Praying for green shoots
Policy remains pivotal in Namibia’s struggle to get its economy back on track, analysts insist.
12 February 2020 | Economics
Without a dramatic investment climate change for the better, we do not foresee a material growth recovery. – Cirrus Securities
Growth expectations for this year vary from between 0% to 1.1%. The economy’s saving grace is likely to come from the primary sector, mostly mining, while tough times are to continue for the secondary and tertiary sectors.
“For the year ahead, while indicators do not suggest as disastrous a year as that just passed, material recovery is also not evident,” says Cirrus Securities, who forecasts a gross domestic product (GDP) expansion of 1.1% for 2020.
“Our expectation in this regard is that a slight growth recovery will be witnessed, however remaining below population growth levels, and well below the growth rates required to suppress the unsustainably high unemployment rate in the country.
“Moreover, risks remain heavily weighted to the downside and long-term indicators remain highly troublesome,” Cirrus says.
In their economic outlook, called “The Aftermath of the Storm … What’s next?”, Simonis Storm’s fair case scenario pens in growth of 0.9%. Worst case scenario foresees growth of -0.5%, while the best case outcome will result in an expansion of 1.7%.
IJG Securities expects growth of between 0% and 0.5%.
Setting the scene
“All indications suggest that Namibia will have seen her deepest recession in her independent history in 2019,” Cirrus says.
Simonis Storm (SS) concurs: “Never in the history of Namibia had we experienced such a prolonged low economic growth, not even during the financial crisis in 2008.”
According to Cirrus, the economy is now smaller in real terms than it was at the end of 2015. Compared to the end of 2014, it is only 2.6% larger.
“However, due to population growth and a shrinking economy, on a per-capita basis, the economy is now only very marginally larger than was the case in 2012 (0.5%), some 8.9% smaller than was the case at the peak in 2015,” the analysts say.
President Hage Geingob had to call a national drought state of emergency again last May – the third one after droughts in 2013 and 2016.
“A staggering 19.8% of Namibian households relied on subsistence agriculture as their primary source of income in 2018. This means that one in every five households, who were already in a vulnerable position, would have been facing dire conditions during 2019.
“This is over and above the poor harvests faced by commercial crop farmers and the severe loss of livestock across the country due to the drought,” Cirrus says.
Commenting on the Economic Growth Summit last year, Cirrus says the reforms announced at the event are insufficient to drive economic recovery. It will do “little to address investor confidence, reduce the bureaucratic burden on the private sector or spur job creation”.
With youth unemployment rising, the country has witness “a dramatic urbanisation” of population.
“The major rural-urban migration trend, and inefficiency in provision of services in most urban areas, has meant that much of this youthful population ends up residing in informal settlements, often in dense and unserviced dwellings,” Cirrus says.
Nearly 40% of the urban population now live in shacks compared to 6.4% in 1991. For the population as a whole, 26.6% now live in improvised houses, up from 7.1% in 1991, Cirrus says.
“Somewhat alarmingly, a marginally smaller percent of the population lives in formal housing now (40.8%) than did so in 1991 (41.0%), illustrating the extent of poor service delivery, which is not only not able to keep up with demand for formal houses from population growth, but is woefully behind on providing access to and supply of this most basic service for the inevitable rural-urban migration,” the analysts say.
Namibian households have tightening their belts, Cirrus says.
“Private consumption, - which accounts for approximately 70% of GDP (from the demand side approach) - recorded contractions of 6.3% in 2017 and 1.3% in 2018. In these inflation-adjusted terms, households bought just slightly more in 2018 than in 2015.”
The core factors impacting household disposable income are household debt, interest rates, (un)employment, and price levels, Cirrus explains.
The average household debt levels are approaching 100%. “In other words, the average Namibian household has already spent nearly all next year’s income,” Cirrus adds.
The worsening quality of employment and rising unemployment are also detrimental to household disposable incomes, they say.
High unemployment has reduced the spending power of the consumer, SS says.
Cirrus anticipates “much of the same” for 2020.
“Households can no longer turn to credit to increase their spending. Job creation and above-inflation wage adjustments are needed to provide a boost to household spending, but there is no obvious catalyst to spur this.”
As a result, wholesale and retail trade is unlikely to see any sudden return to decent growth, Cirrus says.
The analysts forecast growth of -0.9% for the sector this year, up from the estimated -4.8% in 2019. In 2018 and 2017, wholesale and retail recorded growth of -6.3% and -6.8% respectively.
The big driver of the economy this year will be mining.
Cirrus expects the sector to boasts growth of 13.5% in 2020, following an estimated contraction of 16.6% last year.
“Strong growth is anticipated for 2020 – the result of the lower base set in 2019,” Cirrus says.
Vessel downtime and the gradual closure of onshore production in 2019 hampered Namdeb’s diamond output, but a strong recovery is expected this year, it continues. Growth of 19.4% is forecast compared to the estimated contraction of nearly 20% in 2020.
“The sale of the Elizabeth Bay mine to Lewcor sees a new operator in the space for the first time in many years, an exciting development,” Cirrus says.
However, the analysts expect major growth in diamond output only from 2022, with the completion and introduction of Debmarine Namibia’s N$7-billion vessel.
Cirrus anticipates better uranium output in 2020, also a result from the lower base set in 2019. Growth of 17.5% is forecast compared to an estimated -29.9% last year.
“While global nuclear organisations talk about recovery, this is a very long-term outlook – over the next 10-20 years. We do not foresee a short-term recovery,” Cirrus says.
SS expects the diamond and uranium subsectors to “remain strained as long as the trade war [between the US and China] persists”.
Although the overall outlook for mining this year is more upbeat than for 2019, the long-term wellbeing of the industry remains a concern, Cirrus says.
“Many of the large-scale mining operations are nearing their full life of mine. Very few new operations are starting up – and those which do are small. While there is some exploration activity, particularly in uranium and gold interests, the land-locking of exploration licences and concerns over Namibia as an investment jurisdiction have halted the mine pipeline,” Cirrus elaborates.
“The mining industry plays an important role, not only in employment or revenue for the state (income tax, corporate tax, VAT, royalties), but also in foreign currency earnings through exports. With several of Namibia’s major mines nearing their life of mine in the coming decade, and no new major developments on the cards, the longer-term outlook for mining is bleak,” they say.
IJG think the biggest drag on the economy in 2020 will be low levels of investment, “without which there will not be much reprieve for secondary industries such as construction and manufacturing”.
“The spill-over effect of this is struggling tertiary industries, particularly consumer spending which will remain low as household incomes remain under pressure,” says IJG.
According to Cirrus, “a combination of the lack of policy reform, the direction of policy reform and the rate of policy reform will be a huge drag on growth this year”.
“Without a dramatic investment climate change for the better, we do not foresee a material growth recovery. Further, the policy changes that are taking place are taking us in the wrong direction, and the rate of change to turn the ship around is far too slow.
“Namibia could be a high-income country within a decade with the right policy, however we are on the opposite trajectory at preset, with per capita GDP falling, not increasing.
“Moreover, fiscal risks are highly weighted to the downside, with major risks to revenue, and to deficit funding, and there is a material risk that government runs short of funds towards the end of the year again. If this happens, it will present a major risk for late 2020 and into 2021,” Cirrus says.