Fitch Ratings that has revised the Outlook on Namibia’s Long-Term Foreign-Currency Issuer Default Rating (IDR) to Negative from Stable and affirmed the rating at ‘BB’ says Namibia’s economy will contract by a record 5% in 2020.
In a report released Monday, the rating agency says the contraction will happen despite the easing of temporary disruptions to the mining sector and an acute drought which led to a 1.1% decline in 2019.
The fall in global demand for luxury goods and manufacturing inputs as well as disruption to the global gemstone supply chain are dampening exports of diamonds and other mining products (45% of exports in 2016-2019).
The Negative Outlook reflects the significant impact of the coronavirus pandemic on Namibia’s economy and public finances. The shock increases downward pressure on creditworthiness after four years of poor economic performance which has driven a substantial rise in general government (GG) debt.
Fitch believes a subdued growth outlook and particularly high inequality will present a challenging environment for the resumption of fiscal reforms.
Domestic containment measures and reprioritisation of public spending are hitting activity in construction and other domestic sectors, while border closures with neighbouring countries are also affecting trade and tourism.
The temporary easing in monetary and fiscal policies will partly cushion the hit from the shock.
The government has rolled out a support package consisting mostly of wage subsidies and acceleration of tax refunds of 3.3% of the forecast 2020 GDP, in addition to loan guarantees of around 1.3% of GDP.
Meanwhile, the Bank of Namibia (BoN) has cut its policy rate by a cumulative 250bp so far in 2020. The rise in gold prices and the recent upsurge in uranium prices pose some upside risks to our growth forecasts.
“We forecast GDP to rise by 3% in 2021, assuming a near-term easing of disruption from the health crisis. However, the medium-term growth outlook remains subdued, reflecting weak activity in key partners South Africa and Angola, the depletion of onshore diamond and zinc deposits and fishery stocks, as well as strained water supply,” the agency said.
Namibia’s GDP has fallen by an average of 0.2% per year in 2016-2019. Protracted economic weakness and currency depreciation have led to a significant deterioration in GDP per capita in US dollar terms, and we forecast a 25% drop below its 2012 peak.
The GG deficit will widen markedly to 12.8% of GDP in FY2020/2021 (FY20/21, year to end March 2021) on our forecast (forecast ‘BB’ median: 7.5% of GDP in 2020).
The effect of the shock on revenues and fiscal anti-crisis measures will be partly offset by higher transfers from the Southern African Customs Union (SACU, around one-third of fiscal revenue over the last three years), a wage freeze in the civil service for the second consecutive year, and cuts to capital spending.
“We project the deficit will narrow to 7% of GDP in FY21/22 (forecast ‘BB’: 5% of GDP in 2021), as the expiry of economic relief measures will be offset by an approximately 20% drop in SACU revenues on poor regional growth and the lingering effect of the pandemic-related shock on other tax revenues,” the report further says.
The government plans to announce corrective fiscal measures during the mid-year budget review in October. Fitch considers that the authorities have shown a commitment to fiscal consolidation, as evident from the 7.7% of GDP narrowing in the non-SACU primary deficit between FY15/16 and FY18/19.
However, these savings efforts had already reduced capital and non-wage operational spending to multi-year lows prior to the pandemic shock, leaving only modest room for further savings. High payroll expenditure (16.7% of GDP in FY19/20) and interest payments consume two-thirds of fiscal revenue, causing fiscal rigidity.
“In addition, we expect that the implementation of fiscal reforms will be slowed down by growth headwinds and social resistance,” says Fitch.
The sharp GDP contraction and higher deficits will drive a steep rise in GG debt to 68% of GDP at the end of fiscal year 2020/2021, from 56% at end-FY19/20, and well above the forecast ‘BB’ category median of 59% at end-2020.
Planned withdrawals of deposits from sinking funds and other fiscal reserves – which we assume at 2% of GDP per year over the next two years – will help to stabilise GG debt temporarily in FY21/22. The balance of GG deposits with the banking system, including the BoN, was N$9.4 billion (5.3% of GDP) at end-February.
The pandemic-related shock increases the risk that contingent liabilities could have an impact on the fiscal deficit and debt trajectory. The need for government support for SOEs is a longstanding source of budget pressures. SOE debt is high, at around 20% of GDP at-end 2019, of which around one-third is government-guaranteed.
Fiscal borrowing needs are high, averaging 25% of GDP for FY20/21 and FY21/22, on our estimates, and will be mostly covered domestically. This includes the stock of T-Bills (14% of GDP) which we assume that the government will be able to roll over smoothly.
The sovereign’s financing flexibility is supported by a well-developed non-banking financial sector (NBFS) with assets of around 120% of GDP, and regulatory requirements on asset allocation offer the sovereign access to a captive domestic investor base. Access to the South African financial market also underpins the sovereign’s financing flexibility.
The authorities expect cumulative external borrowing of R3.5 billion (1.9% of GDP) in budget support and project loans from the African Development Bank in FY20/21 and N$3.23 billion (1.8% of GDP) in additional multilateral support.
“We expect the government will opt to refinance part of the US$500 million Eurobond principal repayment coming due in November 2021 through international market issuance, to avoid a sharp international reserve drawdown. A high share of local-currency debt of nearly two-thirds of GG debt reduces vulnerability to exchange-rate risks.”
Banks are well-capitalised, according to the BoN, but poor economic growth had already dampened profitability and asset quality, with non-performing loans rising to 5.2% of total loans by end-1Q2020 from 1.5% at end-2016.
Risks for macroeconomic stability stem from strong balance-sheet interconnections between the banking and the NBFS, and the financial sector’s exposure to the regional equity market and domestic real estate. Housing prices have been contracting since March 2018, and household debt is high – at 98% of disposable income.
