Fitch Ratings-Hong Kong-20 November 2017: Fitch Ratings has downgraded Namibia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to ‘BB+’ from ‘BBB-‘. The Outlook is Stable. See full statement below:
KEY RATING DRIVERS
The downgrade of the Long-Term Foreign-Currency IDR reflects weaker-than-forecast fiscal outcomes and our projection that public debt-to-GDP will continue to rise over the medium term. This will leave debt in financial year 2019 (FY19, to end-March 2020) at nearly double the ratio in FY14. The downgrade also reflects a weaker-than-expected economic recovery and our view that medium-term growth has shifted to a lower gear.
Fiscal consolidation was temporarily interrupted in FY17. We forecast the general government (GG) deficit to narrow to 6% of GDP from 6.9% in FY16, against a revised government target of 5.3%. However, this improvement is due solely to a one-off surge in transfers from the South African Customs Union (SACU) which we expect to lead to a downward adjustment in the receipts for FY19. The initially projected reduction in aggregate public capital spending will not materialise due to a NAD2.5 billion capital injection in a new public infrastructure fund and to the settlement of previously unreported arrears worth NAD2.7 billion arising from commitments undertaken in FY16. Total spending-to-GDP will stabilise as lower non-wage current outlays will offset the rise in the payroll, interest costs and public investment.
The government has revised its fiscal consolidation strategy, and no longer targets a reduction or stabilisation of debt-to-GDP between FY17 and FY20. The latest Medium Term Expenditure Framework (MTEF) published earlier in November projects GG debt to grow to 44.2% in FY19, while it was forecast to decline to 37.7% in the previous MTEF. The government also foresees a reduction in the GG deficit to 2.9% in FY19, up from a previous target of 1%. It plans to achieve this improvement by cutting operational costs, stabilising capital spending in nominal terms, and freezing the wage bill by reducing the number of civil servants by 2% per year through natural attrition.
We project fiscal metrics to fall short of the government’s revised targets. We forecast the GG deficit to narrow only to 4.6% of GDP in FY19 due to economic recovery and lower current spending. GG debt will rise to 47% of GDP from 40.7% in FY16 and only 24.8% in FY14. We believe that SACU transfers will underperform official projections due to sagging growth in South Africa. The high public payroll is likely to absorb 50% of revenue in FY17, and is a source of fiscal rigidity. It has soared by 50% in real terms since FY11, and wages in the public sector will rise further in FY18 under a three-year agreement with the trade unions. Reducing the number of state employees will be challenging in the run-up to Namibia’s 2019 elections and against the background of high inequality.
The accumulation of previously undisclosed arrears by several ministries has shed light on underlying shortcomings in the management of public finances. The envisaged public infrastructure fund which will be managed by the Development Bank of Namibia (DBN) will improve the execution of some large public investment projects which are incurring cost overruns. However, it could reduce the government’s incentive to cut non-priority capital spending. The liabilities arising from related investment spending will be attributed to the fund, although this debt will be serviced by the sovereign.
GDP growth will decelerate to 0.8% in 2017 from 1.4% in 2016, according to our forecasts. Cuts in public investment have taken a toll on domestic demand and activity in the construction sector. The expansion of mining output has been slower than expected due to weak uranium prices while the increase in the production of the Husab uranium mine to full capacity was further delayed. GDP has contracted by 1.7% year-on-year in 1H17 despite the growth in the output of other mining commodities and the recovery in agriculture following a drought in 2016.
The economic outlook through to year 2019 remains lacklustre. We project GDP growth to strengthen to 2% in 2018 and 3% in 2019, well below the 2010-2015 average of 5.7%. The acceleration in growth will be driven by the rebound in crop production, steady growth in mining output, and stabilisation of public investment. Namibia’s medium-term growth will remain constrained by the lack of fiscal space, low prices for key mining products including uranium, tighter financing conditions and subdued growth in neighbouring South Africa and Angola.
Namibia’s ‘BB+’ IDRs also reflect the following key rating drivers:
The government’s financing conditions have eased after the strain observed in 2016. Namibia has secured a ZAR10 billion loan from the African Development Bank (AfDB) in 2017. Demand for government securities was bolstered by amendments to the regulation on pension funds and long-term insurers gradually raising the minimum allocation to domestic assets from 35% to 45% by October 2018. The disbursement of the first tranche of the AfDB loan, asset repatriations by investment funds and higher SACU receipts caused excess liquidity to soar fourfold to around NAD6 billion, according to Bank of Namibia (BoN).
