Year ends on bad note with unflattering outlook - Simonis Storm
Financial year 2017 is poised to end on a bad note with massive unemployment, a heavily indebted government, high interest rates and a failure to adhere to fiscal consolidation and a shrinking private sector.
According to Simonis Storm Securities economist, Indileni Nanghonga, debt to GDP is hovered around 43% to GDP at the end of October 2017 way above the 35% threshold.
“We ?believe that government will remain indebted for a prolonged period as it has expanded its borrowing targets on domestic and foreign borrowing as a % of GDP to 27.2% and 17.0%, respectively, compared to 22.8% and 14.0% previously forecasted,” says the analyst.
The budget deficit as a percentage of GDP is estimated at 5.3% compared to a 3.5% previously estimated and closer to our estimate of 5.5%.
Nanghonga says this deficit will mainly be funded through public debt: “It is worrisome that the debt growth level is projected to rise above the economic growth rate.”
Private Sector Credit Extension growth also slowed substantially to 5.4% at the end of September 2017 to a record low since 18.5% peak in November 2012. ?
Credit to individuals (resident sectors) continues to diminish suggesting sluggish consumer confidence. ?
“We believe that the loosening of credit to the Mining and Agriculture Sectors is due to the expected recovery in these Sectors. ?We expect PSCE to remain sluggish in 2018, this is warning signal of an already depressed consumer and a continuous pressure on businesses. The lower ?growth is attributed to the high levels of indebtedness and weaker disposable income of households,” she says. ?
Growth is forecast to remain in a low gear as structural problems such as high unemployment, amongst others, remain a downside risk.
Says Nanghonga, ‘Furthermore, shrinking private sector, overregulation of many industries, excessive increase in overall debt in past 10 years and a lack of skills will drag on economic growth.”
While Simonis Storm expects inflation to average at 5.4% in 2018, compared to 6.6% expected in 2017 after an initial forecast of 6.8% for 2017, they foresee the central bank having the need to cut the benchmark repo rate once in 2018 by 0.25%.
“We believe this is necessary to support the economy and to provide the much needed respite to consumers and businesses,” says Nanghonga.
Mid-Year revenue collection amounted to N$28.03bn, 49.7% of the budgeted revenue of N$56.4bn over the FY2017/18.
This was on par with a similar rate of 49.6% collection rate achieved in the prior period.
The increase in revenue was attributed to higher SACU revenue of about N$2.7bn to N$9.8bn compared to a N$7.0bn recorded in the prior year.
“South African growth is expected to remain low at 1.1% in 2018 and we see higher revenue collection from SACU as unsustainable and expect it to be lower going forward,” says the economist.
SACU revenue is expected to come in at N$17.4bn in the FY2018/19 compared to N$19.6bn recorded in the FY2017/18.
Nanghonga says Simonis Storm forecast overall government revenue to contract by 5.7% to N$53,9bn for FY2018/19 compared to the estimated budgeted revenue of N$57.2bn.
“As a result, we expect the budget deficit as a percentage of GDP to be -5.6% for FY2018/19, compared to a revised -5.3% estimated by the MOF for the same period. This is on account of a shortfall in SACU revenue and on lower tax collections than forecasted due to a weaker than expected economy,” she says.
Meanwhile, Namibia remains highly reliant on SACU revenue as 39.1% of taxes collected was generated from the SACU revenue pool.
With SACU revenue set to remain under pressure in the future, Nanghonga says they expect government revenue to remain subdued.
“Namibia has been one of the main beneficiaries from the SACU revenue pool compared to its peers, with its share averaging 17.3%. With tax collection expected to come in lower than expected and reduction in the SACU revenue pool, we project government revenue to be under severe pressure,” she says.
She also notes that the low growth environment across all SACU regions also comes with revenue risks, especially on revenue from SACU to the Namibia government ?
Aggregate expenditure ceilings for the next MTEF are proposed at N$64.5bn in FY2018/19, N$65.5bn in FY2019/20 and N$66.9bn in FY2020/21.
Meanwhile Expenditure for the FY2018/19 is projected at N$64.5bn compared to N$61.9bn previously projected.
Which suggests an additional spending of N$2.5bn for the FY2018/19 and N$2.8bn for the FY2019/20.
“This proved difficult to uphold the expenditure ceiling especially given the upcoming presidential elections and the persistent issue of unknown outstanding invoices for services provided to government,” she says.
Nanghonga also takes a pick at the public-sector wage bill which has increasingly crowded out other areas of spending.
Namibia’s personnel expenditure stood at 43% to total expenditure and at 48% to operational expenditure.
“We do not see how government will reduce the wage bill. The country is sitting with a high youth unemployment rate of 43.4% and we believe that a prolonged freeze on vacancies could lead to social unrest,” she says.