London, 07 December 2018 -- Moody's Investors Service ("Moody's") has today
affirmed the Ba1 long-term issuer and senior unsecured ratings
of Government of Namibia and maintained a negative outlook.
The affirmation of the Ba1 rating reflects Namibia's gradually improving
medium-term growth prospects and moderate wealth levels that support
the economy's shock absorption capacity. Some areas of relative
strength in the country's institutions, with recently continued
adherence to fiscal consolidation objectives through a challenging economic
and financial environment, also support the Ba1 rating.
The decision to maintain the negative outlook reflects Moody's concern
that the government will not be able to address the vulnerability to shocks
which the structure, level and trajectory of Namibia's debt
burden, creates. Such shocks might include subdued growth
in South Africa, lower than expected Southern African Customs Union
(SACU) revenue, a shock to commodity prices and/or a marked and
prolonged tightening in external financing conditions including renewed
depreciation of the South African rand. While the government has
maintained its fiscal consolidation objectives, progress towards
these objectives and the related strengthening of the country's
fiscal institutions has been limited so far, leaving Namibia's
credit profile exposed to economic and financial shocks.
Namibia's long-term local currency bond and bank deposit ceilings
are unchanged at A2. The long-term foreign currency bank
deposit ceiling is unchanged at Ba2, and the long-term foreign-currency
bond ceiling is also unchanged at Baa2.
RATINGS RATIONALE
RATIONALE FOR AFFIRMING THE Ba1 RATING
GRADUALLY IMPROVING MEDIUM-TERM GROWTH PROSPECTS, DESPITE
STRUCTURAL CHALLENGES
Moody's expects GDP growth of 1% in 2019, ending several
quarters of contraction. Over the medium term, as the weight
of the earlier significant tightening of fiscal policy on growth diminishes,
and as the South African economy gradually recovers, Moody's
expects Namibia's GDP growth to rise towards its potential rate
of around 3.5%. Combined with income levels above
$10,000 in GDP per capita terms (at purchasing power parity),
this will support the economy's shock absorption capacity.
Growth prospects are supported by developments in a range of sectors.
The move up the value chain particularly in the diamond industry is likely
to continue, supporting productivity and GDP growth. Meanwhile,
assuming that some of the infrastructure deficiencies are addressed,
in particular airport capacity, parts of the untapped potential
of the tourism sector will be realized. Moreover, given its
location on the Atlantic and its recent expansion, the Walvis Bay
Port will provide an impetus for promoting Namibia as a logistics sector
and attracting some of the traffic from other ports in the Southern African
region.
Notwithstanding these growth prospects, Namibia faces structural
economic challenges, including high unemployment and skills shortages
which will continue to weigh on economic strength.
MODERATE INSTITUTIONAL STRENGTH BALANCES SOME AREAS OF STRENGTH AND WEAKNESSES
IN INSTITUTIONAL AND POLICY EFFECTIVENESS
Namibia's adherence to the rule of law and control of corruption
are relatively strong, in the 57.5 and 62.1 percentile
of Moody's rated sovereigns respectively. These features
enhance the effectiveness of the country's institutions by providing
a transparent and predictable environment to businesses and individuals.
The sovereign's institutional strength is also supported by the
pegged exchange rate arrangement that promotes stable price competitiveness
with South Africa, Namibia's largest trade partner.
The arrangement also contributes to stable inflation at moderate levels
by preventing sharp swings in the cost of imported goods.
These areas of strength balance some marked institutional weaknesses in
particular in the capacity of the government to prevent a build-up
of debt in the public sector. As a result of these deficiencies,
the pegged exchange rate has, at times, resulted in a pro-cyclical
monetary policy stance.
Recently, notwithstanding very weak growth in South Africa and turbulent
global financial markets with pressure on the South African rand,
the government has so far maintained its fiscal consolidation objective.
So far, its efforts have not prevented the continued slow rise in
the government's debt burden, or succeeded in altering the
composition of the debt burden to lessen the exposure to external shocks.
Greater success sustained through economic and financial cycles will enhance
the credibility and effectiveness of fiscal policy, a relative weakness
of Namibia's credit profile.
