Economic analysts have commended the Ministry of Finance for implementing a fiscal consolidation plan that has averted, at least for now, a possible downgrade by rating agency, Fitch.
This comes after Fitch Ratings this week reaffirmed its credit rating and outlook for Namibia’s sovereign debt, affirming the country’s long-term foreign and local currency Issuer Default Ratings (IDRs) at ‘BBB-‘, with a negative outlook.
The rating agency stated that the investment grade ‘BBB-‘ reflected the country’s “strong growth potential and record of political stability, balanced by high fiscal and external deficits”, while the negative outlook reflected “uncertainties about the growth outlook and the ability of the Government to reverse the rise in debt”.
Several economic analysts who spoke to the Windhoek Observer noted that, by securing a credit facility at the African Development Bank at very favourable interest rates, the Ministry of Finance had eased pressure on the domestic debt market, hence the outcome of the recent rating.
The analysts, however, said Fitch’s latest rating report on Namibia was notably silent on the possible impact of the current economic, political and credit-rating woes in South Africa, which could significantly impact on Namibia if prolonged.
Fitch forecasts that Namibia’s economic growth will recover to 2 percent in 2017 from 0,2 percent in 2016, despite meagre growth in its major trading partner, South Africa.
The rating agency added that growth will return to 5 percent or higher over the medium term.
IJG Research Analyst, Dylan van Wyk, said the consolidation of Government expenditure, especially on the operational budget, should continue as originally planned.
He said given Government’s financial position, little can be done in terms of fiscal stimulus, while Namibia’s monetary policy was closely tied to the South African Reserve Bank’s policy.
“Consumption in South Africa is already contracting, which is likely to affect the SACU revenue pool negatively and should we see further contractions in Namibian and South African consumption spending, we may see Namibian Government revenues for the next budget year revised lower.
“Furthermore, the low growth and low inflation environment in South Africa will likely allow the South African Reserve Bank to lower interest rates in an attempt to boost economic growth, and Namibia will probably move in tandem with South Africa.
“The biggest risk is that if the low growth environment persists in South Africa, triggering further ratings action and a downgrade of the local credit rating in South Africa, that will lead to portfolio outflows and may lead to a depreciating currency, which would be negative for both Namibia and South Africa,” Van Wyk said.
PSG Namibia Research Analyst, Shelly Arnold, said Fitch appeared to be more concerned about the possibility of further fiscal slippages, following a sizeable N$6,3 billion shortfall in total revenue in the 2016/17 financial year, and the adverse effect this could have on Government’s debt-servicing costs.
Fitch warned that further fiscal slippage that results in a higher debt-to-GDP ratio, a wider-than-expected current account deficit that depletes foreign reserves or weaker-than-expected economic growth, could all result in Namibia losing its investment grade rating.
Arnold, however, said Fitch’s assessment of Namibia’s credit rating risks was broadly in line with that of Moody’s and their own.
According to Fitch, better performance in the mining sector will narrow the current account deficit to 8,3 percent of GDP, from 10,5 percent in 2016, but the external deficit remains a weakness to the sovereign ratings.
The rating agency forecasts that inflation will drop to six percent by end of 2017, from 6,3 percent last recorded in May on the back of declining food and fuel prices and that the Bank of Namibia will hold the repo rate unchanged at 7 percent for the rest of 2017.
Capricorn Asset Management Economic Analyst, Claudia Boamah, applauded the Ministry of Finance for cutting expenditure by larger amounts in the short-term, which was expected to reduce the deficit-to-GDP ratio to 3,6 percent from 6,3 percent.
Boamah said even though Fitch disagreed with that estimate and gauges 4,2 percent as a more realistic expectation; the agency regarded Namibia’s sovereign credit risk as relatively acceptable, hence the BBB rating.
“The country may have stayed afloat of a downgrade this time, but the negative outlook means that Namibia’s growth potential is vulnerable to unfavourable budget and trade balances. Of the factors that affect these ratings, only the high public expenditure growth is under the control of the Ministry of Finance.
“The lower than expected revenue from mining, agriculture and SACU are factors beyond the Ministry of Finance’s control. Therefore, the Ministry of Finance has done all it can. Further cuts to Government expenditure would only serve to escalate unemployment and dampen growth.
“Perhaps, what can be changed as far as the Government’s involvement in the economy is concerned is a realisation of the fact that we might want to shift focus from an over-reliance on the primary sector which is susceptible to uncontrollable factors like the weather and global commodity prices,” Boamah said.