25 February 2019

Namibia: Schlettwein Not Panicking Over Latest Fitch Rating

Windhoek — Finance Minister Calle Schlettwein says government is working around the clock to bring about some positive change and mitigate the risk of a downgrade by international rating agencies.

One of the agencies, Fitch, last week revised Namibia's economic outlook from stable to negative while keeping the country's credit ratings at BB+ for foreign denominations and AA+ for the South African market. This, Schlettwein, should not affect investors' confidence in the country.

Fitch Ratings said the revised outlook to negative reflects Namibia's weak growth performance and the agency's downward assessment of growth prospects with adverse implications for the government's ability to stabilise the public debt trajectory.

Fitch projected a contraction of 0,4 percent in 2018 compared to the previous forecast of 0,6 percent, noting a decline in gross domestic product (GDP) for the tenth consecutive quarter in quarter three of 2018.

"The contraction reflects weak domestic demand, due mostly to fiscal consolidation, lower private investment and soft disposable income growth, as well as sluggish activity in neighbouring South Africa and Angola.

This was only partly offset by robust activity in mining mostly due to the ramping-up of the Husab mega-mine's production of uranium," read the Fitch report.

Commenting on the issue on NBC News on Friday, Schlettwein emphasised that it was important to state that the rating itself was in fact affirmed.

"So, there was no downgrade of any rating, but it was the outlook of this rating that was being maintained that was revised and adjusted from a stable outlook to a negative outlook," he said.

"It is an important distinction between the outlook and the rating so all the ratings have been maintained and we still sit at BB+ for foreign denominations and AA+ for the South African market."

Schlettwein explained that ratings cover a number of indices but the main one that caused the change in outlook was the fact that the country has been in negative growth for 10 consecutive quarters.

"The ratings agents had anticipated that the recovery towards positive growth would happen somewhere in 2018. Now, that did not occur and therefore the change in outlook. What one can however say is that the indications are indeed that there is a recovery but the recovery is not strong enough to change a negative growth rate to a positive one," said the finance minister.

He said that statistical evidence from the Namibia Statistics Agency (NSA) shows that that a number of indices are improving, such as final consumption and the balance of payments, which has brought the current account down to only 2.2 percent - meaning that the country is exporting more and importing less.

"So, there is solid indication that the economy has turned and that the recovery is on its way, albeit in a slow way," Schlettwein maintained.

In terms of investment climate, Schlettwein said there was a lot of talk about waning confidence because of policy stances taken by government, vis-a-vis tackling inequality and poverty.

"There were notions that that this caused a decline in investor confidence. In fact, the ratings agency is not of that opinion. They laud Namibia for that policy to fight inequality and poverty and they appreciate the fact that we are consistent in these policies and we believe that the fight against poverty and inequality are at the core of our structural economic reform."

"The notion that we have limited policy space is also confirmed. There is little support from neighbouring countries and the region for Namibia to reach positive growth and we as a small open economy rely on this support," Schlettwein explained on national television.

Said Schlettwein: "What we have to do is to target our reform strategy and our resources to areas where it makes the most impact. On the expenditure side we are now targeting subsidies to state-owned enterprises. We believe they are too high and they must reform and perform better. We believe that the wage bill is crowding out other service delivery in the public sector and we must take concrete steps to reduce wage expenses. Also, on the expenditure side we have to target where the impact is highest, that is youth employment and we believe we are able to do that by investing in the social sector and in the power sector."

Commenting on the ratings development, Daniel Kavishe, FirstRand Namibia's Group Economist, noted that Fitch expects the economy to rebound gradually in 2019 to 0.7 percent from a projected decline of -0.4 percent in 2018.

"All in all, it is unlikely that the country rating will improve in the near term unless drastic changes are made to create policy stability and a competitive investment environment. 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," said Kavishe.

He added that the proposed tax amendments, which are intended to increase revenue, will likely detract from the pace of economic recovery. However, he stated that quick wins for the country will be clarity on policy fronts, reining-in government debt and transformation of governance at state-owned entities.

"Through the improvement of the local business environment, Namibia will be set on a sustainable and steady path of economic recovery that entices both domestic and foreign investments," said Kavishe.

With the government's budget deficit expected to widen to 4.1 percent by 2020/2021, Fitch Ratings remains concerned of transfers to loss-making SOEs and high public-sector payroll costs.

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