Namibia registered a deficit on the current account during the first quarter of 2020, mainly due to deterioration in the merchandise trade balance. Translated into layman's terms, this means that the country imported more than it exported during the first quarter of the year, resulting in a current account deficit of N$432 million during the first quarter of 2020, compared to a surplus of N$312 million in the first quarter of 2019, as detailed in the Bank of Namibia's (BoN's) latest quarterly report.
BoN attributed the deficit to the worsening merchandise trade deficit, reflecting a significant decline in export earnings but confirmed that the country's stock of international reserves, however, increased resulting in an import cover of 5.3 months at the end of the first quarter of 2020, compared to 4.9 months a year earlier. Both figures were still above the international benchmark of 3.0 months.
According to local economist and Managing Director of Twilight Capital, Mally Likukela, Namibia is 'skating on thin ice' because a deficit on the current account places undue pressure on national reserves, which in turn are used to pay for imports. This, Likukela added, speaks to macro-economic fundamentals that if not adhered to could wreak havoc on the country's balance of payments.
Meanwhile, the quarterly report also showed that Namibia's international investment position recorded an increased net liability position of N$18.6 billion at the end of the first quarter of 2020, compared to N$16.3 billion a year earlier.
This increased net liability position was mainly due to a reduction in foreign assets in the form of portfolio and other investment, as prices of assets declined sharply amidst the Covid-19 pandemic. In addition, the Namibia Dollar weakened against all major trading currencies during the first quarter of 2020 on the back of rising concerns over the pandemic.
The report also confirmed that activity in the domestic economy slowed significantly during the first quarter of 2020, driven by weak performances in some key sectors.
Reads the report: "The decline was observed across a number of key sectors, such as mining, agriculture, tourism, transport, manufacturing and wholesale and retail trade. The decline observed in the mining sector was largely because of lower production of zinc and uranium. Livestock marketing activity, particularly cattle and small stock marketed, slowed due to drought conditions in the previous year and thereby negatively affected the agricultural sector's production. Similarly, wholesale and retail trade, manufacturing, transport and storage and tourism activities were subdued. Activity in the communication, construction, and electricity sectors, however, improved, albeit modestly."
Namibia's inflation declined during the first quarter of 2020, driven mainly by lower inflation for food, and housing and transport. Inflation declined to 2.3% during the first quarter of 2020 from 4.5% during the corresponding quarter of 2019. The decline was largely reflected in a decrease in inflation for food, housing and transport. This was mainly on account of weak domestic economic activity and deflationary pressure in the rental market. The inflation rate dropped to 1.6% and 2.1% in April and May 2020, respectively, driven by declines in inflation for housing and transport.
On the monetary front, growth in broad money supply (M2) and credit extended to the private sector rose during the first quarter of 2020. The 12-month growth in M2 rose to 11.3% during the period under review, sustained by growth in domestic claims, particularly claims on the central government due to an increase in government borrowing.
Growth in credit extended to the private sector also increased due to a marginal rise in demand for credit by the household sector. The Bank of Namibia reduced its Repo rate twice during the first quarter of 2020, reaching the lowest recorded level. Since the beginning of 2020, BoN reduced the repo rate by a cumulative 250 basis point.
On the fiscal front, the central government's debt stock rose during the quarter to 31 March 2020 and the central government's budget deficit is estimated to widen considerably during the fiscal year 2020/21. The central government's total debt as a percentage of GDP stood at 56.8% at the end of March 2020, representing a yearly increase of 7.7 percentage points. Total loan guarantees as a ratio of GDP also increased during the period under review but remained within the set ceiling of 10%. Going forward, the central government budget deficit in the fiscal year 2020/21 is estimated to rise to 12.5% of GDP, much higher compared to the previous fiscal year. The rise is mainly on account of governments' effort to help save lives and to support livelihoods as well as to mitigate the effect of the Covid-19 pandemic on economic activity. In this regard, the Central Government expenditure is estimated to rise during 2020/21, compared to the previous year.
BoN also noted that all available data points to slower global economic growth during the first quarter of 2020 as growth in both advanced economies (AEs) and emerging market and developing economies (EMDEs) receded relative to the fourth quarter of 2019, with most large economies registering a contraction in real GDP.
"This is primarily because of measures taken to contain the spread of the Covid-19 pandemic which also significantly affected economic activity. The outbreak of the Covid-19 pandemic created panic and uncertainties across the globe requiring various policy responses. The demand for commodities and risky assets such as equities also declined, while that for US treasuries increased, causing a sharp decline in yields. Some EMDE currencies depreciated quite significantly. Investor sentiment was negatively affected and turned into a defensive mode as the extent and severity of the Covid-19 pandemic and its impact on economic growth remained unknown," read BoN's report.
Furthermore, as expected, the global economy is projected to contract significantly in 2020 and recover only in 2021. In its just-released June 2020 World Economic Outlook (WEO) Update, the International Monetary Fund (IMF) projects the global economy to contract by 4.9% in 2020, its worst recession since the Great Depression, and more severe than what was seen during the global financial crisis in 2008/2009.
Downside risks weighing heavily on global growth include uncertainty regarding the duration and direction of the pandemic and related travel restrictions as well as lockdowns. Furthermore, a risk remains that countries could experience a re-emergence of infections that will prolong the lockdown measures and travel restrictions, thereby slowing down the re-opening of economies. BoN's report noted that the volatility of international commodity prices might also derail recovery in many parts of the world.