Moody’s not positive about Nam

Jo-Maré Duddy – Merely five months after Moody’s rated Namibia two notches below junk status, the international credit rating agency changed its outlook on government from stable to negative.

The outbreak of Covid-19 and government’s “associated policy response” will result in a “significant contraction” in the economy this year, as well as “a much larger fiscal deficit”, Moody’s said on Friday.

This will “add to the already deteriorating fiscal trends in Namibia, resulting in a significantly higher debt level”, Moody’s said.

The latest blow to government’s creditworthy comes just before finance minister Iipumbu Shiimi’s maiden budget speech tomorrow.

Shiimi yesterday confirmed that he will table the 2020/21 Budget in parliament tomorrow.

Commenting on Moody’s new outlook, he said: “Let us first understand Moody’s assessment before I respond.”

‘Weakening strength’

Government’s long-term foreign debt, excluding the rand, was first slated as junk by Moody’s in August 2017 when it downgraded the country from Baa3 to Ba1. In December 2019, Moody’s downgraded Namibia further to Ba2, but with a stable outlook.

On 17 April this year, Moody’s still regarded government’s outlook as stable.

However, Moody’s last Tuesday called a rating committee to discuss government’s rating. Commenting on the main points raised during the discussion, Moody’s said: “The issuer's [government] economic fundamentals, including its economic strength, and fiscal and financial strength have materially weakened. The issuer's susceptibility to event risk has marginally improved.”

Moody’s said its negative outlook “reflects the economic and financial pressures the coronavirus shock is exerting on Namibia's credit metrics, exacerbating existing vulnerabilities”.

“A prolonged recession, sharply rising debt burden, and significantly larger gross borrowing requirements amid much tighter financing conditions particularly expose Namibia to the current shock.

“Meanwhile, the effectiveness of measures to restore growth and revive fiscal consolidation, after the shock has passed, will be challenged by Namibia's comparatively more rigid economic and fiscal structure relative to Ba2-rated peers,” Moody’s said.

Commenting on the credit rating agency’s opinion, co-founder of Cirrus Capital, Rowland Brown, said: “I think it’s fair to say that Moody’s has been generous to Namibia, and is somewhat behind the curve.”

“The impact that the Covid shock will have on the Namibian macro metrics will be extensive,” Brown told Market Watch yesterday.

Recession, debt

Moody’s expects the economy will grow by around -7% this year, on par with the Bank of Namibia’s current forecast of -6.9%. Growth in the past three years was -0.7%.

Higher anticipated health spending due to Covid-19, coupled with the recession adverse impact on government’s tax revenue is likely to see the fiscal deficit for 2020/21 spike to 10% of gross domestic product (GDP), Moody’s expects.

Financing the higher deficit is bound to push government’s debt up to 68.5% of GDP by end-2020, the agency forecasts.

“As the debt servicing burden rises, the rigid budget structure (in particular the government wage bill) means the task of repeating ambitious fiscal consolidation will become increasingly more difficult,” Moody’s said.

Moody’s further expects a large decline of about 20% in revenue from the Southern African Customs Union (SACU) in 2021. This will “further complicate fiscal consolidation efforts,” Moody’s said.

The Covid shock will transmit in Namibia “through a sharp growth shock reflecting lower mining activity and lower tourism arrivals given the halt in travel”.

“While Namibia does not face acute financing pressures, the severe tightening of financial conditions will challenge the government's ability to meet larger gross financing needs and amortising external commercial debt in coming years without an increase in borrowing costs that would threaten medium-term fiscal consolidation efforts,” Moody’s warned.

Junk here to stay

Moody’s said an upgrade in government’s credit rating is “unlikely in the foreseeable future given the negative outlook”.

“A change in outlook to stable would likely reflect confidence that the government was likely to be able to contain the longer-term fiscal and debt impact of the coronavirus shock and maintain sufficiently broad funding options to meet its larger funding needs without a significant increase in borrowing costs.

“Evidence of a recovery from both the coronavirus shock and the drought that would lead to a sustainably stronger growth, government revenue generation, narrower current account deficits through higher competitiveness and export revenue and rising foreign exchange reserves buffers would also support a stable outlook,” Moody’s said.

Government could furthermore polish its image by “the resumption of broad implementation of structural fiscal reforms to narrow the fiscal deficit, which would stabilise and eventually reduce the debt burden, improve debt affordability, and reduce liquidity risks”.

Should government’s policy response to the economic and fiscal challenges resulting from the coronavirus shock be insufficient to arrest the upward debt trajectory, Moody’s could downgrade Namibia further.

The same applies if “the ongoing deterioration in Namibia's debt burden and debt affordability was likely to result in liquidity risks, raising questions over the government's ability to refinance maturing debt”.

“Longer term, reduced confidence in the government's ability to introduce broader structural reforms to reduce the economy's and budget's persistent vulnerabilities may warrant positioning the rating at a lower level. A sustained decline in foreign currency reserves that threatened reserves adequacy would also put downward pressure on the rating,” Moody’s said.