Namibia bolstered by liquidity

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Namibia’s long-term foreign-currency issuer default rating (IDR) has been affirmed at BB by Fitch Ratings, based on a strong liquidity position.

The rating agency has however kept Namibia’s outlook at negative, on increased downward pressures on its creditworthiness due to a continued rise in general government (GG) debt.

Even so, Namibia’s financing risks are manageable, according to the rating agency. This is despite large funding needs, which Fitch expects to average 10% of gross domestic product (GDP) between the 2020 to 2021 and 2022 to 2023 fiscal years.

This excludes the stock of treasury bills – about 15% of GDP, which Fitch assumes that the government will be able to roll over smoothly. This is as lower private credit growth, tax deferrals and capital repatriation have supported domestic market liquidity in recent months.

Namibia’s financing flexibility is supported by a well-developed non-banking financial sector (NBFS) with assets of around 120% of GDP.

The financing flexibility is also supported by regulatory requirements on asset allocation, which offer the treasury access to a captive domestic investor base. Access to the South African financial market also underpins the country’s financing flexibility.

Namibia’s government is preparing to refinance part of the $500 million Eurobond principal repayment coming due in November 2021, possibly through international market issuance. This is in a bid to avoid a sharp international reserve drawdown.

The Namibian authorities have also applied for a $192 million loan – about 1.7% of GDP from the International Monetary Fund (IMF) under the Rapid Credit Facility.

Namibia’s government has also applied for an approximately $331 million (N$5 billion) loan – about 2.9% of GDP under the African Development Bank’s COVID-19 Response Facility.

The Namibian authorities expect both loans to be disbursed in two equal tranches, in the 2020 to 2021 and the 2021 to 2022 fiscal years.

Despite increased recourse to foreign borrowing, local-currency debt share in GG debt will remain high, at around 63%, reducing the debt trajectory’s vulnerability to exchange-rate risks.

The current account balance (CAB) will switch to a 0.7% of GDP surplus in 2020 from a 1.7% of GDP deficit in 2019 on a sharp compression in domestic demand. This is in addition to a pick-up in Southern African Customs Union (SACU) transfers, which will offset the deterioration in exports of goods and tourism.

Fitch expects the CAB to turn into a moderate deficit of around 2% of GDP in 2021 and 2022, in line with the forecast BB median. This as import demand bounces back and SACU transfers decline, offsetting the recovery in exports.

International reserves will stabilise slightly above $2 billion over 2020 to 2022, covering on average 4.4 months of annual current account payments, according to Fitch. This is in line with the forecast BB median and consistent with the sustainability of the peg of the Namibian dollar to the South African rand.

The Bank of Namibia also benefits from an approximately $79 million (R1.2 billion) swap line with the South African Reserve Bank, which could offer a back-stop in case of external stress.

On the downside, Namibia’s rating is weighed down by high fiscal deficits and debt.

GG debt is expected to rise to 70% of GDP at the end of the 2020 to 2021 fiscal year and further to 76% in the 2022 to 2023, from 56% in the 2019 to 2020 fiscal year.

Namibia’s GG debt has been steadily increasing since the end of the 2014 to 2015 fiscal year, despite significant measures towards fiscal consolidation. This is illustrated by a 7.6% of GDP narrowing in the primary balance excluding transfers from SACU between the 2015 to 2016 and 2018 to 2019 fiscal years.

The acceleration in the debt trajectory reflects the severe impact of the COVID-19 crisis shock on public finances and the Namibian economy.

Fitch expects the GG deficit to double to 10.7% of GDP in the 2020 to 2021 fiscal year. This is from 5% of GDP in the 2019 to 2020 fiscal year, exceeding the forecast BB median of a 7.8% of GDP deficit in 2020.

The rating agency’s forecast for the fiscal deficit takes into consideration a 3.5% of GDP decline in non-SACU GG revenue. Fitch also takes into account a 1.4% of GDP increase in spending on health services and economic relief measures.

A temporary 2% of GDP improvement in SACU transfers will offset a rise in debt interest cost and capital spending.

The budget deficit will remain large over the next two years, narrowing only to 7.6% of GDP in the 2021 to 2022 and 6.5% in the 2022 to 2023 fiscal year.

Namibia’s government intends to tackle the drain on the budget from transfers to financially weak state-owned enterprises (SOEs) through a combination of restructuring and divestment.

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

Fitch would consider downgrading the rating if Namibia’s government fails to achieve clear progress towards stabilising government debt-to-GDP in the medium term.

Increased external vulnerabilities for example from significant widening of the current account deficit or a sustained decline in international reserves would also lead to a downgrade in the rating.

Fitch would upgrade the rating if there is evidence of stronger ability to implement fiscal reforms sufficient to stabilise the government debt-to-GDP trajectory in the medium term.

Meanwhile, Moody’s Investors Service has downgraded Namibia’s long-term issuer and senior unsecured ratings to Ba3 from Ba2 due to a further weakening its fiscal strength.

This comes after Fitch dropped Namibia’s outlook from stable to negative, earlier in 2020 on increasing downward pressure on the country’s creditworthiness.

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