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
