Moody’s: Namibia’s credit profile balances medium-term growth prospects against rising public debt

London (Capital Markets in Africa) – Namibia’s Baa3 rating with a negative outlook reflects the country’s solid medium-term growth prospects and institutional strength, set against credit challenges including its rising public debt and heightened external risks, Moody’s Investors Service said in a report this week.

The annual update, “Government of Namibia — Baa3 Negative Annual Credit Analysis”, is now available on www.moodys.com. Moody’s subscribers can access this report via the link at the end of this press release. The research is an update to the markets and does not constitute a rating action.

“Namibia’s credit challenges include the rapid rise in its public debt levels, which reached 42.3% of GDP in 2016-17 from 26.2% in 2011,” said Zuzana Brixiova, a Moody’s Vice President — Senior Analyst and co-author of the report. “The country also faces increasing external risks stemming from persistent current account deficits and relatively low international reserves.”

Moreover, Namibia is vulnerable to further tightening in domestic funding conditions if fiscal slippages continue, potentially leading to a substantial increase in its debt-servicing costs. The recently approved $226.5 million loan from the African Development Bank for budgetary reforms will help fund the deficit this fiscal year while the government undertakes gradual fiscal consolidation to address structural challenges.

Namibia experienced significant fiscal slippage in the fiscal year 2016-17 due in part to overestimated nominal GDP growth and overly optimistic revenue projections. The government’s fiscal slippage has led to a higher borrowing requirement, and in turn to a more rapid accumulation of public debt. Moreover, the need to finance these sizeable fiscal deficits against the background of weaker than expected fiscal consolidation put significant albeit temporary pressure on domestic liquidity conditions.

Moody’s expects government debt to continue to rise marginally and reach 45.4% of GDP in FY2018-19. Despite Namibia’s rising debt-to-GDP ratio, debt relative to government revenues will remain very slightly below the Baa-rated median across the rating horizon, reflecting the government’s relatively strong ability to collect taxes. Nevertheless, since about half of the Namibian public debt is in foreign currency, most notably US dollars, foreign exchange risk has also risen.

Moody’s expects a recovery in Namibian diamond, gold and uranium mining, as well as a rebound in the agricultural sector to drive GDP growth in the coming years. The economy is projected to expand by 4.5% in 2017 and 4.9% in 2018.

Namibia’s moderate institutional strength, reflecting its record of policy predictability, also supports its creditworthiness. The country’s stable political landscape and track record of political and institutional consensus building are conducive to supportive macroeconomic policy and structural reform.

Namibia could return to a stable outlook if the government’s commitment to fiscal consolidation were to result in a marked slowing and eventual reversal of debt accumulation.

A sustainable improvement in the country’s twin balances, a sustained easing of funding conditions in the domestic market, and a material increase in foreign-exchange reserves comfortably above three months of imports would also generate upward rating pressure.

In contrast, a sustained decline in foreign-currency reserves and/or an increase in funding pressure resulting from reduced market appetite for government securities, leading to a material increase in borrowing costs, would create downward rating pressure.