PSG maintains to rate Namibia a notch below investment grade

PSG Namibia has maintained its rating of BB+, one notch below the investment grade with a negative outlook in its latest economic quarterly report.

This follows the firm’s decision to downgrade Namibia’s sovereign credit rating by one notch and maintain a negative outlook in November 2017, due to a rapid rise in public debt levels, a deterioration in the short- to medium- term growth outlook and the reduced credibility of the government’s financial management and commitment to fiscal consolidation.

“Our negative outlook on the “BB+” rating implies an increased risk of lower-than-expected economic growth and higher- than-expected public debt levels over the coming 12 months, which could trigger a further downgrade. However, if growth recovers meaningfully and fiscal prudence is restored we could change our outlook back to stable,” maintains the firm.

Weakening confidence in Namibia’s financial management capabilities due to the government's issues with backlogged payments, increasingly market- unfriendly policy proposals and generally weaker regional growth which had a significant impact on the government’s Southern African Customs Union (Sacu) revenues, contributed to the loss of investment grade status.

“Although we expect a robust economic growth recovery from the current recession in the medium term, we still foresee moderate fiscal slippages in the short term and significant downside economic risks.”

“We take note of the fact that some recent efforts have been made to reduce wasteful expenditure and that last year’s African Development Bank (AfDB) loan has alleviated the governments’ liquidity problems,” said the firm.

PSG has taken note of President Hage Geingob’s directive that seeks to establish control systems that aim to reduce the state’s personnel and related expenses as well as transport costs in the next three financial years.

“The defense ministry is also trying to ease its financial constraints by sending troops home when on leave to save on food and other costs at military bases," PSG said.

The ministry has already been allocated N$6.0 billion, 4.9 percent more than the allocation for FY2017/18 in the latest budget.

“However, we would like to see more meaningful cost-cutting measures implemented, such as addressing the unsustainable public-sector wage bill and improving the financial performance of public enterprises,” says PSG.

Meanwhile, finance minister Calle Schlettwein, in his budget speech also said the public wage bill should be managed more effectively, with specific wage bill reduction target ratios set for realization over the MTEF.

“Public Enterprises reforms are indispensable to the realisation of a successful fiscal consolidation measures. Perpetual bail out of the public enterprises, especially those in the economic, financial and commercial sectors is unsustainable and should be reined in,” he said.

PSG forecasts an average annual growth rate of 2.1% per year during 2017-19, compared to its previous forecast (in November 2017) of 2.5% per year over the same period.

Economic growth has fallen sharply from around 6.0% during 2013-15, due to a downturn in diamond exports, a sharp contraction in construction output, fiscal consolidation, severe drought and weaker regional trade, said the firm.

For 2018, the finance ministry estimates growth to have returned to positive rates at about 1.2 percent and 2.1 percent for 2019.

Over the MTEF economic activity rate is projected to average 3.1 percent, underpinned by robust export growth most especially from mining output, improvements in private and public investment as well as other components of final demand.

Said the minister, “Recovery is expected to be led by increased activity in the mining sector on account of better commodity prices. While commodity prices have improved, the weak rain conditions this year threaten to slow the pace of continued better recovery in this sector since 2017.”

“Thirdly, the easing of recessionary pressures in the construction industry and key sectors in the tertiary industry services sector comes to bear over the MTEF. Climate change is certain and comes with associated costs, requiring us to implement environmental fiscal reforms. Accessing the Global Climate Fund is a priority,” he added.

However, the minister said this growth outlook is generally too weak to support robust expansion of per capita incomes and requires supportive policy interventions going forward to reinvigorate the pace and quality of growth.

“Timely interventions set out in this budget and an improved external environment offer an opportunity to lift the growth potential,” he said.