The third quarter of the financial year finds the country’s economy in an unfortunate predicament with an uncoordinated fiscal and monetary policy mix that does not support growth, Simonis Storm warned.
The financial broker firm issued this warning at the sidelines of the tabling of the 2016/2017 mid-term budget review by finance minister, Calle Schlettwein last week Thursday in parliament.
Commenting on the tight fiscal policy, Simonis Storm submitted that government’s commitment to fiscal consolidation since the previous mid-term budget review, and the subsequent decision to cut spending on capital projects in an attempt to safeguard the country’s fiscal prudency, was partly reinforced by an economic squeeze.
Namibia’s share of SACU revenue (whose share of total budgeted revenue has averaged by 31.0% over the last six years) has declined by 18.2% since 2014.
This was partly due to a slowdown in global trade, while government spending has gone unabated by 65% over the last four fiscal periods (2013/14 to 2016/17), mostly debt financed, and the economy has only grown by 12.3% in real terms from 2013 to 2015.
At the same time the budget deficit increased by 185% over the last three years.
“However, we are inclined to believe that ‘business has to go on’ and the mid-term budget review would be another important opportunity for the Minister of Finance to restore the confidence of credit rating agencies on how to further steer fiscal policy in the midst of alarming government debt levels,” acquiesced Simonis Storm.
As the mid-term budget review came under way, the ability of the minister to respond to the Fitch report, which highlights a revision of Namibia’s investment outlook from stable to negative in August, was last week’s key expectation as the nation braces for yet another credit risk assessment towards year’s end.
Simonis Storm further views the gradual increase in the repo rate by 75bps since June 2015 in Namibia, and its associated impact on domestic spending, as principally driven by South African specific events such as the dismissal of the Finance Minister in December 2015. This led to a drastic sell-off in the ZAR and thus, an escalation of inflation above the South African Reserve Bank’s upper band of 6.0%.
Namibia’s worsening fiscal position is yet another harbinger of doom come the November/December ratings as nearly all monetary indicators have breached the national benchmarks.
For instance, the Current Account (CA) as a percentage of GDP has reached 14.0% of GDP in 2015/16 against the benchmark of 10.0%.
Simonis Storm forecasts CA as percentage of GDP to worsen further to 18.0% by year-end against a continued lackluster economy, contracting by 1.2% in the second quarter of 2016 from a positive growth of 3.3% in the first quarter of the year.
“This would make the possible downgrade of Namibia’s investment position to ‘Junk’ an inevitable event by year-end. Henceforth, this may be suggestive that drastic structural policy measures in terms of expanding the government revenue base would have to be introduced, speedily,” Simonis Storm said.
It added: “With that logic in mind, we are thus hoping to get some more feedback on the status of establishing the Revenue Agency and hence on the commitment made in February 2016 to strengthen the efficacy of tax collection.
The financial service firm said that while there is an outside chance of tax reforms being announced, such as wealth tax, it believes that, this will not have an immediate effect on the improvement of Government revenue.
Given that the Ministry has already implemented stricter or rather prudent financial management measures in September, one of which is to halt expenditures on all capital projects, and that payments for all ministries are now processed at the main office, Simonis Storm do not see additional cost cutting measures as likely to put the economy on an even lower growth path (Government spending contributed 45% of GDP in 2015).
As the current account deficit continues to widen off the back of looming government debts and lackluster growth, the most possible alternative to fill the government liquidity gap would be to approach multilateral financial institutions such as the IMF for possible financial assistance.
As government revenue continue to be under pressure, Simonis Storm does not see GRN being in a position to collect enough money to pay off government debts currently estimated at 41.0% of GDP, a worrisome concern which makes the chance of surviving a negative rating slim.
“We expect government revenue to remain restrained in the short to medium term as SACU receipts, which has been the main source of budget revenue (averaging 31.0% of budget revenue in the last six years) diminishes at the back of a slowdown in global trade. The IMF now expects the global economy to grow by 3.1% in 2016, down from 3.4% in 2015,” posits Simonis Storm.