Moody’s downgrade based on speculation

Moody’s downgrade based on speculation

Calle Schlettwein

The government of Namibia took note with concern of the decision by Moody’s Investor Services to downgrade Namibia’s international credit rating to Ba1, from Baa3-in December 2016, while maintaining its negative outlook. This essentially put Namibia’s international debt issuances in the category of “junk status”, an assessment that we do not concur with for reasons elaborated in subsequent paragraphs.

We further note, that Namibia’s local currency bond and bank deposit ceilings were also lowered to A2 from A1; the foreign currency bank deposit ceiling to Ba2 from Baa3; and the foreign-currency bond ceiling to Baa2 from A3. While these ratings still reflect investment grade, we also do not think that domestic economic conditions warrant a downgrade at this point in time.

In December 2016, following the tabling and approval of the mid-year budget review with its accompanying fiscal consolidation programme, Moody’s reaffirmed Namibia’s credit rating at the investment grade notch of Baa3- and revised the ratings outlook from “stable” to “negative”, reflecting a number of risk factors which need to be ad-dressed. The Namibian government has taken steps to address these risk factors pointed out by Moody’s in December 2016. Although we understand that countries credit ratings change with the changing conditions in the country, it is the considered opinion of the Namibian government.

This recent rating action by Moody’s relied merely on an exchange of emails on a single item, that of outstanding invoices and how Government is planning to settle them. This is highly regrettable. A thorough assessment taking all factors into consideration would have been the proper way in dealing with reviewing Namibia’s sovereign credit rating.

Firstly, with regard to the assertion that Namibia’s fiscal strength has eroded due to sizeable fiscal imbalances and an increasing debt, the view of the government is as follows.

A review of Namibia’s rating only 4 months into the budget implementation for the 2017/18 financial year is made too early and, therefore, on a very narrow base and may contain speculative conclusions on the performance of the budget for the whole financial year.

The process followed by Moody’s is, therefore, not systematic as we are busy developing the mid-year budget review and better informed ratings action and effective country assessment could have benefited from the mid-year budget review planned for October 2017.

No additional borrowing has been incurred to pay for the outstanding invoices (to date N$1.7 billion worth of outstanding invoices have been paid) and funds paid are from own cash reserves and budgeted funds.

Our records show a current debt level of 41.9 %, which is within the threshold of 42 % for middle-income countries the size of Namibia to be considered sustain-able. The debt level of 43% is, therefore, overstated by Moody’s. Moreover, Namibia’s overall voluntary debt ceiling of 35% of GDP has been conservative and is well within the SADC convergence threshold of 60% of GDP.

The debt ceiling was intentionally conservative to demonstrate the government’s commitment to prudent fiscal policy and to build up buffers for times of economic hardships.

The statement in the release that “other sources of potential deterioration are shortfalls in Southern African Customs Union (SACU) revenues relative to forecasts, as well as expenditure over-runs in the context of upcoming SWAPO leadership elections (end-2017) and presidential elections (2019)” is purely speculative and not evidenced at all.

The SWAPO congress is an inner party process and the insinuation of budget over-runs being caused by the leadership and presidential elections are irresponsible. SACU revenues are locked into a formula driven process and are therefore de facto guaranteed for the current financial year under review. Further, expected SACU revenue for FY2018/19 – 2019/20 was reduced deliberately by 10% to be conservative in our approach and compensate for possible volatility in that revenue stream.

Secondly, regarding the view of limited institutional capacity to manage shocks and address long-term structural fiscal rigidities the situation is as follows:

The budget execution ranged between 95% – 100% for the preceding 10 years and therefore a statement that projections always differ from actual out-turns cannot be factually supported.

It is recognised that Namibia’s small and open economy remains vulnerable to externally induced shocks. The most prominent risks are currency volatility, commodity prices, climatic conditions and regional and global economic developments.

One of the positive developments for Namibia which was ignored by Moody’s in this assessment is the level of foreign exchange reserves that increased to 5.3 months of import cover during the second quarter 2017. This is a crucial variable in credit worthiness that cannot be ignored. It is puzzling that at a time when Namibia’s import coverage has increased, Moody’s decides to downgrade our credit ratings.

Domestic revenue has also improved substantially during the first four months of the current financial year.
This is mainly because of improving global and regional economic performance, coupled with better collection realized through the tax incentive scheme (about 40% of total revenue collected in the first 4 months).
Thirdly, with regard to risk of renewed government liquidity pressures, the Namibian Government would like to make the following pertinent observations.

Since the beginning of the current financial year, the demand for government debt securities, to finance the budget deficit, improved substantially. That is mainly on account of policy response-fiscal consolidation which is taking traction and constant open engagement with the market players. The deficit has been reduced from a high of 8.3% FY2015/16 to 6.3% in FY2016/17 and preliminary print affirms that position.

The pressure is even relieved further by the improved liquidity in the banking sector, boosted by the payment of the outstanding invoices and expected improvement in domestic revenue collection. The Government’s resorting to local sources for funding the budget deficit is optional, aimed at supporting the development of local capital markets.

This downgrade, relative to the December 2016 rating action, reflects Moody’s view of the effect of the 2017 spending arrears standing at 1.3 % of GDP now being implemented on a fast-track basis in excess of the 2017/18 budget, which Moody’s views as a significant deterioration of the government fiscal position, public debt and a further build-up of financial vulnerabilities, thus compromising the effectiveness of the budget policy framework.

• Calle Schlettwein is Namibia’s minister of finance. This is an abridged version of his statement issued last weekend.

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