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Rating Action:

Moody's changes outlook on Namibia's rating to negative from stable; affirms Ba2 rating

22 May 2020

London, 22 May 2020 -- Moody's Investors Service, ("Moody's") has today changed the outlook on the Government of Namibia's ratings to negative from stable. Concurrently, Moody's has affirmed Namibia's Ba2 issuer and senior unsecured ratings.

The negative outlook reflects the economic and financial pressures the coronavirus shock is exerting on Namibia's credit metrics, exacerbating existing vulnerabilities. A prolonged recession, sharply rising debt burden, and significantly larger gross borrowing requirements amid much tighter financing conditions particularly expose Namibia to the current shock. Meanwhile, the effectiveness of measures to restore growth and revive fiscal consolidation, after the shock has passed, will be challenged by Namibia's comparatively more rigid economic and fiscal structure relative to Ba2-rated peers.

The coronavirus outbreak, deteriorating global economic outlook, falling oil prices, and asset price declines, are creating a severe and extensive credit shock across many sectors, regions and markets. Moody's regards the coronavirus outbreak as a social risk under its ESG framework. For Namibia, the shock is transmitting through a sharp growth shock reflecting lower mining activity and lower tourism arrivals given the halt in travel. While Namibia does not face acute financing pressures, the severe tightening of financial conditions will challenge the government's ability to meet larger gross financing needs and amortising external commercial debt in coming years without an increase in borrowing costs that would threaten medium-term fiscal consolidation efforts.

Namibia's long-term local currency bond and bank deposit ceilings remain unchanged at Baa1. The long-term foreign currency bank deposit ceiling, and the long-term foreign-currency bond ceiling also remain unchanged at Ba3 and Baa3 respectively.

RATINGS RATIONALE

RATIONALE FOR NEGATIVE OUTLOOK

PROLONGED RECESSION, RISING DEBT BURDEN AND GROWING FUNDING NEEDS AMID TIGHTER FINANCIAL CONDITIONS

The decision to change the outlook to negative reflects the challenges the government faces as a result of the coronavirus shock and the difficulties in addressing the vulnerabilities present in the rigid structure of the Namibian economy and government budgetary position. A significant contraction in GDP, and a much larger fiscal deficit, as a result of the coronavirus outbreak and associated policy response, will add to the already deteriorating fiscal trends in Namibia, resulting in a significantly higher debt level. Coupled with the continued weakness and subdued growth in its important trading partner South Africa (Ba1 negative), lower than expected Southern African Customs Union (SACU) revenue from next year as a result of the sharp regional slowdown, a shock to demand for minerals and associated commodity prices declines, an extended drought, and dislocated capital markets, are all challenging the country's credit profile. While the government has moved quickly to address the health challenges posed by the coronavirus outbreak, the effect on the economy leaves Namibia's credit profile more exposed than peers to economic and financial shocks.

Moody's forecasts GDP will contract by around 7% this year, after -0.7% in the past three years. Namibia's mining sector, constituting about 10% of GDP in 2019, will contract sharply as a result of subdued global commodities demand combining with the lockdown curtailing many mining operations and the exports of minerals. Moreover, the tourism sector which Moody's estimates contributes about 12% of GDP, has ground to a halt as a result of the cessation of international travel. The agriculture sector after a prolonged and devastating drought over recent years, also remains depressed. While Moody's expects GDP growth to rise in 2021 to 1.8%, the strong growth rates seen in the first half of this decade are unlikely in the foreseeable future as the expansionary fiscal policy and favourable commodity price and investment dynamics that fuelled Namibia's growth will not be repeated in coming years.

With health-related spending on the coronavirus outbreak adding to own source revenue generation severely curtailed by the economic contraction, Moody's expects a sharp widening of the fiscal deficit to 10% of GDP in fiscal 2020, moderating only slowly to 8.5% in 2021 and declining further in future years as the fiscal situation progressively normalises. While Moody's expects that after the lockdown period ends in the latter half of 2020 revenue will increase and one-time expenditures will be reduced, the significantly larger fiscal deficit will lead to an increase of the debt burden to 68.5% of GDP by end-2020, rising further to 72.3% in 2021, up from 53.3% at end-2019 (and almost triple the 25.2% figure in 2014).

Moody's anticipates that the government will resume the path of fiscal consolidation to return to a deficit of about 3% in the medium to long-term and slow the upward debt trajectory. The government has a track record of achieving fiscal consolidation, as evidenced in the period from 2015 to 2019 where the primary deficit was reduced from 6.6% of GDP to 1.0% of GDP. However, as the debt servicing burden rises, the rigid budget structure (in particular the government wage bill) means the task of repeating ambitious fiscal consolidation will become increasingly more difficult. The scope for additional non-wage bill expenditure rationalization and capital expenditure reductions has been largely exhausted, with further expenditure reduction much more politically challenging. Moody's expectation for a large decline of about 20% in SACU revenue in 2021, equivalent to 2pp of GDP, will further complicate fiscal consolidation efforts.

Namibia's gross borrowing requirements are high and rising. They will rise to 28% GDP in 2020 and about 35% in 2021 (from 20% in 2019 and an average of 15-20% over the past five years), driven by a widening of the fiscal deficit as well as the amortization of the $500m eurobond in November 2021 (equivalent in size to 5% of GDP). In response to immediate funding requirements, the government has been recently drawing on the sinking fund previously established to finance the maturing eurobond. Enlarged gross borrowing requirements as a result of higher deficits and an increasing stock of short-term domestic debt exposes Namibia's fiscal metrics to growth, exchange rate and interest rate shocks.

