Namibian economy expected to continue bleeding red ink
Although the Namibian economy is projected to recovery in 2021, policymakers face scary challenges such as rising public debt levels as well as as well as budget policies, central banking and structural reforms .
19 January 2021 | Economics
Although most economies, including South Africa, rebounded in in the third quarter of 2020, Namibia’s economy remains into deeper recession.
According to Indileni Nanghonga, the Senior Research and Product Development Officer at Agribank, the economy contracted to 10.5% in the third quarter of 2020 compared to a decline of 2.1% recorded in the corresponding quarter of 2019.
The economy will gradually recover to 2.6% in 2021 and 3.2% in 2022 based on the assumption that most countries will open their economies coupled with a gradual uptick in private consumption.
While there is hope for an economic recovery, there still exists great uncertainty on a resurgent second wave of the pandemic and its impact on the economy. With growth prospects already weighed down by existing challenges, further economic and social interruption by Covid-19 could hurt the country’s fiscus and compromise economic recovery, post-Covid-19, Nanghonga said.
Since December 2020, Namibia has received good rainfall. “We are optimistic that the remainder of the 2020/21 rainy season will record good showers. Good rainfall is welcomed after a prolonged drought which stressed water supply for agriculture and consumption. This improves prospects for agricultural production output and may attract investment in the sector," she pointed out.
Furthermore, it enables Agribank to provide funding to support the sector while at the same time improving its financial metrics. Notwithstanding this, floods due to heavy rainfall remain a risk to the agriculture sector, estate industry and road infrastructures, she said.
Inflation is expected to hang around 3% to 3.5% in 2021. A good rainy season is expected to contain food inflation mainly from stable cereal prices and subdued prices for fruit and vegetables. If the projected food growth is hindered by floods and pests, we expect food prices to continue their upward trajectory. Fuel prices are expected to remain subdued while housing costs started increasing moderately towards the end of 2020, she said.
Inflation remains subdued and the repo rate is contained at 3.75%. The repo rate is the cost of borrowing by commercial banks from the central bank. Long term bond investors are benefiting from attractive real returns. This is mainly realised on the 10 to 30-year tenures, where the current real return is between 5% and 11% at a 2.5% inflation rate. Although real returns will remain attractive in 2021, they are expected to narrow towards mid-year. The risk of a further credit downgrade shadows the country’s debt repayment ability, she added.
There exists a trade-off effect in the trade balance as lower exports have been offset by reduced imports, keeping the current account deficit contained. This is expected to carry on in 2021, with more upside towards the export of hard commodities.
The debt burden is expected to reach 70% of GDP at the end of 2020 and increase further to 74% in 2021. These levels are up from 56% at the end of 2019 and nearly triple the level seen at the end of 2014. Debt servicing costs are a huge part of rising debt levels and is set to peak at 6% of GDP over the Medium-Term Expenditure Framework (MTEF) period.
The absence of significant policy measures to arrest and ultimately reverse the debt accumulation will stifle the country’s ability to borrow in the medium term. In addition, the expected increase in the debt-to-GDP ratio in 2021 can be attributed to a widening of the fiscal deficit coupled with the maturing N$500 million Eurobond in November 2021, she said. - [email protected]