Further fiscal slide can be costly for Namibia: PSG

02 June 2017
Author   Eric Nyasha Mhunduru
Moody’s Investors Service (Moody’s) is concerned about the possibility of further fiscal slippage, following a sizeable N$6,3 billion shortfall in total revenue in the 2016/17 financial year and the adverse effects this could have on the government’s debt-servicing costs.
PSG Namibia Analyst and Equity Strategist, Eloise du Plessis, this week said despite an expected rebound in economic growth on the back of improved mining and agricultural output in 2017, Moody’s saw a moderate risk of significant fiscal slippages over the medium term given the size of the required budget cuts and risks to the global outlook that may adversely affect the economy and tax collections.
Moody’s concerns, contained in a recent report, arose from the N$6 billion loan the African Development Bank (AfDB) recently extended to Namibia to service its budget deficit. AfDB approved the first tranche of N$3 billion from the envisaged N$6 billion to be used to finance the country’s budget deficit over a two-year period.
Namibia was also expected to receive a further N$4 billion for infrastructure financing over the same period.
Although Moody’s believes the AfDB loan could help government fund its budget deficit while it undertakes gradual fiscal consolidation to address the economy’s structural challenges, it is concerned that Namibia’s public debt had risen rapidly to 42,3 percent of GDP in the 2016/17 financial year that ended in March, from 26,2 percent in the 2011/12 financial year.
Moody’s says that over-optimistic GDP estimates for the 2016/17 financial year resulted in significant tax revenue shortfalls, which led to higher government borrowing and increased the ratio of public debt to GDP.
The rating agency expects government debt to rise slightly to 45,4 percent of GDP in the 2018/19 financial year. Nevertheless, Moody’s says the country could return to a stable outlook on its credit rating, provided that government can stick to its fiscal consolidation path.  
“A narrowing of the current account and government budget deficits, a decrease in borrowing costs and a significant increase in international reserves could support positive rating actions, whereas the converse could result in a downgrade,” said Du Plessis.
The Moody’s report further stated that Namibia is vulnerable to further tightening in domestic funding conditions if fiscal slippages continued, potentially leading to a substantial increase in its debt-servicing costs.
Du Plessis, however, said until evidence of such significant fiscal slippages emerges, Namibia’s investment-grade rating appears to be safe and would only be impacted by South African credit rating downgrades indirectly.
She said this could lower growth or increase government bond yields.
According to Moody’s report, Namibia’s “Baa3/negative” rating, equivalent to “BBB-” on Namibia’s sovereign credit rating scale, reflected the country’s good medium-term growth prospects and institutional strength, while also reflecting credit challenges such as rising public debt and heightened external risks.
This report is an update and does not constitute a rating action.
The last rating action by Moody’s was to change the outlook on Namibia’s credit rating to negative in December 2016.
“There have been no actions on Namibia’s long-term foreign currency credit rating by the major international rating agencies since early April when South Africa’s credit rating was downgraded by Fitch Ratings (Fitch) as well as S&P Global Ratings (S&P) and was also placed on watch for a possible downgrade by Moody’s.
“Given Namibia’s deep trade and financial market links with South Africa, concerns have been raised in the media and by some analysts that Namibia would soon face the same relegation from the ratings agencies.
“However, we conclude that the agencies do not view these countries’ ratings as being inexorably linked to each other. This recent Moody’s report is notably silent on the South African downgrades as were its previous statements.
“Considering Fitch’s response since the South African downgrades, its only action was to upgrade Namibia’s National Rating on the South African scale to ‘AAA (zaf)’ from AA+(zaf).
“This was merely a technical adjustment of a relative measure of creditworthiness for rated entities within South Africa and Namibia and did not affect Fitch’s long-term foreign currency credit rating for Namibia, which was affirmed at “BBB- with a negative outlook in September 2016,” Du Plessis said.

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