Nam remains in junk grip

Moody’s on Friday keep Namibia’s credit rating at junk and maintained its negative outlook for the sovereign.

“The negative outlook reflects Namibia's persistent vulnerability to a range of shocks that would weigh on revenue, increase financing costs and, as a result, weaken fiscal strength and raise liquidity and external vulnerability risks,” Moody’s said.

It added that the affirmation of the Ba1 rating reflects Namibia's gradually improving medium-term growth prospects and moderate wealth levels that support the economy's shock absorption capacity.

Moody’s estimates that, in the absence of shocks, government’s fiscal consolidation path is achievable. Government plans a gradual fiscal consolidation, with the deficit narrowing to 4.5% of gross domestic product (GDP) in the current fiscal year ending March 2019 and 4.0% for 2019/20, from 5.0% of GDP in 2017/18 and a peak at 8.3% in 2015/16.

Combined with improving but still moderate nominal GDP growth, it would slow but not halt the increase in the debt burden, to around 46.7% of GDP in 2019/20 from 42% in 2017/18, Moody’s said.

“At these levels, the debt burden is higher than the median level for Ba1-rated sovereigns (32.9% in 2017). A relatively broad revenue base and moderate overall cost of debt supports debt affordability.

“Moody's estimates that interest payments absorbed around 8.9% of revenue in 2017, comparable to the median level of 9.3% for Ba1-rated sovereigns. However, consolidation at the projected pace would not quickly remove the sovereign's vulnerability to a range of potential negative developments that would weigh on revenue and/or raise financing costs,” the agency said.

SACU

Moody’s warned that “Namibia is and will, in the absence of faster consolidation, remain vulnerable to lower SACU revenue (about one third of total revenue) than currently assumed by the government and Moody's”.

Related to SACU revenue, with about 20% of exports shipped to South Africa, Namibia's economic environment remains closely tied to that of its main trading partner, Moody’s said.

“Moody's expects a gradual increase in GDP growth in South Africa but the significant challenges it faces in achieving sustained robust growth point to downside risks that would spill over and dampen Namibia's government revenue,” it said.

Government revenue is also partly linked to commodity prices, Moody’s continued. “The royalties and income from the diamond sector and from other mineral ores provide a source of revenue for the government that is vulnerable to production or price shortfalls.”

While the government plans several measures to improve revenue generation capacity and tax administration, including establishing a new revenue agency planned for 2019, the effectiveness of these measures in raising revenue in a stable growth and commodity price environment and in improving the resilience of revenue to weaker growth and prices developments is untested, according to the rating agency.

It added that a large wage bill which accounts for around 50% of government expenditure constrains the government's capacity to cut spending and restore fiscal consolidation should revenue collection be lower than currently expected.

Turbulence

Namibia's fiscal outlook is vulnerable to a tightening in financing conditions, in particular external financing conditions, potentially resulting from turbulent global financial markets, Moody’s said.

“Renewed and persistent downward pressure on the South African rand, and the Namibian dollar which is pegged to it, would raise the burden of US dollar-denominated debt which Moody's currently estimates to be around 11.4% of GDP as of 2017.

“Should prospects of slower fiscal consolidation dent the confidence of domestic banks in macroeconomic stability, the cost of financing domestic debt, including a large stock of T-bills (11.6% of GDP in October, 2018) would rise and rapidly weaken debt affordability,” Moody’s said.

Namibia also has a sub-investment rating at Fitch Ratings.