Moody’s downgrades Namibia’s ratings to Ba3, maintains negative outlook

NAMIBIA (Capital Markets in Africa) – Moody’s Investors Service (“Moody’s”) downgraded the long-term issuer and senior unsecured ratings of the Government of Namibia to Ba3. The outlook remains negative.

The downgrade reflects a further weakening in Namibia’s fiscal strength despite policy statements of plans to rein in the fiscal deficit. The debt burden is now markedly higher, it will continue to rise for the foreseeable future; debt affordability is weakening. The coronavirus shock continues to pressure Namibia’s revenue generation capacity, a trend exacerbated by Namibia’s weak growth prospects, notwithstanding moderate institutional adjustment capacity and external buffers that backstop creditworthiness.

The negative outlook reflects risks remaining slanted to the downside. Implementation of the government’s fiscal consolidation plans will invariably prove challenging in a low growth environment, particularly as the government targets reducing the large but politically challenging public sector wage bill. Moreover, very large gross borrowing requirements, given the sovereign’s continued reliance on short-term funding, point to material liquidity risk.

Concurrently, Namibia’s long-term local currency bond and bank deposit ceilings were lowered to Baa2 from Baa1. The long-term foreign currency bank deposit ceiling was lowered to B1 from Ba3, and the long-term foreign-currency bond ceiling was lowered to Ba1 from Baa3.

The rationale for a downgrade to Ba3
Moody’s expects a sharp widening of the fiscal deficit to 9.6% of GDP over fiscal 2020, remaining elevated at 8.3% in 2021. This will lead to an increase of the debt burden to 72% of GDP by end-2020 and 74% in 2021, up from 56% at end-2019 and nearly triple the level at end-2014. Meanwhile, debt affordability has weakened, with the interest bill set to rise to 15.5% of revenues next fiscal year (up from 5% five years ago).

The increase in debt is driven by the primary deficit and interest costs: both representing a drag on debt dynamics over the coming five years, while growth will provide only a moderate offset starting from 2021. Interest costs are set to peak at around 6% of GDP and the foreign currency share at around 1% over the forecast period, leaving debt affordability at a moderate level while ever the interest rate remains lower than nominal growth.

Moody’s expects real GDP to contract by 6.9% in 2020, and only grow by 2.4% in 2021 as agricultural production gradually returns after a prolonged and devastating drought, while the mining sector and the travel and tourism industry remain depressed. The weak growth outlook continues to pressure revenue generation, compounded by the forthcoming decline in Southern African Customs Union (SACU) receipts in the next two years. The recovery of SACU receipts starting from 2023 supports a gradual narrowing of the primary balance, allow for stabilization of the debt burden.

Moody’s expects Namibia’s debt burden to peak at around 80% of GDP by 2025, and to remain broadly stable over the medium term, absent significant policy measures to arrest and ultimately reverse the debt accumulation.

Institutional adjustment capacity and external buffers support the rating
The deterioration in the credit profile is balanced by a number of credit supports. The relative strength of the country’s institutions was evident in the three years immediately prior to the onset of the coronavirus outbreak with the authorities achieving fiscal consolidation of four percentage points of GDP which arrested the previous increase of general government debt after large fiscal deficits in 2014-16.

On the external side, lower exports have been offset by reduced imports, keeping the current account deficit contained. Namibia’s net international reserves are expected to remain stable and modest, covering just above four months of imports, which translates to approximately $2 billion.

While fiscal and external financing needs will remain elevated over the forecast period, the large public pension fund provides Moody’s with some level of confidence in the ability of the government to continue to meet its liabilities should it be unable to access the international capital market and/or to draw from new credit lines from development partners. The domestic banking system is robust, well-capitalized and liquid, and coupled with the liquidity in the pension funds sector, can adequately fund the government’s operations into the medium term.

The rationale for the negative outlook
The FY2020/21 Mid-Year Budget Review and Medium Term Budget Policy Statement delivered in October envisaged fiscal consolidation and structural reforms to reduce the fiscal deficit to 4.1% of GDP by 2023/24, based on a mix of expenditure restraint and revenue generation. However, implementation of the government’s improved tax administration and increased tax revenue generation will invariably prove challenging in a low growth environment. Moreover, the intended reduction in the large public sector wage bill through a combination of attrition and early retirement will invariably prove politically challenging, posing risks to the realization of ambitious fiscal consolidation plans to arrest the upward debt trajectory.

Meanwhile, Namibia’s gross borrowing requirements are very high, with high and increasing reliance on short-term financing raising government liquidity risks. Namibia’s gross borrowing requirements will rise to about 38% of GDP in 2021 (from 30% this year and an average of 15-20% over the past five years) before declining slightly in the following years. The increase in 2021 is driven by a widening of the fiscal deficit as well as the amortization of the $500 million Eurobond maturing in November 2021 (which amounts to 5% of GDP). Moody’s expects Namibia to finance most of its borrowing requirements domestically while additional external funding from the official sector will help meet the higher borrowing requirements. Nevertheless, higher short-term financing reliance leaves Namibia vulnerable if and when interest rates rise, either through monetary policy tightening or a widening in spreads.

Environmental, social, and governance considerations
Environmental considerations weigh on Namibia’s economic strength and credit profile. Given the prominence of agriculture in the economy and reliance on rainfall to drive irrigation, recurring droughts can have a significant negative impact on agriculture.

Social considerations are also material to the rating. High-income inequality and high levels of unemployment hamper competitiveness and have the potential to fuel social discontent.

Relatively robust governance and institutions, coupled with a stable political environment, support Namibia’s credit profile, although the strength of governance will be tested by the challenge of stabilizing and reversing a high debt burden and maintaining moderate borrowing costs.

GDP per capita (PPP basis, US$):10,279 (2019 Actual) (also known as Per Capita Income)
Real GDP growth (% change): -1.6% (2019 Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.6% (2019 Actual)
Gen. Gov. Financial Balance/GDP: -5.6% (2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.7% (2019 Actual) (also known as External Balance)
External debt/GDP: 64.5% (2019 Actual)
Economic resiliency: ba2
Default history: No default events (on bonds or loans) have been recorded since 1983.

On 30 November 2020, a rating committee was called to discuss the rating of the Government of Namibia. The main points raised during the discussion were: the issuer’s economic fundamentals, including its economic strength, fiscal and financial strength, which have all materially weakened. The issuer’s susceptibility to event risk has remained unchanged.

Factors that could lead to an upgrade or downgrade of the ratings
The negative outlook signals an upgrade is unlikely in the near term. Moody’s would likely change the outlook to stable if there were signs that growth in the medium term is strengthening. Stronger growth would in turn be supportive of rebuilding fiscal buffers and bolstering foreign exchange reserves which would enhance Namibia’s capacity to absorb shocks. Even in a context of subdued growth, indications that fiscal consolidation will stabilize and eventually lower the debt burden would also support the rating.

Conversely, indications that Namibia’s liquidity risks increase, as its capacity to source financing for its very large funding needs at moderate costs erodes, would likely lead to a downgrade. Moreover, an increased likelihood that the debt burden will continue to rise markedly faster and higher than Moody’s projects would also exert negative pressure on the rating.