In support of the government's fiscal objectives, Namibia
has embarked on a series of reforms aimed at improving macroeconomic governance
that seeks to address key credit challenges such as rising government
expenditures and volatile revenue. To maximize revenue, the
government has established the Namibia Revenue Agency (NAMRA) to streamline
the existing Inland Revenue service and the customs and excise department.
It has also implemented an integrated tax system and proposed changes
to the tax law in order to boost the tax take. Moreover,
the government has established a Ministry of Public Enterprises to centralise
the monitoring of state owned enterprises (SOEs), increase the transparency
of their operations and prevent the materialization of contingent liabilities.
Some of these reforms are at a very early stage, often still being
designed. Their implementation will be complex and any credit benefits
will, if realized, only materialize over a period of time.
RATIONALE FOR THE NEGATIVE OUTLOOK
The negative outlook reflects Namibia's persistent vulnerability
to a range of shocks that would weigh on revenue, increase financing
costs and, as a result, weaken fiscal strength and raise liquidity
and external vulnerability risks.
FISCAL CONSOLIDATION CHALLENGES PERSIST DESPITE LOWER LIQUIDITY PRESSURE
The government plans a gradual fiscal consolidation, with the deficit
narrowing to 4.5% of GDP in FY2018-19 (the year ending
in March 2019) and 4.0% for FY2019-20, from
5.0% of GDP in FY2017-18 and a peak at 8.3%
in FY2015-16. In the absence of shocks, Moody's
estimates that such a fiscal consolidation path is achievable.
Combined with improving but still moderate nominal GDP growth, it
would slow but not halt the increase in the debt burden, to around
46.7% of GDP in FY2019-20 from 42% in FY2017-18.
At these levels, the debt burden is higher than the median level
for Ba1-rated sovereigns (32.9% in 2017).
A relatively broad revenue base and moderate overall cost of debt supports
debt affordability. Moody's estimates that interest payments
absorbed around 8.9% of revenue in 2017, comparable
to the median level of 9.3% for Ba1-rated sovereigns.
However, consolidation at the projected pace would not quickly remove
the sovereign's vulnerability to a range of potential negative developments
that would weigh on revenue and/or raise financing costs.
First, Namibia is and will, in the absence of faster consolidation,
remain vulnerable to lower SACU revenue (about one third of total revenue)
than currently assumed by the government and Moody's.
Second, and related to SACU revenue, with about 20%
of exports shipped to South Africa, Namibia's economic environment
remains closely tied to that of its main trading partner. Moody's
expects a gradual increase in GDP growth in South Africa but the significant
challenges it faces in achieving sustained robust growth point to downside
risks that would spill over and dampen Namibia's government revenue.
Third, government revenue is also partly linked to commodity prices.
The royalties and income from the diamond sector and from other mineral
ores provide a source of revenue for the government that is vulnerable
to production or price shortfalls.
While the government plans several measures to improve revenue generation
capacity and tax administration, including establishing a new revenue
agency planned for 2019, the effectiveness of these measures in
raising revenue in a stable growth and commodity price environment and
in improving the resilience of revenue to weaker growth and prices developments
is untested.
Meanwhile, a large wage bill which accounts for around 50%
of government expenditure constrains the government's capacity to
cut spending and restore fiscal consolidation should revenue collection
be lower than currently expected.
Moreover, Namibia's fiscal outlook is vulnerable to a tightening
in financing conditions, in particular external financing conditions,
potentially resulting from turbulent global financial markets.
Renewed and persistent downward pressure on the South African rand,
and the Namibian dollar which is pegged to it, would raise the burden
of US dollar-denominated debt which Moody's currently estimates
to be around 11.4% of GDP as of 2017.
Should prospects of slower fiscal consolidation dent the confidence of
domestic banks in macroeconomic stability, the cost of financing
domestic debt, including a large stock of T-bills (11.6%
of GDP in October, 2018) would rise and rapidly weaken debt affordability.
EXTERNAL VULNERABILITY RISKS HAVE DIMINISHED BUT REMAIN
The current account deficit has narrowed significantly in the past year,
to 6.1% of GDP in 2017 from 15.8% one year
earlier. There has been a structural improvement founded on a fall
in construction-related imports as a result of tighter fiscal policy.
