Namibia: Do-or-Die Year for Treasury to Sustain Begging Bowl

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(File photo).
12 December 2019

The latest credit rating by Moody's rating agency has placed Namibian policymakers in a do-or-die situation next year, as the country's ability to borrow is downgraded two notches above a no-go investment grade for a not growing economy.

Moody's Investor Service downgraded the country credit rating from Ba1 to Ba2 last week after a recent visit to the country.

The country's credit rating is now two notches above a speculative investment grade, which is characterised by high yield bonds; where borrowers have to promise high interest rate to lenders.

This raises the question of whether the country can afford to slide further in its credit rating, given the fact that it relies on borrowing to fund its budget deficit, in the face of slow revenue generation, with interest payments now standing at 10% of total national budget expenditure.

Moody's indicated that the much hyped expenditure cuts by the government cannot shield the country from a further dent in borrowing ability.

Moody's current credit rating is now aligned with Fitch's country downgrade early this year, with both rating agencies sending a signal to the international lenders of how risky it is to invest in Namibian government bonds.

The rating agency stated that the country's debt burden has ballooned over the past decade to 45,6% of GDP at the end of the 2018 fiscal year.

Moody's added that the weaker medium-term growth prospect could bury the country further in debt servicing problems; making 2020/21 a do-or-die year for policymakers.

The weaker growth prospect will hamper government revenue generation, which will raise exposure to downside risks that could lead to a bigger debt trap.

Moody's assessment also gives dim recovery prospects, stating that the economy's competitiveness and productivity has weakened, reducing the capacity of the economy to recover from the shocks it faces.

ANALYSTS

Risk lecturer at the University of Namibia Samuel Nuugulu said generally the rate downgrade is bad news for an ailing economy like Namibia's.

However, he said even though the country's international borrowing ability keeps being tainted the increased domestic asset allocation requirements on local pension funds is a relief for government in terms of funding a considerable amount of its deficit locally.

"This will help the government in mitigating its funding liquidity risk emanating from high borrowing costs and low appetite for its high risk rated securities," Nuugulu said.

Going forward, however, the government needs to formulate and implement good policies targeting key priority sectors such as agriculture and manufacturing.

"In my view the two sectors play a fundamental role in reviving the country's economy in two ways, through employment creation and by generating tangible economic activities," he said.

Economist Mally Likukela highlighted fiscal leakage such as the election budget, and not paying attention to red flags that are raised and the previous rating assessments - and thirdly, the consistent neglecting of spending ceilings or targets coupled with resource mismanagement remain.

"Ultimately, those eroded the fiscal space further and dampen the country's ability to stabilise the economy, Likukela said.

He added that "the implications of the rating downgrades are dire and will be severe in the long-run considering the ambitious Harambee and NDP5 plans that requires significant amount of funding."

He advised those trusted with the country's resources to decisively re-appropriate the limited funds in its coffers to increase the level of aggregate demand in the domestic economy either through increases in government spending or through reductions in taxes.

Likukela added that it will take more than words of confidence; rather bold empirical based actions and adherence to growth strategies will make a significant difference to the current no growth phase.

Cirrus Capital economist Rowland Brown believes that without substantive reform, they do not expect to see a material growth recovery in the coming period,with a growth of 4% needed to get the social and economic balance in order.

"We need growth in excess of 4% to create jobs faster than the net growth in the labour force. To reduce youth and overall unemployment, and without economic growth, we will not see much real growth in government revenue, the analyst stated.

Brown explained that is not wise to milk more revenue out of the approximately 300 000 (12% of the population) formally employed people in the country, and the approximately 27 000 formal employers (just over 1% of the population) will be more likely to reduce employment and employers, and thus tax revenue, than increase it.

He said the budget deficit will continue for the foreseeable future, unless major reforms are witnessed.

"Thus, we do not view the outlook as stable, rather the risks as heavily weighted to the downside at present," he forecasted.

Moreover, Brown said that recovery is very possible, however, increasingly complex, if those tasked to advise policymakers continue to sell a more politically palatable message to the government than the reality.

He warned: "We as a country are in great trouble if we do no reform radically in the near term."

Brown explained that the reforms needed are not impossible, however they do require a deep understanding of the economy, and also a degree of foresight.

VAGUE OPTIMISM

Finance minister Calle Schlewttwein, in his response to the downgrade, said he was still optimistic the government's current stance of fiscal consolidation will yield results such as revenue generation, the creation of jobs, as well as the reduction of poverty and inequality.

"We therefore remain optimistic that growth prospects will gain traction as the implementation of the adopted measures is scaled-up," he said.

The minister indicated that increasing the development budget by 42,2% will be the lever for supporting domestic economic activity, with available data indicating the easing of constraints in the construction sector.

Schlettwein also expressed faith in the African Development Bank's N$4 billion loan for the next three years for the agricultural mechanisation programme, rail and road infrastructure projects as well as essential public infrastructure projects in the education sector.

Moreover, he expressed hope that the recently launched SMEs financing directive to source locally and implementation of recommendations by the High Level Panel on the Economy will improve things.

The minister also banks on other markets for borrowing such as the local and SA market saying that "while the long-term non-rand, foreign bonds are rated at sub-investment grade, the rand-denominated bonds are still at investment grade."

Schlettwein is also looking at pension fund money/assets as the 45% domestic asset requirement takes effect, thus releasing money into the domestic economy to finance investments in the real and services sectors.

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