11 March 2019

Namibia: No Link Between Rising Debt and Economic Growth

Photo: Stefan Magdalinski/Wikipedia
Independence Avenue Windhoek

A local analyst has expressed concern that an increase in debt has surpassed Namibia's economic growth as the country experienced negative growth in the gross domestic product since the second quarter of 2016.

This means that despite the government taking out more debt, which is meant to grow the economy, economic growth has remain suppressed in roughly three years.

Simonis Storm analyst Indileni Nanghonga said the nominal outstanding value for treasury bills (TBs) increased at a fast pace of 76,2% to N$21,9 billion over the last three years, with inflation linkers and vanilla bonds increasing by 795,5% and 84,4% to N$4,7 billion and N$28,3 billion, respectively in February 2019.

The current economic growth contracted to -0,8% during the third quarter of 2018.

Nanghonga said government debt continues to grow, yet negative growth and high unemployment persist.

"We are of the view that money borrowed is partially being used for interest payments at the expense of local developmental spending, a trend that is unsustainable in the long run," the analyst said.

She, however, added that the demand for government instruments continues to be on an upward trajectory, indicating a tremendous increase in overall over-subscription during auctions.

Nanghonga added that shorter- (GC20-GC22) and medium-dated (GC23-GC30) bonds widened by 0,4 basis points respectively, while the longer-dated (GC32-GC45) securities narrowed by 6,5 basis points.

"We continue to prefer the 9- and 12-month TBs over the 3- and 6-month TBs on an effective annual yield basis. We reiterate our preference for medium to long-dated bonds to increase duration," she noted.

Nanghonga said the Namibian yield curve narrowed by 2,3 basis points on average during the period under review, which is attributed to a lower yield tendered on the GC37 in February, which has narrowed by 40,5 basis points at the last tender.

"Appetite for primary tenders picked up since January 2019, being over-subscribed by an average of 5,4 times. With the GC20 close to maturity, we are of the view that investors are aiming to increase duration at a cautious pace as uncertainty around rising government debt and its servicing costs remains prevalent.

"Bid-to-cover ratios were higher in February 2019, with spectacular appetite for the GC27. Furthermore, 2019 activity on the secondary market trades picked up, reaching a five-year high, but we read the data with caution as not all secondary trades are recorded," she stated.

In their talking points, PSG Namibia said despite economic growth being expected to recover over the medium term, it will, however, 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.

Their talking points were in line with Fitch Ratings revising its outlook on Namibia's long-term foreign currency credit rating from 'stable' to 'negative', while affirming the credit rating at BB+ (one notch below investment grade).

"In order to get a positive rating action, the government will have to halt the rise in government debt-to-GDP ratio, have a a marked improvement in the country's external balance-sheet, and a stronger medium-term economic growth," PSG said.

- charmaine@namibian.com.na, Twitter; Char_Ngatjiheue.

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