Finance Minister on state of economy

1. Let me take this opportunity to brief the House and the public about the general state of our economy, the main outcome of the recently announced credit rating assessment by Fitch Credit Ratings Agency early this month and the impact on Namibia, actual or potential, of BREXIT; that is, the expected exit of the United Kingdom from the European Union.

2. Honourable Speaker, the latest information and assessments suggest that our economy faces a slowdown in the pace of activity this year, with only moderate improvements expected next year. This outlook is also beset with external downside risks.

3. In view of that, the Government is acting timeously to address the challenges and vulnerabilities that have been building up. The outlook has significantly changed relative to the baseline assumptions we made at the time of the budget last year. Which we had consulted widely internally and with external assessors, in a changing global economic environment, timely adjustments are necessary due to domestic and external effects, given the circumstances of each country.

4. We are now working on a comprehensive set of measures to shore up the resilience of our economy and we are frontloading measures to place public finances on a firmer sustainable path through a fiscal adjustment framework and its corresponding policy packages. I am due to announce, and start implementing these measures during the Mid-Year Budget Review which I will table in the last week of October this year.

5. Honourable Speaker, let me start by highlighting the main developments in the domestic economy and the medium-term economic outlook. The key strength for our economy during the past years has been the strong growth performance, standing at above 5 percent in the last five years.

6. However, a confluence of factors are impacting on the economic performance and outlook. As a small open economy and fragile in terms of the environmental impact, the effects of the slowdown in our major trading partners and global commodity prices are being felt in the domestic economy through a considerable slowdown in revenue and activity in some sectors of the economy. For this reason, growth for this year is expected to be considerably lower than the 4.3 percent projected in 2016. The severity of the economic slowdown was understated. Even at the global level, IMF had to respectively revise downward the global economic outlook in January, April and July this year.

7. Honourable Speaker, with regard to fiscal operations, we have to contend with considerably lower than anticipated revenue outturn, due to weaker economic output. As a result of shortfalls in GDP and revenue during the FY2015/16, the fiscal indicators have changed; with the budget deficit for that year now estimated at about 8.3 percent, up from the 5.3 percent deficit that was budgeted for, while the public debt ratio has also risen to about 40 percent of GDP. This outturn has carried over to the current fiscal year and needs to be contained. Concerted policy response package will have to be rolled out, starting with the Mid-Year Budget Review this year and extended to the rest of the MTEF in a manner that balances between ensuring growth and social development, while placing public finances on a sustainable path.

8. Honourable Speaker, let me now turn on the main weaknesses raised by Fitch Credit Ratings Agency in its assessment in September this year.

9. Namibia has subscribed to Fitch Credit Ratings in 2005 and to Moody’s Investor Service in 2011 as independent and reputable credit ratings agencies of international repute, reflecting the Government’s commitment to fiscal transparency and responsible Public Finance Management.

10. In its latest assessment outcome released in early this month, Fitch Ratings has affirmed Namibia’s Sovereign Credit Rating at the investment grade notch of BBB-.

11. In addition, the ratings also:-  affirmed Namibia’s senior unsecured Foreign and Local-Currency bonds at ‘BBB-‘;  affirmed the Namibia’s ceiling at BBB and the Short-term ForeignCurrency and Local-Currency default risk at F3, and  affirmed the ratings on Namibia’s bonds with a National rating at ‘AA+  Namibia remains credit worthy – we are able to honor all our debtors.

12. These affirmed ratings have been the historical ratings score for Namibia under Fitch ratings criteria for several years now. Namibia’s relativ

ely strong economic growth performance and outlook remain the key ratings strength and an anchor for medium-term policy response. 13. However, the outlook on the rating has been revised from “stable” to “negative”, reflecting a number of prevalent risk factors which need to be managed prudently and mitigated in the short to the medium-term. Thus, the rating is not a downgrade of the investment rating, but a downward revision of the outlook reflecting that there are risks to contend with.

