Explaining Namibia’s credit rating by Fitch

Explaining Namibia’s credit rating by Fitch

The International Rating Agency Fitch on August 31 released its latest view of the Namibian economy. The purpose of the article is to highlight the key findings of Fitch, the factors that led to their assessment and some words on the way forward.

In a nutshell, Fitch reaffirmed Namibia’s International Default Rate (IDR), or international investment grade rating at BBB-; Namibia’s short-term foreign currency and local currency IDR at F3; Namibian bond issuance in the South African market at AA+; National bond issuance at AA+; and revised its outlook on Namibia’s long-term foreign and local currency IDR from stable to negative.

It is important to note that Fitch differentiated between a Ratings Watch, which is more serious and a ratings outlook, which takes a one to two year view. Namibia was not put on a Ratings Watch.

Fitch cites the following reasons for changing its outlook on Namibia to negative from stable:
An overshoot in the deficit to GDP ratio in the past financial year to 8.3 percent from 5 percent on account of reduced South African Customs Union (SACU) inflows;
a decline in domestic tax collection;
an increase in government’s overall debt to 38.2% as a ratio of GDP by the end of 2015, from 23.2% percent at the end of 2014;
an increase in the current account deficit to14.1% of GDP in 2015 from 8.9% one year earlier;
the proposed introduction of the New Equitable Economic Empowerment Framework (NEEEF);
and a possible cooling-off of the housing market, especially at the top end of the market.

Fitch acknowledges the following strengths in the Namibian economy: An impressive growth performance, despite several headwinds, such as drought and the weak performance of trading partners; a sound banking system, in particular the good asset quality on the loan books of banks, as reflected in a non-performing loan ratio of only 1.6%; a strengthening in the external position of the country, both in terms of the trade balance and the international reserve position; and a strong track record of political stability and governance indicators that are better than rating peers.

My assessment is that given the strong headwinds, as noted by Fitch, it is a big plus that Namibia has retained its IDR on external debt at BBB- and on South African and national debt at AA+. It is important to note that the national rating of AA+ is the second highest rating assigned in the Fitch rating classification, while the BBB- rating is the lowest of the investment grade ratings.

It should not be surprising that Fitch changed its outlook for Namibia from stable to negative. Minister of Finance Calle Schlettwein has on several occasions sensitised the market about the impact of the changing global environment on the Namibian economy and as a result a process of fiscal consolidation already started during the mid-term budget review last year.

From a pure growth perspective the change in outlook by Fitch might have been an over-reaction. Fitch admits that in the global context and compared to rating peers Namibia’s growth performance had been – to borrow from Fitch itself – “impressive”.

To put this into context, both the IMF and World Bank have twice reduced global growth projections in 2016. With the exception of a few East African countries, Namibia’s growth remains among the highest in sub-Saharan Africa.
Fitch’s view on NEEEF is not entirely justifiable and should not have been included in the assessment of their outlook. To preempt the final outcome of NEEEF while consultations are still ongoing is pre-mature.

On the way forward, government will implement the following measures to address the situation. Firstly, government will continue to engage the rating agencies and the ultimate subscribers to Namibian debt instruments.
Government would like to assure investors and all stakeholders that the Namibian economy is stable, and that debt payments will be honoured. There is no risk that Namibia will not be able to honour debt obligations in the near and medium term, as the bulk of the country’s debt obligations is in domestic instruments, while foreign debt is mainly long-term.

The medium and long-term outlook of the Namibian economy remains favourable and government will be able to anchor debt at 30 percent of GDP, as advocated under the Harambee Prosperity Plan.

Secondly, additional foreign borrowing will be stopped altogether, or minimised as much as possible. As noted before, the rating on foreign debt is BBB-, which is the lowest investment rate, while the rating on borrowing in the national and South African currency is AA+, the second highest. Due to currency fluctuation, international debt issuance contributed significantly to the increase in the debt-to-GDP ratio to 38%.

Thirdly, measures to cut non-essential spending and improve on spending priorities will continue. Budget lines, such as travel and subsistence, materials and supplies, transport and training and workshops will be scrutinised for additional savings. A review of the civil service wage bill, which is one of the key cost drivers, will also be considered.

Fourthly, expenditure cuts on the development budget will be matched by counter-proposals of private sector investment to the same magnitude. Viable projects that can generate its own revenue streams will enable private sector capital to fill the vacuum that reduction in government capital will have.

Here development of various economic infrastructure projects, such as electricity generation and housing infrastructure, will positioned as public-private partnership (PPP) projects. In this connection, the Harambee Prosperity Plan is committed to having a PPP framework in place before the end of the year.

Fifthly, some approved capital projects in the current Medium Term Expenditure Framework will, in the spirit of Harambee, be accommodated under some of the risks capital provisions of the Government Institution Pension Fund [GIPF].

In this regard, the GIPF has committed to significant land servicing and construction of houses for civil servants. Other pensions funds will be encourage to invest more in the local economy.

Sixthly, on the revenue side, the Harambee Prosperity Plan fast-tracks the establishment and operationalisation of an independent revenue authority, the broadening of the tax base and the streamlining of tax administration.
Further details will be provided during the budget mid-term review.

* Dr John Steytler is an economic advisor to President Hage Geingob. This analysis was first published in The Southern Times.

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