London, 04 December 2020 -- Moody's Investors Service ("Moody's") has today downgraded the long-term
issuer and senior unsecured ratings of the Government of Namibia to Ba3.
The outlook remains negative.
The downgrade reflects a further weakening in Namibia's fiscal strength
despite policy statements of plans to rein in the fiscal deficit.
The debt burden is now markedly higher, it will continue to rise
for the foreseeable future; debt affordability is weakening.
The coronavirus shock continues to pressure Namibia's revenue generation
capacity, a trend exacerbated by Namibia's weak growth prospects,
notwithstanding moderate institutional adjustment capacity and external
buffers that backstop creditworthiness.
The negative outlook reflects risks remaining slanted to the downside.
Implementation of the government's fiscal consolidation plans will
invariably prove challenging in a low growth environment, particularly
as the government targets reducing the large but politically challenging
public sector wage bill. Moreover, very large gross borrowing
requirements, given the sovereign's continued reliance on
short-term funding, point to material liquidity risk.
Concurrently, Namibia's long-term local currency bond and
bank deposit ceilings were lowered to Baa2 from Baa1. The long-term
foreign currency bank deposit ceiling was lowered to B1 from Ba3,
and the long-term foreign-currency bond ceiling was lowered
to Ba1 from Baa3.
RATINGS RATIONALE
RATIONALE FOR DOWNGRADE TO Ba3
NAMIBIA'S DEBT BURDEN CONTINUES TO RISE, WHILE SUBDUED GROWTH
COMPLICATES REVERSING FISCAL DETERIORATION
Moody's expects a sharp widening of the fiscal deficit to 9.6%
of GDP over fiscal 2020, remaining elevated at 8.3%
in 2021. This will lead to an increase of the debt burden to 72%
of GDP by end-2020 and 74% in 2021, up from 56%
at end-2019 and nearly triple the level at end-2014.
Meanwhile, debt affordability has weakened, with the interest
bill set to rise to 15.5% of revenues next fiscal year (up
from 5% five years ago).
The increase in debt is driven by the primary deficit and interest costs:
both representing a drag on debt dynamics over the coming five years,
while growth will provide only a moderate offset starting from 2021.
Interest costs are set to peak at around 6% of GDP and the foreign
currency share at around 1% over the forecast period, leaving
debt affordability at a moderate level while ever the interest rate remains
lower than nominal growth.
Moody's expects real GDP to contract by 6.9% in 2020,
and only grow by 2.4% in 2021 as agricultural production
gradually returns after a prolonged and devastating drought, while
the mining sector and the travel and tourism industry remain depressed.
The weak growth outlook continues to pressure revenue generation,
compounded by the forthcoming decline in Southern African Customs Union
(SACU) receipts in the next two years. The recovery of SACU receipts
starting from 2023 supports a gradual narrowing of the primary balance,
allow for a stabilization of the debt burden.
Moody's expects Namibia's debt burden to peak at around 80%
of GDP by 2025, and to remain broadly stable over the medium term,
absent significant policy measures to arrest and ultimately reverse the
debt accumulation.
INSTITUTIONAL ADJUSTMENT CAPACITY AND EXTERNAL BUFFERS SUPPORT THE RATING
The deterioration in the credit profile is balanced by a number of credit
supports. The relative strength of the country's institutions
was evident in the three years immediately prior to the onset of the coronavirus
outbreak with the authorities achieving fiscal consolidation of four percentage
points of GDP which arrested the previous increase of general government
debt after large fiscal deficits in 2014-16.
On the external side, lower exports have been offset by reduced
imports, keeping the current account deficit contained. Namibia's
net international reserves are expected to remain stable and modest,
covering just above four months of imports, which translates to
approximately $2 billion.
While fiscal and external financing needs will remain elevated over the
forecast period, the large public pension fund provides Moody's
with some level of confidence in the ability of the government to continue
to meet its liabilities should it be unable to access the international
capital market and/or to draw from new credit lines from development partners.
