12 December 2018

Namibia Slightly Out of Junk - Moody's

Photo: Daily Trust
Moody’s Investors Service.

RATINGS agency Moody's last Friday rated the Namibian government as speculative, reflecting that although there are improving prospects for economic growth, the country is still risky to borrow to, Thus it maintained a negative outlook of the economy.

Economic Association of Namibia (EAN) research associate Klaus Schade explained that ratings such as affirmed by Moody's indicate the creditworthiness of a country.

"It is an important indicator for potential financial investors but also direct investors since it highlights the level of risks involved in investing in the country.

"The lower the rating, the higher the risk, and consequently the higher the costs of borrowing since investors expect a higher return in order to cover potential losses," he added.

Schade said: "Namibia maintained her rating one notch below investment rating, and therefore, investment in the country is seen as speculative. Since it is one notch below investment rating, it is not really junk. However, the negative outlook sends a strong message that more needs to be done."

"We can only expect an upgrading to investment rating in the medium-term. However, we need to improve the outlook to at least stable, if not positive. This would require that we address the risks the report has identified," he noted.

According to Moody's, the decision to maintain the negative outlook is based on the inability of Namibia to address the country's vulnerability to shocks that are created by the country's debt burden.

Namibia's reduced Southern African Customs Union (Sacu) revenue, the subdued South African economic growth, the renewed depreciation of the rand to which Namibia is pegged, and the ever-fluctuating commodity prices are among the issues that Moody's has listed as those the government will not have control over.

"While the government has maintained its fiscal consolidation objectives, progress towards these objectives and the related strengthening of the country's fiscal institutions has been limited so far, leaving Namibia's credit profile exposed to economic and financial shocks," the agency said.

The ratings agency stated that notwithstanding growth prospects, Namibia faces structural economic challenges, including high unemployment and skills shortages, which will continue to weigh on economic strength.

On corruption, the agency said Namibia's adherence to the rule of law and control of corruption are relatively strong, in the 57,5 and 62,1 percentile of Moody's rated sovereigns, respectively. These features enhance the effectiveness of the country's institutions by providing a transparent and predictable environment to businesses and individuals.

Economist and co-founder of Cirrus Capital Rowland Brown said other issues such as state-owned enterprises' (SOEs) insolvency and bailouts, the increasing lack of money and the continuous dulling of investors' confidence in the country are some of the vital vulnerabilities which are poorly understood and/or appreciated in Namibia.

"We generally agree with the Moody's assessment," Brown said, adding that seeing that well-run businesses are also struggling under current economic conditions, SOEs are not likely to be able to make it, for they could not even break even during good days, and they could be expected to ask for government bailouts.

He noted that bank funding growth has recently fallen to its lowest level in over 15 years. Although the banks have been funding the budget deficit over the past 18 months by being the largest net buyer of short-term government debt, bank funding pressure can be expected to cause funding the deficit to be more challenging and more expensive than previously thought.

Brown cautioned that while African Development Bank and potential Chinese loans may ease this situation to some extent, they are once again once-off levers that merely postpone a crisis, not avert it. Should substantial structural changes to the budget not be undertaken, the use of finite levers to fund the deficit and stabilise local liquidity will become ever-less functional.

He added that it is only through investment recovery that Namibia will return to the growth levels required to ensure that job creation exceeds labour force growth, but the present business/policy environment in Namibia is repelling investors rather than attracting them.

"As a country with one of the highest tax-revenue to GDP ratios, we remain convinced that our fiscal challenges have little to do with the revenue side of the budget, and that reform to expenditure is required to ensure fiscal stability and an improved credit rating," Brown said.

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