RATIONALE FOR AFFIRMING THE Ba2 RATING

MODERATE INSTITUTIONAL STRENGTH, ECONOMIC DIVERSIFICATION, AND DOMESTIC FINANCING OPTIONS BALANCE FISCAL WEAKNESSES

Notwithstanding downside risks captured in the negative outlook, Namibia benefits from a number of credit supports. Despite weak growth performance over the last 3 years, the Namibian economy remains comparatively diversified, with moderate wealth levels (per capita GDP standing at US$11,266) supporting the rating.

With a stable political climate, the authorities have over the past few years strengthened the policymaking architecture by introducing a more transparent budgeting and robust policymaking apparatus. These changes have enhanced elements of institutional strength supporting shock absorption and adjustment capacity, and ultimately resiliency. There is a propensity to enact fiscal consolidation to arrest the debt increase and ultimately shift it to a downward trajectory. The government also has been focused on increasing own-source revenue generation capacity (revenues/GDP) and, while potentially volatile in the next year, access to predictable SACU receipts allows for proactive budgeting.

The current account deficit is predominantly financed by disbursements of external debt. The current account deficit narrowed in 2019 and Moody's expects it to stabilize at a lower level over the medium term compared with the past decade. The current account deficit is expected to decline to 2.0% in 2020 from 2.3% in 2019 as a result of the combined effects reduced supply from reduced exports but equally a reduced demand from reduced imports containing the current account deficit. In 2021, while Moody's expects the current account to temporarily widen by about 2pp of GDP in 2021, which matches the forecast 20% drop in SACU receipts for the year, the Namibian economy has adequate foreign exchange reserves at approximately 4 months of import cover, and a credible currency arrangement ensuring parity between the Namibian dollar and the South African Rand which reduces external vulnerability risks. The arrangement also contributes to stable inflation at moderate levels, averaging 5% over the last 3 years, by preventing sharp swings in the cost of imported goods.

Namibia has a reasonably deep domestic financing pool and access to a larger pool of investors in neighbouring South Africa. The capacity of the domestic financial sector to finance government budget deficits in local currency is a buffer on which the sovereign can rely, at least in the near term. Banks and pensions funds remain willing to fund the government. Notwithstanding weak economic dynamics resulting in non-performing loans to close to 4.6% at end-2019, up from 3.6% at end-2018, the domestic banking system is strong, well capitalized and liquid. Three of the four largest banks in Namibia are linked to South Africa; coupled with the liquidity in the pension funds sector means adequate funding options into the medium term.

ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS

Environmental considerations weigh on Namibia's economic strength and credit profile. Given the prominence of agriculture in the economy and reliance on rainfall to drive irrigation, recurring droughts can have a significant negative impact on agriculture.

Social considerations are also material to the rating. High income inequality and high levels of unemployment hamper competitiveness and have the potential to fuel social discontent. Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety. For Namibia, the shock mainly relates to an economic shock that exacerbates existing fiscal weaknesses.

Relatively strong governance and institutions, coupled with a stable political environment, support Namibia's credit profile.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

WHAT WOULD CHANGE THE RATING UP

An upgrade is unlikely in the foreseeable future given the negative outlook.

A change in outlook to stable would likely reflect confidence that the government was likely to be able to contain the longer-term fiscal and debt impact of the coronavirus shock and maintain sufficiently broad funding options to meet its larger funding needs without a significant increase in borrowing costs.

Evidence of a recovery from both the coronavirus shock and the drought that would lead to a sustainably stronger growth, government revenue generation, narrower current account deficits through higher competitiveness and export revenue and rising foreign exchange reserves buffers would also support a stable outlook. In addition, a stable outlook would be supported by the resumption of broad implementation of structural fiscal reforms to narrow the fiscal deficit, which would stabilize and eventually reduce the debt burden, improve debt affordability, and reduce liquidity risks.

WHAT WOULD CHANGE THE RATING DOWN

Moody's would likely downgrade Namibia's rating should the policy response to the economic and fiscal challenges resulting from the coronavirus shock be insufficient to arrest the upward debt trajectory, and if the ongoing deterioration in Namibia's debt burden and debt affordability was likely to result in liquidity risks, raising questions over the government's ability to refinance maturing debt.

Longer term, reduced confidence in the government's ability to introduce broader structural reforms to reduce the economy's and budget's persistent vulnerabilities may warrant positioning the rating at a lower level. 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$): 11,266 (2019 Actual) (also known as Per Capita Income)

Real GDP growth (% change): -1.1% (2019 Actual) (also known as GDP Growth)

Inflation Rate (CPI, % change Dec/Dec): 2.6% (2019 Actual)

Gen. Gov. Financial Balance/GDP: -4.6% (2019 Actual) (also known as Fiscal Balance)

Current Account Balance/GDP: -2.3% (2019 Actual) (also known as External Balance)

External debt/GDP: 68.4% (2019 Actual)

Economic resiliency: ba2

Default history: No default events (on bonds or loans) have been recorded since 1983.

On 19 May 2020, 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, and fiscal and financial strength have materially weakened. The issuer's susceptibility to event risk has marginally improved.

The principal methodology used in these ratings was Sovereign Ratings Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1158631. Alternatively, 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 further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

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 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/Sub Sovereign
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

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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