Moody's expects the current account deficit to hover around 4-5%
of GDP. At these levels, the deficit will be largely financed
by net foreign direct investment inflows. Combined with some debt
inflows, Moody's projects broadly stable foreign exchange
reserves at $2-2.5 billion.
While these developments point to somewhat reduced external vulnerability
risks, such risks remain. In particular, Namibia's
foreign exchange reserves cover around 4.8 months of imports as
of June 2018, which provides only a modest buffer to a shock to
export revenue. A commodity price shocks and/or production shortfalls
would lead to a renewed widening in the current account deficit and foreign
exchange reserves erosion to low levels.
WHAT COULD CHANGE THE RATING UP
The negative outlook indicates that an upgrade is unlikely in the foreseeable
future.
Moody's would likely change the outlook to stable should confidence
in the resilience of Namibia's credit profile to shocks increase.
This would result from significant fiscal measures and strengthening of
the institutions that would place the debt burden on a clear and marked
downward trajectory and enhance fiscal flexibility to respond to negative
economic or financial developments. Such measures would likely
involve improved revenue generation and a marked reduction in the public
sector wage bill leading to a narrower fiscal deficit and greater fiscal
space. Institutional improvements that enhance revenue collection
and bolster the credibility and effectiveness of the government's
fiscal consolidation objectives would support improved fiscal strength.
Evidence of a sustainably narrower current account deficit through higher
competitiveness and export revenue, raising foreign exchange reserves
buffers would also support a stable outlook.
WHAT COULD CHANGE THE RATING DOWN
Moody's would likely downgrade Namibia's rating should the scope
for a policy response that would effectively shore up Namibia's
government finances and liquidity position in the event of an increase
in financing costs and/or prospects of weaker revenue diminish further.
Evidence that fiscal consolidation was insufficient to prevent the debt
burden from continuing to rise would be particularly negative for the
rating. However, Namibia's heightened exposure to financing
shocks reflects not just the increase in the level of debt seen in recent
years, but, relatedly, the significant foreign currency
component of government debt. The absence of measures to address
at least one of those weaknesses, either by placing the debt burden
on a clear and marked downward trajectory and/or by reducing materially
the reliance on foreign currency debt, would imply sustained exposure
to financing shocks which would also be negative for the rating.
A sustained decline in foreign currency reserves that threatened reserves
adequacy would also put downward pressure on the rating.
GDP per capita (PPP basis, US$): 11,229 (2017
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.9% (2017
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.2%
(2017 Actual)
Gen. Gov. Financial Balance/GDP: -5.0%
(2017 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -6.1% (2017 Actual)
(also known as External Balance)
External debt/GDP: 56.5% (2017 Actual)
Level of economic development: Moderate level of economic resilience
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 3 December 2018, a rating committee was called to discuss the
rating of Government of Namibia. The main points raised during
the discussion were: The issuer's economic fundamentals, including
its economic strength, institutional strength/ framework,
and fiscal and financial strength have not materially changed.
The issuer's susceptibility to event risk has marginally improved.
The principal methodology used in these ratings was Sovereign Bond Ratings
published in November 2018. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The weighting of all rating factors is described in the methodology used
in this credit rating action, if applicable.
REGULATORY DISCLOSURES
For ratings issued on a program, series or category/class of debt,
this announcement provides certain regulatory disclosures in relation
to each rating of a subsequently issued bond or note of the same series
or category/class of debt or pursuant to a program for which the ratings
are derived exclusively from existing ratings in accordance with Moody's
rating practices. For ratings issued on a support provider,
this announcement provides certain regulatory disclosures in relation
to the credit rating action on the support provider and in relation to
each particular credit rating action for securities that derive their
credit ratings from the support provider's credit rating. For provisional
ratings, this announcement provides certain regulatory disclosures
in relation to the provisional rating assigned, and in relation
to a definitive rating that may be assigned subsequent to the final issuance
of the debt, in each case where the transaction structure and terms
have not changed prior to the assignment of the definitive rating in a
manner that would have affected the rating. For further information
please see the ratings tab on the issuer/entity page for the respective
issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity (ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Kelvin Arthur Dalrymple
VP - Senior Credit Officer
Sovereign Risk Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
Marie Diron
MD - Sovereign Risk
Sovereign Risk Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454
