What a Moody's downgrade means

Economists are in general agreement that the recent downgrade by Moody's is not expected to immediately affect the average Joe but have sounded a caution that government's obligations to its lenders will now become pricier.

According to them, this also has the ability to make the possibility of funding future deficits improbable, delay planned expenditure on projects of importance or even raise the cost of lending at the consumer level.

Capricorn Asset Management analyst Claudia Boamah said the immediate impact of Moody's actions would not be noticeable in the short term but could become more visible with time. “In the short term the impact on the average Namibian is minimal. There could be long-term indirect effects on the man on the street… it all depends on how the markets will react,” said Boamah. According to her, the treasury had reacted positively to concerns raised by Moody's by cutting spending considerably.

“Moody's has issued their view but most of the concerns are concerns that the country is well aware of [which] were mostly addressed in March (when the budget was tabled). Until there is a significant market reaction, I would not want to speculate on what it means for ordinary people.”

Boamah also pointed out that it was not necessarily a downgrade and that Namibia had avoided outright junk status. According to her, the actions of Moody's only have bearing on Namibia's outstanding long-term unsecured bonds that are not backed by government guarantees. “While it is correct to say that Namibia has been downgraded (because most current ratings are lower than previous ones) it isn't quite right to say that we are on 'junk status'. Of the individual credit features which were taken into consideration only long-term senior unsecured bonds were relegated to junk status.

According to her, the government's secured debt obligations still remained investment grade going by the report issued by Moody's.

“Long-term foreign currency bonds and deposits are still of investment grade and long-term domestic bonds and deposits are of prime investment grade,” said Boamah.

On the back of the downgrade, IJG head of research Eric van Zyl was of the opinion that an interest rate cut would not necessarily follow through as was eagerly expected, thus affecting the rate at which consumers borrow from the commercial banks.

“The Moody's downgrade has the potential to affect the man on the street through higher borrowing costs. We expected the Bank of Namibia to cut interest rates this week, but following the downgrade we think that there is an increased probability that BoN will keep rates at present levels. As the currency is not immediately affected by the downgrade, as it would be in South Africa, there is little real impact on the regular Namibian in the short term,” said Van Zyl.

Simonis Storm analyst Frans Uusiku said Namibia's debt repayments would rise, placing significant risk on the government's ability to fund future government deficits.

“It means that Namibia's creditworthiness has been downgraded to non-investment grade due to scepticism that the government may not be able to honour its debt repayments as the revenue squeeze lingers,” said Uusiku.

Like other analysts, Uusiku was in agreement that it would raise the cost of borrowing. “This lack of investor appetite will effectively raise the cost of borrowing for the Namibia government in the international capital market. This would pose significant risk of financing the budget deficit in the future,” added Uusiku.

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