Govt guarantees balloon by billions

Jo-Maré Duddy – Government guarantees have sky-rocketed by more than N$12 billion or nearly 500% since 2012/13 and are expected to increase by at least another N$2.5 billion by 2020/21.

As a percentage of gross domestic product (GDP), government guarantees have jumped from 2.4% to and estimated 8% in the current fiscal year, which ends on March 31. For the coming two fiscal years, the percentage is projected to remain at 8%, budget documents show.

Documents tabled by finance minister Calle Schlettwein in his main budget in March last year, projects that government guarantees will total more than N$15.8 billion in the coming fiscal year – N$1 billion from the current year one. Of this, N$12.3 billion or nearly 79% will be foreign guarantees.

Fitch

Fitch Ratings lowered its outlook on government’s sub-investment credit rating in foreign currency from stable to negative on Thursday.

Fitch said the high debt of SOEs “presents a significant contingent liability for the sovereign”. According to the agency, SOEs’ debt comprised 25% of gross domestic product (GDP) at the end of 2017/18. Of this, about 6% of GDP was guaranteed by the government. Transfers to loss-making SOEs are one of the reasons budget pressures persists, Fitch said.

On Friday – a day after the Fitch warning – the Roads Authority (RA) said the Road Fund Administration (RFA) will bail it out with a government guaranteed loan of N$500 million from a local financial institution. The RA needs the millions to settle arrears payments to contractors.

Rapid reforms and transformation of governance at state-owned enterprises (SOEs) are crucial if Namibia wants to polish its tarnished creditworthiness of foreign debt and shed its junk status at international rating agencies, local analysts say.

Analysts

Reacting to Fitch Ratings’ latest report, both FirstRand Namibia and Simonis Storm (SS) singled out changes at SOEs as one of the remedies for Namibia’s ailing credit image.

The group economist of FirstRand Namibia, Daniel Kavishe, said it is unlikely that Namibia’s will improve in the near term unless drastic changes are made to create policy stability and a competitive investment environment.

The head of research at PSG Namibia, Eloise du Plessis, agrees. “We expect that a positive rating action from either Fitch or Moody’s is unlikely in the coming 12 months and that risks to the country’s sovereign credit ratings are skewed to the downside,” Du Plessis says.

Kavishe says “quick wins” for government will be “clarity on policy front, reigning-in government debt and transformation of governance at state-owned entities”.

SS analyst Indileni Nanghonga says “rapid SOE reforms” are necessary.

Remedies

In addition, Nanghonga adds, the following is needed: better strategic service infrastructure, improving capital allocations, attracting talent and skills, removal of policy uncertainties to try and win back foreign investors and investor confidence, rent-seeking behaviour shackled and a booming commodity price environment.

“With the above, we need a strong leadership that can tackle corruption and take the economy out of the current prolonged recession,” she says.

Like Kavishe, Du Plessis emphasised that government will have to reign in debt.

“Although economic growth is expected to recover over the medium term, it will be hampered by fiscal consolidation, structural problems such as high unemployment, a large skills shortage, a lack of investment in value-added sectors and ongoing global trade tensions.

“In order to get a positive rating action, the government will have to facilitate a halt in the rise in government debt-to-GDP, a marked improvement in the country’s external balance sheet, and stronger medium-term economic growth,” Du Plessis says.

As social deficits widen, government will have to pronounce itself on key legislature related to land reform, equitable economic empowerment and public-sector governance to reignite investor confidence, Kavishe says.

“Through the improvement of local business environment, Namibia will be set on a sustainable and steady path of economic recovery that entices both domestic and foreign investments,” he elaborates.