Namibia: Nam's Negative Rating Agony

(file photo).

NAMIBIA'S negative credit ratings days are far from over, especially in light of the current negative growth, a prevailing drought, and persistent SOEs bailout requests, analysts have predicted.

Credit ratings agency Fitch revised Namibia's economic outlook and credit rating from stable to negative in February, warning that the country's ability to pay its foreign debt has become riskier.

The rather gloomy sentiments come after the downgrading of South Africa's outlook from stable to negative, and a maintained credit risk just one notch above junk status.

Last week Friday, Fitch Ratings Agency downgraded the outlook of the biggest economy in the southern African region from stable to negative, citing concerns about the government's financial support of Eskom, and low economic growth.

Other than Eskom, the South African government is also bailing out SABC and South African Airways.

Local analysts are of the opinion that bailouts in a strained economy increase government expenses, and coupled with unconvincing economic growth figures, the government will struggle in raising adequate revenues and stabilising reliability on government funds.

Head of research at PSG Wealth Namibia, Eloise du Plessis said these ratings normally rendered by Moody's or Fitch Ratings carry an element of importance that cannot be ignored.

"Theoretically, when the country's credit rating is downgraded, one expects to pay high interest rates to raise funds/to borrow, and thus government debt costs increase. Once the cost of debts increase, more money will be diverted to paying lenders, as opposed to investing in social aspects and the infrastructure of the country," she stated.

About 10% or N$6 billion of Namibia's 2019/20 national budget will go towards servicing debt.

"The main issue with a lower credit rating is that the cost of the debt goes up. You pay a higher interest rate on the debt, " she noted.

Du Plessis further explained that there are certain investors who will not borrow to countries below a certain credit rating.

"There is, however, a very robust high yield bond investing sector globally, so demand is not really the problem. It is how much you are paying on the debt," she stressed.

Du Plessis said Namibia was better off than other economies in the region, adding that in terms of foreign direct investment, before the Moody's downgrade, Namibia was the last remaining sub-Saharan country with an investment grade Eurobond rating.

"If investors were to shun African investment due to Eurobond credit ratings, Namibia is in no worse position than its neighbours who have Eurobonds. Botswana and Mauritius' local sovereign debt is still investment grade rated, but they do not have Eurobonds," she continued.

"Due to the recent proposed increase in the domestic asset requirements of Namibian pension funds, I do not think there will be a problem of reduced market appetite for local government securities and increased local borrowing costs," she noted.

Klaus Schade of the Economic Association of Namibia and member of the high-level panel on the Namibian economy, said the current indicators are not convincing enough for the country to get a better rating, and the current measures in place will not materialise in time to avoid a further downward rating.

He said Namibia faces similar challenges as South Africa, namely lower than expected growth, which will affect the budget deficit to GDP ratio, as well as the public debt to GDP ratio.

"The prevailing drought is putting further pressure on the government's finances, while a further economic contraction will most likely result in lower than expected revenue. Furthermore, the trade deficit is not narrowing significantly, in particular because of lower diamond production," he stated.

He added that "any measures the government puts in place, including policy adjustments, will take some time to convert into economic growth. We can, therefore, not expect an improvement in our sovereign rating, but need to continue taking the necessary steps to avoid a downward adjustment in the coming rating".

Penda Ithindi, economic adviser to the minister of finance, said from a fiscal/budgeting point of view, the ministry had done what it could to contain expenditure.

He explained that because the factors that could yield a positive rating were not addressed at the same time and at the same rate, it would be difficult to expect the country not to remain in the negatives.

The economy, as one of the main factors, did not grow as expected. But growth-stimulating projects that were approved, and the development budget which was increased, are indicative of the government's commitment to grow the economy, Ithindi added.

"The implementation rate of various projects have not come through in time to ensure the economy is stimulated, and as a result the country outlook and negative rating might not improve from the negative status," he said.

Local economists Mally Likukela and economics lecturer Omu Kakujaha-Matundu were, however, blunt in their assessments that the economic conditions that led to the country being downgraded from stable to negative have now worsened.

While they both cited the persisting drought and the bailing out of public enterprises, Likukela advised the government to take advantage of the upcoming investor conference to restore the damaged confidence.

Cirrus Capital's Rowland Brown said despite great efforts to stabilise the fiscus, Namibia continues to experience great fiscal pressure, and keeps on running large (albeit shrinking) budget deficits.

Should this be the case, coupled with a further downgrade, he said the cost of borrowing would increase as the reliance on pension funds to suck up government debts will dry up, which will then raise the additional cost of borrowing in the economy.

"The marginal cost of borrowing is likely to increase, going forward, as transitory demand for government debt by pension funds dries up, and given the relatively short duration of the public debt profile, this will mean that the marginal and average cost of funding will converge relatively quickly," Brown added.

He said putting the increased cost in borrowing into perspective, it will raise the amount of money owed, in comparison to the level of economic activities, which will sink any stable outlook revision for the country.

"The combination of a rising debt to GDP ratio and a rising debt servicing cost, relative to the size of the economy, means the rating outlook remains fragile," Brown said.

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