The domestic banking system is robust, well-capitalized and
liquid, and coupled with the liquidity in the pension funds sector,
can adequately fund the government's operations into the medium
term.
RATIONALE FOR THE NEGATIVE OUTLOOK
The FY2020/21 Mid-Year Budget Review and Medium Term Budget Policy
Statement delivered in October envisaged fiscal consolidation and structural
reforms to reduce the fiscal deficit to 4.1% of GDP by 2023/24,
based on a mix of expenditure restraint and revenue generation.
However, implementation of the government's improved tax administration
and increased tax revenue generation will invariably prove challenging
in a low growth environment. Moreover, the intended reduction
in the large public sector wage bill through a combination of attrition
and early retirement will invariably prove politically challenging,
posing risks to the realization of ambitious fiscal consolidation plans
to arrest the upward debt trajectory.
Meanwhile, Namibia's gross borrowing requirements are very
high, with high and increasing reliance on short term financing
raising government liquidity risks. Namibia's gross borrowing
requirements will rise to about 38% of GDP in 2021 (from 30%
this year and an average of 15-20% over the past five years)
before declining slightly in the following years. The increase
in 2021 is driven by a widening of the fiscal deficit as well as the amortization
of the $500 million eurobond maturing in November 2021 (which amounts
to 5% of GDP). Moody's expects Namibia to finance
most of its borrowing requirements domestically while additional external
funding from the official sector will help meet the higher borrowing requirements.
Nevertheless, higher short-term financing reliance leaves
Namibia vulnerable if and when interest rates rise, either through
monetary policy tightening or a widening in spreads.
ENVIRONMENTAL, SOCIAL, AND GOVERNANCE CONSIDERATIONS
Environmental considerations weigh on Namibia's economic strength and
credit profile. Given the prominence of agriculture in the economy
and reliance on rainfall to drive irrigation, recurring droughts
can have a significant negative impact on agriculture.
Social considerations are also material to the rating. High income
inequality and high levels of unemployment hamper competitiveness and
have the potential to fuel social discontent.
Relatively robust governance and institutions, coupled with a stable
political environment, support Namibia's credit profile, although
the strength of governance will be tested by the challenge of stabilising
and reversing a high debt burden and maintaining moderate borrowing costs.
GDP per capita (PPP basis, US$):10,279 (2019
Actual) (also known as Per Capita Income)
Real GDP growth (% change): -1.6% (2019
Actual) (also known as GDP Growth)
Inflation Rate (CPI, % change Dec/Dec): 2.6%
(2019 Actual)
Gen. Gov. Financial Balance/GDP: -5.6%
(2019 Actual) (also known as Fiscal Balance)
Current Account Balance/GDP: -1.7% (2019 Actual)
(also known as External Balance)
External debt/GDP: 64.5% (2019 Actual)
Economic resiliency: ba2
Default history: No default events (on bonds or loans) have been
recorded since 1983.
On 30 November 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, fiscal and financial strength,
which have all materially weakened. The issuer's susceptibility
to event risk has remained unchanged.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
The negative outlook signals an upgrade is unlikely in the near term.
Moody's would likely change the outlook to stable if there were
signs that growth in the medium term is strengthening. Stronger
growth would in turn be supportive of rebuilding fiscal buffers and bolstering
foreign exchange reserves which would enhance Namibia's capacity
to absorb shocks. Even in a context of subdued growth, indications
that fiscal consolidation will stabilize and eventually lower the debt
burden would also support the rating.
Conversely, indications that Namibia's liquidity risks increase,
as its capacity to source financing for its very large funding needs at
moderate costs erodes, would likely lead to a downgrade.
Moreover, an increasing likelihood that the debt burden will continue
to rise markedly faster and higher than Moody's projects would also
exert negative pressure on the rating.
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.
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: 44 20 7772 5456
Client Service: 44 20 7772 5454
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
