Moody’s warns against rising debt

Both Moody’s and Fitch think government will fail to reach its debt-to-GDP ratio target of 45% by 2020/21.

13 September 2018 | Economics

Finance has not been especially good at forecasting deficits which does not instil much confidence in their expectations for reduced deficits going forward. – Eric van Zyl, Research Chief: IJG Securities

Jo-Maré Duddy – The international credit rating agency Moody’s expects government’s debt to continue rising and reach 50% of gross domestic product (GDP) by 2020.

Moody’s latest report on Namibia, which has a junk credit rating with the agency, says Namibia's fiscal strength has weakened in recent years.

“Although government debt to GDP, at slightly more than 40% in the 2017/18 financial year, remains moderate relative to its regional peers, the pace of debt accumulation has been rapid in recent years,” Moody’s said.

Commenting on Moody’s opinion, IJG Securities research chief Eric van Zyl said the agency would not have mention the level of 50% of GDP had they not modelled the expected increase in public debt against the growth prospects for Namibia.

“Government continues to run large budget deficits and year after year the forecast for future periods sees the deficits for the outer MTEF [medium-term expenditure framework] years grow. In other words, finance has not been especially good at forecasting deficits which does not instil much confidence in their expectations for reduced deficits going forward,” Van Zyl said.

In his budget in March, finance minister projected total debt to reach more than N$99 billion in 2020/21 – up from an estimated N$83.7 billion the current fiscal year. According to his forecast, this would mean that debt will be 45% of GDP in 2020/21. Government’s own threshold is 35%.

In its report last month, Fitch Ratings, who also view Namibia’s credit rating as junk, projected that debt will reach 51% of GDP.

“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,” the report stated.

Releasing its latest Fixed Income and Economics Report last week, Simonis Storm (SS) said Fitch reaffirming Namibia’s junk status “did not come as a surprise as the fiscal consolidation measures are not sufficient to reduce public debt/GDP”.

“The macroeconomic environment has deteriorated, which will negatively affect tax collection. We do not see the above reverting in the near future,” SS said.

Growth

Van Zyl said larger deficits will lead to the use of larger amounts of debt to finance expenditure leading to a higher debt-to-GDP ratio than currently expected by ministry of finance, provided GDP growth materialises as expected.

Schlettwein’s budget growth forecast for this year is about 1.2%. Moody’s expects 0.9% and Fitch 0.6%.

Van Zyl said IJG does not see much in terms of growth drivers for the Namibian economy at present, and the threat of external shocks may derail growth expectations. “Should growth falter it would lead to a higher debt-to-GDP ratio than is expected,” he said.

Moody’s said moderate average real GDP growth and a high level of wealth are counterbalanced by growth volatility linked to commodity exports. “The economic recovery hinges on continuing growth in agriculture and mining, as well as gradually improving manufacturing, which should offset contraction in the construction sector,” it said.

Moody’s added that government is also susceptible to a further tightening of domestic funding conditions, which could be related to persistent fiscal slippages and would raise debt servicing costs.

SS pointed out that government debt has increased by 714% over the last decade. “We remain concerned over escalating debt levels given the skewed bond maturity profile at the short end. This will put pressure on government’s ability to repay debt,” the analysts said.

Outlook

Moody's said it could change its outlook for Namibia from negative to stable if the government were to “demonstrate commitment to fiscal consolidation that results in a deceleration of debt accumulation and an eventual decline in debt levels”.

It would likely downgrade the rating if fiscal consolidation were to fail to contain rapid public sector debt accumulation, Moody’s said.

“A sustained decline in foreign-currency reserves to below three months of import cover, increased funding pressure reflecting reduced market appetite for government securities, leading to a material increase in borrowing costs, or both, would also put downward pressure on the rating,” the agency said.

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