Namibia lowered on credit concerns

Namibia’s outlook has been dropped from stable to negative by Fitch Ratings, on increasing downward pressure on the country’s creditworthiness, on the back of the coronavirus disease 2019 (COVID-19) crisis.

Fitch has however maintained Namibia’s long term foreign currency issuer default rating (IDR) at BB, as the country benefits from a number of credit financing options.

The COVID-19 shock has increased the downward pressure on the country’s creditworthiness, on the back of four years of poor economic performance. This has driven a substantial rise in general government (GG) debt.

Fitch expects Namibia’s economy to contract by a record 5% in 2020. This is despite easing of temporal disruptions to the mining sector and a drought which led to a 1.1% decline in 2019.

Temporary easing in monetary and fiscal policies will partly cushion the hit from the shock. The country has accelerated tax refunds of 3.3% of the forecast 2020 gross domestic product (GDP) and loan guarantees of around 1.3% of GDP.

The Bank of Namibia (BoN) has cut its policy rate by a cumulative 250 basis points in 2020, with the rise in gold prices posing upside risks to growth forecasts.

Fitch expects GDP to rise by 3% in 2021, assuming near-term easing of disruption from the health crisis.

Namibia’s GDP has fallen by an average of 0.2% per year from 2016 to 2019. Fitch expects GDP per capita in US dollar terms to drop below its 2012 peak of 25%.

Fitch also expects GG deficit to widen to 12.8% of GDP in the 2020 to 2021 financial year, against the forecasted BB median 7.5% of GDP in 2020.

The rating agency expects the deficit to drop to 7% of GDP in the 2021 to 2022 financial year. This as the expiry of relief measures will be offset by an approximately 20% drop in Southern African Customs Union (SACU) revenues.

Namibia authorities have shown commitment to fiscal consolidation, as evident from the 7.7% of GDP narrowing in the non-SACU primary deficit in the three years to 2019, according to Fitch.

However, these savings efforts had already reduced capital and non-wage operational spending to multi-year lows prior to the pandemic shock, leaving only modest room for further savings.

High payroll expenditure, which accounted for 16.7% of GDP in the 2019 to 2020 financial year and interest payments consume two-thirds of fiscal revenue, causing fiscal rigidity.

The GDP contraction and higher deficits will result in a rise in GG debt to 68% of GDP at the end of the 2019 to 2020 financial year. This is from 56% in 2019 to 2020 and well above the forecast BB median of 59% at year-end 2020.

Namibia’s planned withdrawals of deposits from sinking funds and other reserves, which are about 2% of GDP, will help stabilise GG debt temporarily in the 2021 to 2022 financial year.

The balance of GG deposits with the banking system, including BoN stood at approximately $541.6 million (N$9.4 billion) or 5.3% of GDP, as of February 2020.

Namibia’s governments need to support state owned enterprise’s (SOEs) is a longstanding source of budget pressures, according to Fitch.

SOE debt is high, at around 20% of GDP at year-end 2019, of which around one-third is government-guaranteed.

Fiscal borrowing needs are high, averaging 25% of GDP for the 2020 to 2021 and 2021 to 2022 financial year, which will mostly be covered domestically, according to Fitch.  This includes treasury bills which account for 14% of GDP.

The country’s current account deficit (CAD) will narrow to 0.8% of GDP in 2020, significantly below the forecast BB median of 4.2%. The CAD will widen to 2.2% of GDP in 2021 as domestic demand bottoms out and SACU transfers drop.

Fitch expects net external debt to rise to 30% of GDP in 2021, with international reserves covering 3.5 months of current account payments. This is below the current BB median of 4.6 months.

On the upside, Namibia’s financing flexibility is supported by a well-developed banking sector with assets of around 120% of GDP. The regulatory requirements on asset allocation offer Namibia access to a captive domestic investor base.

The country’s access to the South African financial market also underpins its financing flexibility.

Namibia expects external borrowing of approximately $201.7 million (R3.5 billion) or 1.9% of GDP in budget support and project loans from the African Development Bank in 2020 to 2021.

The government also expects N$3.23 billion or 1.8% of GDP in additional multilateral support.

Fitch expects Namibia to refinance part of the $500 million Eurobond principal repayment coming due in November 2021 through international market issuance.

Namibia’s high share of local-currency debt of nearly two-thirds of GG debt reduces vulnerability to exchange-rate risks.

Namibia’s banks, are well capitalised, according to BON, but poor economic growth has dampened profitability and asset quality. Non-performing loans rose to 5.2% of total loans, as of March 2020 from 1.5% at year- end 2016.

Fitch may consider a downgrade if Namibia fails to lay out credible fiscal consolidation plans sufficient to stabilise government debt to GDP in the medium term.

The rating agency may also downgrade Namibia if there is a significant widening of the current account deficit and reduced confidence in the expected post crisis recovery.

Fitch may consider upgrading Namibia’s rating if there are credible fiscal plans and stronger ability to implement reforms to stabilise the government debt to GDP in the medium term.

The rating agency may also upgrade the rating if there are lower than expected economic shocks on the economy from the COVID-19 crisis.

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