London, 06 December 2019 -- Moody's Investors Service ("Moody's") has today
downgraded the long-term issuer and senior unsecured ratings of
the Government of Namibia to Ba2 and changed the outlook to stable.
The downgrade reflects further weakening in Namibia's debt position,
despite ongoing fiscal consolidation, as growth remains weaker for
longer than Moody's previously anticipated.
The stable outlook is underpinned by Namibia's relatively robust
institutions and governance strength that supports creditworthiness.
Policymakers retain some capacity to respond to shocks, helped by
moderate liquidity and external vulnerability risks.
Concurrently, Namibia's long-term local currency bond
and bank deposit ceilings were lowered to Baa1 from A2. The long-term
foreign currency bank deposit ceiling was lowered to Ba3 from Ba2,
and the long-term foreign-currency bond ceiling was lowered
to Baa3 from Baa2.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE TO Ba2
DESPITE FISCAL CONSOLIDATION, DEBT CONTINUES TO RISE AS MEDIUM-TERM
PROSPECTS ARE WEAKER
Despite spending restraint, Namibia's government debt continues
to rise. The debt burden has more than doubled over the past decade
to 45.6% of GDP at the end of fiscal 2018 from 19.2%
ten years earlier.
In its October 2019 mid-year budget review, the government
announced its intention to reach a primary budget surplus by 2021/22 which
would result in debt stabilising at around 53% of GDP by 2022/23.
However, in light of previous fiscal slippages, Moody's
forecasts the government to reach a primary balance only by 2023/24 and
the debt burden to stabilise at a higher level, at just below 55%
by 2024/25.
The government relies on a combination of cuts to the level of subsidies,
goods and services procurement, and to a lesser extent the wage
bill to reach its target of a primary surplus. It expects that
the wage bill (45% of total expenditures in fiscal 2018) will decline
marginally as a share of GDP, driven by natural attrition and limiting
wage increases to below inflation. Moody's takes into account
the likely flow of departures from the administration and contained wage
inflation, but the related relief on total government expenditure
will be limited and materialise over an extended period of time.
Meanwhile, interest payments that account for around 10%
of total expenditure further limit the room for fiscal consolidation.
In the absence of additional significant fiscal consolidation measures,
Namibia's fiscal strength will weaken further.
Moreover, weaker medium-term growth prospects will also contribute
to a rise in the debt burden, by constraining government revenue,
and raise exposure to downside risks that could lead to a more pronounced
weakening in debt position than Moody's currently expects.
The economy has been buffeted by a series of economic shocks coupled with
the prolonged drought affecting the agriculture sector, resulting
in an estimated decline of 1.5% of GDP in 2019. Looking
forward, Namibia's growth potential is constrained by significant
negative spillovers from weak growth in South Africa on which Namibia's
economy depends for non-mineral exports, limited investment
in the mining sector, in part related to weaker external demand
for the country's main minerals.
Both competitiveness and productivity in general have weakened,
reducing the capacity of the economy to recover from the shocks it faces.
Namibia's ranking in the World Bank Doing Business Report has declined
markedly over the years, to 104th place in 2020 from 66th in 2010,
reflecting weaknesses in key areas including registering property,
starting a business and trading across borders. In addition,
labour productivity growth has declined reflecting gaps in education and
skill levels. While favourable, the prospects for the fledging
logistics sector, part of the government's medium-term
growth strategy, only partly offset the structural constraints to
Namibia's potential growth.
RATIONALE FOR THE STABLE OUTLOOK
The stable outlook at Ba2 is underpinned by relatively robust institutions
and governance strength that supports Moody's view that policymakers
retain some capacity to respond to shocks, helped by moderate liquidity
and external vulnerability risk.
Namibia remains exposed to various long-standing shocks,
namely subdued growth in South Africa, potentially lower than currently
expected Southern African Customs Union (SACU) revenue, a shock
to commodity prices and/or a marked depreciation of the South African
rand.
In the face of these potential shocks, the country's institutions
provide a transparent and predictable environment to businesses and individuals.
In particular, Namibia's adherence to the rule of law and
control of corruption are relatively strong, as evidenced in the
Worldwide Governance Indicators. Policy effectiveness is also supported
by the pegged exchange rate arrangement that promotes stable price competitiveness
with South Africa, Namibia's largest trading partner.
The arrangement also contributes to stable inflation at moderate levels
by preventing sharp swings in the cost of imported goods.
Persistent fiscal deficits and a high share of short-term debt
- 40% of total domestic debt, and 25% of total
debt at end of fiscal 2018 - lead to large gross financing needs
for the government, which Moody's expects to peak at around
21% of GDP from 18% currently. This introduces some
liquidity risk. However, Moody's assesses that a large
and liquid domestic financial sector (with assets worth 150% of
GDP) supports the government's funding capacity.
Moreover, debt management capacity has improved. Several
external government bonds are maturing over the next three years,
including a ZAR3.1bn ($210m) bond due in April 2020,
a $500m Eurobond due in November 2021, and a ZAR1.4
bn ($100m) bond due in October 2021. The authorities have
already refinanced ZAR1.6 bn of the April 2020 bond to new long-dated
instruments. For the other instruments, the government has
created a sinking fund that includes $380m earmarked for repayment.
Every quarter ZAR400m (about $30m) is channelled to the sinking
fund at the central bank, with 50% converted to USD and 50%
kept in ZAR. The sinking fund is included in the level of foreign
exchange reserves that stood at $2.1 bn at end September
2019.
The current account deficit is financed by a combination of foreign direct
investment and other investments. Following wide current account
deficits between 2008 and 2016, when they averaged 8% of
GDP, the deficit narrowed in 2018 to around 2% of GDP.
The historically high deficits in part reflected capital imports for large-scale
infrastructure and mining projects, as well as increasing domestic
consumption owing to the rapid expansion of credit to households and government
indebtedness. The improvement since 2016 mainly reflects the end
of large mining construction projects, as well as subdued domestic
demand. Moody's expects that the current account deficit
will fluctuate between 2%-5% of GDP in the medium
term.
With a gradual widening of the current account deficit as domestic consumption
recovers, Moody's expects that the international reserves
will erode to 3 months of import cover from just around 4 at end 2018
over the medium term. However, the central bank's credible
management of the pegged exchange rate is likely to keep external vulnerability
risks moderate.
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.
Relatively strong governance and institutions, coupled with a stable
political environment, support Namibia's credit profile.
WHAT COULD CHANGE THE RATING UP
Signs that growth is strengthening materially and durably, supportive
of rebuilding fiscal buffers and strengthening Namibia's external
position would likely lead to an upgrade.
WHAT COULD CHANGE THE RATING DOWN
Conversely, indications that Namibia's growth potential continues
to weaken and/or signs that the debt burden will continue to rise markedly
faster than Moody's projects, potentially raising liquidity
risks would likely lead to a downgrade. In addition, a sharper
deterioration of the external position compared to Moody's baseline expectation
would put negative pressure on the rating.
GDP per capita (PPP basis, US$): 11,298 (2018
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -0.1% (2018
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 5.1%
(2018 Actual)
Gen. Gov. Financial Balance/GDP: -4.8%
(2018 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -2.4% (2018 Actual)
(also known as External Balance)
External debt/GDP: 46.5% (2018 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 2 December 2019, 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. 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, 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.
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 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
