Namibia discoloured by credit concerns

Namibia’s outlook has been dropped from stable to negative by Moody’s, on worrying credit metrics. This been exacerbated by economic and financial pressures, on the back of the coronavirus disease 2019 (COVID-19) crisis.

The rating agency has however maintained Namibia’s issuer and senior unsecured ratings at Ba2, as the country benefits from a number of credit financing options.

Moody’s expects Namibia’s gross domestic product to contract by around 7% in 2020, after -0.7% in the three years to 2020.

Namibia’s mining sector, constituting about 10% of GDP in 2019, is expected to contract sharply. This is as a result of subdued global commodities demand combining with the lockdown curtailing many mining operations and the exports of minerals.

The tourism sector which Moody’s estimates contributes about 12% of Namibia’s GDP, has ground to a halt as a result of the ban on international travel.

Namibia’s agriculture sector also remains depressed, after a prolonged and devastating drought over recent years.

While Moody’s expects GDP growth to rise in 2021 to 1.8%, the strong growth rates seen in the first half of this decade are unlikely in the foreseeable future.

Moody’s expects a sharp widening of the fiscal deficit to 10% of GDP in fiscal 2020, moderating only slowly to 8.5% in 2021 and declining further in future years.

The rating agency expects that after the lockdown period ends in the latter half of 2020, revenue will increase and one-time expenditures will be reduced.

However, the significantly larger fiscal deficit will lead to an increase of the debt burden to 68.5% of GDP by the end of 2020, rising further to 72.3% in 2021.This is up from 53.3% at end of 2019 and almost triple the 25.2% figure in 2014.

Moody’s expects the Namibian government to resume the path of fiscal consolidation to return to a deficit of about 3% in the medium to long-term and slow the upward debt trajectory.

The Namibian government has a track record of achieving fiscal consolidation, as evidenced in the period from 2015 to 2019. The primary deficit was reduced from 6.6% of GDP to 1.0% of GDP in the period.

Moody’s expectation of a large decline of about 20% in Southern African Customs Union (SACU) revenue in 2021, equivalent to 2% of GDP will complicate fiscal consolidation efforts.

Namibia’s gross borrowing requirements will rise to 28% GDP in 2020 and about 35% in 2021, from 20% in 2019 and an average of 15% to 20% over the past five years. This is driven by a widening of the fiscal deficit as well as the amortisation of the $500m Eurobond in November 2021, equivalent to 5% of GDP.

On the upside, despite weak growth performance over the three years to 2020, the Namibian economy remains comparatively diversified. The country has moderate wealth levels, with GDP per capita standing at $11,266.

Namibia’s current account deficit narrowed in 2019 and Moody’s expects it to stabilize at a lower level over the medium term compared with the past decade.

The current account deficit is expected to decline to 2.0% in 2020 from 2.3% in 2019.

Moody’s expects the current account to temporarily widen by about 2% of GDP in 2021, which matches the forecasted 20% drop in SACU receipts for the year.

However, the Namibian economy has adequate foreign exchange reserves at approximately four months of import cover.

The country also has a credible currency arrangement ensuring parity between the Namibian dollar and the South African rand which reduces external vulnerability risks. The arrangement also contributes to stable inflation at moderate levels, averaging 5% over the last three years.

Namibia also has a reasonably deep domestic financing pool and access to a larger group of investors in neighbouring South Africa.

Notwithstanding weak economic dynamics resulting in non-performing loans to close to 4.6% at end-2019, up from 3.6% at end-2018, Namibia’s domestic banking system is strong, well-capitalised and liquid.

Moody’s would consider changing the outlook to stable if there is confidence that the government will be able to contain the longer-term fiscal and debt impact of the coronavirus shock.

The rating agency would downgrade Namibia’s rating if policy responses to the economic and fiscal challenges resulting from the coronavirus shock are insufficient to arrest the upward debt trajectory.

Meanwhile, Moody’s has also maintained Namibia’s long-term local currency bond and bank deposit ceilings at Baa1. The long-term foreign currency bank deposit ceiling, and the long-term foreign-currency bond ceiling also remain unchanged at Ba3 and Baa3 respectively.

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