Nam stuck on junk heap

Fitch Ratings on Friday affirmed government’s debt in foreign currencies, excluding the rand, at two notches below investment status.

The global rating agency, one of the top three in the world, affirmed Namibia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB-' with a Stable Outlook.

According to Fitch, a BB rating means an “elevated vulnerability to default risk”.

Moody’s, also one of the top three credit ratings agencies in the world, rates Namibia’s IDR at B1, meaning government’s debt in foreign currency falls in a “highly speculative” bracket.

Namibia was first rated as junk by Moody’s and Fitch in 2017. Namibia has had four sub-investment downgrades by the agencies.

Stable outlook

Affirming Namibia’s stable outlook, Fitch on Friday said the outlook was supported by the country’s strong governance indicators and institutional framework, and fiscal financing flexibility supported by the large non-banking financial sector (NBFS).

“This is balanced against elevated fiscal deficits, rigid fiscal structure, high government debt levels, and moderate medium-term growth prospects.

“The stable outlook reflects Fitch's view that the government's fiscal consolidation efforts will limit the rise in government debt and lead to its stabilisation over the medium term,” it said.

Debt

Fitch estimates general government debt rose to 69.8% of gross domestic product (GDP) at end of the fiscal year 2022/23 from 56% of GDP at end of the 2019/20 financial year, well above the estimated 'BB' median of 55.6% of GDP.

Fitch said the elevated debt level is a result of the pandemic-related economic contraction and fiscal response.

“Fitch forecasts that the rigid fiscal structure, rising interest costs, and increasing social spending will lead to a rise in government debt to 72% of GDP by FY24/25 before stabilising around this level over the medium term,” it said.

Namibia's financing flexibility is supported by a well-developed NBFS with assets of over 150% of GDP, regulatory requirements on domestic asset allocation and access to the South African financial market, the rating agency said.

“Gross borrowing requirements have been large at 20-30% of GDP since FY20/21 and will spike again in 2025 with the US$750 million Eurobond coming due in October.

“The government plans to replenish its sinking funds over the next two years to redeem a portion of the maturing Eurobond and roll over the reminder through international market issuance,” Fitch added.

Deficit

Fitch estimates the fiscal deficit narrowed to 5.3% of GDP in the fiscal year ended March 2023, from 8.1% of GDP in FY21/22, thanks to stronger-than-expected revenue collection and contained spending bill.

The agency expects the general government fiscal deficit to further improve to 4.5% of GDP in FY23/24 as Southern Africa Customs Union (Sacu) receipts are projected to increase by 72% year-on-year (y/y). This will be partly offset by higher social spending and debt servicing cost, it said.

According to Fitch, fiscal risks stem from higher-than-budgeted transfers to state-owned enterprises (SOEs), although these have declined y/y in FY23/24, and spending pressure due to higher cost of living and the general election scheduled in 2024.

“The incumbent party remains the dominant political force, but faces increasing challenges from other smaller parties,” Fitch said.

Consolidation

Fitch expects fiscal deficits to remain at elevated levels of above 4% of GDP in the medium term amid gradual fiscal consolidation.

“The FY23/24 budget did not outline any meaningful revenue mobilisation measures except for the ongoing efforts to improve tax administration, and proposed small tax cuts effective in FY24/25 and FY25/26.”

Government remains committed to fiscal consolidation, as demonstrated by a four-year public-sector wage freeze before a below-inflation adjustment in FY22/23, Fitch said.

“However, further consolidation will be challenging in the context of rigid fiscal structure, low growth, high living cost and high inequality,” it added.