Refinancing risks are moderate. The stock of T-bills has doubled in two years, which has raised the rollover risk. Public finances are vulnerable to the risk of a depreciation of the South African rand to which the Namibian dollar is pegged, as 30% of GG debt is denominated in foreign currencies other than the rand.
Significant contingent liabilities for the budget arise from the possible need to restructure some loss-making SOEs, notably in the transport sector. The expected liquidations of the troubled SME bank and Road Contractor Company are pending judicial approval but will generate only modest costs for the budget. Additional contingent liabilities for the budget arise from guarantees of SOE debt amounting to 7.4% of GDP, most of which are on external debt.
The Public Enterprise Governance Act Amendment bill will streamline the institutional framework of state-owned enterprises (SOEs). Its approval in Parliament is likely in 2018. The reform may reduce government transfers to unprofitable public companies and also paves the way for a possible partial privatisation of some state assets, notably the telecoms operator MTC.
We forecast the current account deficit to remain wide, averaging 6.9% in 2017-2019, well above the ‘BB’ median of 2.1%. It will nonetheless improve from 14.5% in 2016 as imports of capital goods moderate and mining exports expand. Net external debt increased to 5% of GDP in 2016, turning to a debtor position for the first time since 2005. External financing conditions are affected by heightened political and economic risks in South Africa. External buffers have improved, with foreign-currency reserves forecast to average 4.2 months of current account payments in 2017-2019, up from 3.1 in 2016. This is due to the disbursement of the AfDB loan, asset repatriations and the repayment of some BoN claims on the National Bank of Angola.
The congress of the ruling South West African People’s Organization (SWAPO) later in November is a source of policy uncertainty. We expect the fiscal and growth-enhancing reform drive to gain momentum after the congress. A government reshuffle seems likely, and we expect a new cabinet to initiate some major reforms – including the overhaul process of the SOE sector. We also expect the government to retract the most controversial provisions of the National Economic Equitable Empowerment (NEEE) draft bill and the National Investment Promotion Act (NIPA), and submit revised versions of the two bills to Parliament in 2018.
The controversial provisions of the NEEE draft bill and NIPA underscore the lingering policy risks resulting from Namibia’s high inequality despite being likely to be withdrawn. Namibia’s long-standing political stability and governance indicators are a major credit strength, at well above the ‘BB’ median.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch’s proprietary SRM assigns Namibia a score equivalent to a rating of ‘BB+’ on the Long-Term Foreign-Currency (FC) IDR scale.
Fitch’s sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
Fitch’s SRM is the agency’s proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch’s QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
The Stable Outlook reflects Fitch’s assessment that upside and downside risks are broadly balanced.
Future developments that could result in a downgrade include:
-Significant deterioration in debt dynamics beyond our current forecasts
-Wider-than-expected external deficits or emergence of significant external funding pressures
-Lower-than-forecast economic growth, for example due to an aggravation of policy uncertainty or weaker mining activity
Future developments that could result in an upgrade include:
-Narrowing of the budget deficit sufficient to place the government debt-to-GDP ratio on a downward trajectory
-Marked improvement in the current account balance consistent with a stabilisation of external-debt-to GDP ratios
-Stronger medium-term growth resulting from better prospects for the mining sector or implementation of structural reforms
We expect global economic trends and commodity prices to develop as outlined in Fitch’s Global Economic Outlook.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR downgraded to ‘BB+’ from ‘BBB-‘; Outlook Stable
Long-Term Local-Currency IDR downgraded to ‘BB+’ from ‘BBB-‘; Outlook Stable
Short-Term Foreign-Currency IDR downgraded to ‘B’ from ‘F3’
Short-Term Local-Currency IDR downgraded to ‘B’ from ‘F3’
Country Ceiling downgraded to ‘BBB-‘ from ‘BBB’
Issue ratings on long-term senior unsecured foreign-currency bonds downgraded to ‘BB+’ from ‘BBB-‘
Issue ratings on long-term senior-unsecured local-currency bonds downgraded to ‘BB+’ from ‘BBB-‘
Namibia’s National Long-Term Rating on the South African scale downgraded to ‘AA+(zaf)’ from ‘AAA(zaf)’; Outlook Stable
Issue ratings on Namibia’s bonds with a National rating downgraded to ‘AA+(zaf)’ from ‘AAA(zaf)’