered by the rise in the regulatory domestic asset requirement for institutional investors from 35% to 45% of total assets. Rollover risks arise from the upsurge in the stock of short-term treasury bills at 12% of GDP in June 2018, double its level five years earlier, reflecting a low market appetite for long-term government notes,” Fitch says.
“The outlook for improved credit ratings is definitely not on the near-term horizon,” commented Dylan van Wyk, senior analyst at Cirrus Capital, on Fitch’s announcement on Monday.
Eloise du Plessis, research head at PSG Namibia, said: “We expect that a positive rating action from either Fitch or Moody’s [where Namibia also has junk status] is unlikely in the coming 12 months and that risks to the sovereign credit rating are skewed to the downside.”
Klaus Schade, research associate at the Economic Association of Namibia (EAN), said there are “no quick-fix solutions and it usually takes countries a couple of years to regain an investment grade”.
Fitch said Namibia’s rating is “weighed down by weak medium-term growth prospects and wide budget and external deficits relative to rating peers”. The international credit rating agency is not convinced that drastic expenditure cuts will alleviate government’s debt problem. “The fiscal consolidation measures set forth by the government will not be sufficient to achieve the official goal of stabilising and eventually reducing public debt/GDP, in Fitch's view.”
This is the most important sentence in Fitch’s latest report, Van Wyk said. “Although Fitch has recognised the efforts made towards fiscal consolidation their report, they certainly feel that more measures should be put in place. Furthermore, Fitch also recognises that fiscal consolidation will be a long and arduous process,” he said.
Budget documents tabled by finance minister Calle Schlettwein in March targets a debt-to-GDP ratio of 46% in 2019/20. Fitch forecasts it will rise to 51% of gross domestic product – up from 43% in 2016/17 and 2017/18.
Growth
Fitch believes the economy will only recover “modestly” this year. Where the agency expected growth of 2%, it now forecast 0.6% in 2018. This is due to a deeper than expected contraction in domestic demand in 2017, renewed delays in the ramping-up of the Husab uranium mega-mine production to full capacity and low rainfall at the start of the current season, Fitch says.
“The economy's susceptibility to external risks and weather hazards is compounded by the lack of fiscal space to cushion exogenous shocks while monetary policy is constrained by the exchange rate peg. Moreover, medium-term growth prospects are constrained by structural bottlenecks, including low education outcomes and a business climate that is somewhat weaker than rating peers,” Fitch continues.
“Against this backdrop, fiscal consolidation is advancing only slowly as the government strives to protect economic growth amid pressures to tackle high inequality and unemployment,” the agency says.
Fitch says short-term refinancing risks are moderate. However, it could intensify from 2020 should the budget deficit remain wide, as substantial amounts of market debt reach maturity.
“Nearly two-thirds of public debt is held domestically by a captive investor base and liquidity has been bolstered by the rise in the regulatory domestic asset requirement for institutional investors from 35% to 45% of total assets. Rollover risks arise from the upsurge in the stock of short-term treasury bills at 12% of GDP in June 2018, double its level five years earlier, reflecting a low market appetite for long-term government notes,” Fitch says.
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