14. The ratings weaknesses emphasized the following factors:-  The increase in the Budget deficit in 2015/2016 to 8.3 percent of GDP, from the budgeted deficit of 5.3 percent, above the fiscal target of 5 percent and the ‘BBB’ median of 2.7 percent. This was mainly a result of the shortfalls in budgeted revenue;  The increase in the government debt stock to 38.2 percent of GDP, above the government target of 35 percent at the end of 2015, which is forecast to rise further to 39% of GDP by 2016;  The deterioration of Namibia’s current account deficit to 14.1 percent of GDP in 2015, from 8.9% in 2013, and above the BBB median of 1.3 percent;  Declining levels of international foreign reserves of around 2.7 months of import cover by mid-2016, which is below the peer median of 5.7 months of imports coverage, and  Other policy issues such as the possible negative repercussions on the economy from the envisaged coming into force of the New Equitable Economic Empowerment Framework (NEEEF) in its current form.

15. These key strength and risk factors have equally been emphasized during the recently concluded 2016 Article IV Consultation Surveillance mission undertaken by IMF in mid-September and whose Report will be available at the end of October 2016, after the necessary approval process.

16. Honourable Speaker, it should be noted that the current MTEF which I tabled in February 2016 provides a basis for pro-growth fiscal consolidation, with phased spending cuts already commenced, while other non-core spending has been lowered or postponed in many cases, and Fitch has welcomed this approach in its statement.

17. The Government will take further measures to address these ratings weaknesses, starting with the planned Budget Review. Honourable Speaker,

18. Let me conclude my statement by reflecting on the impact of the expected exit of the United Kingdom from the European Union.

19. As we are all aware, on the 23 June 2016, the United Kingdom voted to exit from the European Union. The impact of the envisaged exit, which is anticipated to materialize in two years’ time, has wider ramifications for the UK, the EU and the global economy.

20. For Namibia as a small open economy that is also trading with the UK and home to some of the UK investors is also not immune from the impacts of the envisaged exit.

21. The impact is felt through four main channels, namely:-  The trade channel, given that about two percent of Namibia’s exports, mainly beef and fish, valued at about N$800 million are destined for the UK market. External demand weaknesses as well as indirect impact through UK trade with South Africa are expected to weigh on Namibia in the medium-term.  Second, the impact is felt through exchange rate volatility as a result of the currency peg with the South African Rand. Right after the BREXIT vote on the 24 June 2016, the South African Rand appreciated against the British Pound by 2.7 percent. The appreciation against the British Pound continued to reach 12 percent, and at the same time, the Rand depreciated against the US Dollar by 5.4 percent and 2.4 percent against the Euro, with implications on the competitiveness of exports to the UK, external debt and investment in general.  Third, equity prices declined with the BREXIT announcement. Many large Namibian companies are dual listed on the Namibian Stock Exchange, Johannesburg Stock Exchange and London Stock Exchange. The share prices of most Namibian companies with dual listings as well as banks will in the foreseeable future continue to be exposed to the relative exchange rate and market volatility.  Last, the immediate result of the fallout from BREXIT has impacted on investor sentiments especially in the bond market, with shits to safer and higher yielding investment grade assets, given the current low rate environment. Namibia’s two USD bonds for example have seen increased demand over the first two weeks of BREXIT announcement. Honourable Speaker,

22. To conclude, the external effects on our economy as well as domestic vulnerabilities, especially those emphasized in the external assessments require timely and concerted response mechanism. Let me take this opportunity to reassure the market and the public that the Government will spare no time to implement the corrective measures in a timely and targeted manner. This is, of course, taking cognizance of the fact that we are a small open economy and we have withered perfect storms and headwinds in the past. We summon common resolve and energy to move forward. We have started a dialogue with the financial sector that is the banking sector, asset managers and other non-banking financial service providers and all pension funds and insurers to develop an action plan for the way forward.

23. I will announce these specific measures in the upcoming Mid-Year Budget Review for 2016, which I intend tabling at the end of October this year.