Namibia's Junk Status Remains
News - National | 2018-08-16
Page no: 1
by Charmaine Ngatjiheue
Photo: racyja.com
THERE is doubt that Namibia would regain a positive investment grading, following Fitch Ratings maintaining the country's rating at junk status.
Analysts said this is because the economy is still faced with hardships, from both the domestic and global front.
In November last year, the ratings agency downgraded the country's credit rating from BBB- to BB+.
Fitch maintained the current rating because it took into consideration the government's commitment to stabilising the debt and fiscal reforms, while the domestic economy is showing signs of a modest recovery.
“They also reflect the challenges to fiscal consolidation in a difficult economic and social environment,” a statement said yesterday.
Fitch noted that the modest economic recovery in 2018 projected at 0,6%, compared to a contraction of 0,8% in 2017, also played an essential part in avoiding a further downgrade.
Meanwhile, the high wage bill, as well as transfers to public enterprises, remain major challenges for the country to regain a positive outlook.
Fitch predicted that the central government's deficit would exceed budget projections, narrowing from 5,1% of GDP in the 2017 fiscal year (ended March) to 4,9% of GDP in 2018, and further to 4,1% in 2019 against a target of 2,3%.
Furthermore, the agency regarded Namibia's long-standing political stability as a major credit strength. However, the upcoming land conference, as well as the revised New Equitable Economic Empowerment Framework could create some policy reservations.
CONFIDENCE LEVELS
Economic Association of Namibia's research associate Klaus Schade agreed that the current review maintains the 2017 rating, and thus remains one notch below the investment grade of BBB-.
“Earlier in May and July, Fitch affirmed the ratings for the Development Bank of Namibia at BB+ with a stable outlook as well as the rating for NamWater respectively. In general, institutions cannot be rated better than the overall country rating,” he said.
Schade stressed that there are no quick-fix solutions, and it usually takes countries a couple of years to regain an investment grade.
“However, to regain an investment grading, the government should address the high wage bill, which prevents it from investing in necessary infrastructure, ranging from transport to water, which can attract domestic and foreign private sector investment.
“Investment in infrastructure will create short-term jobs in the construction sector and afterwards jobs in the private sector, owing to additional investment.
“Additional business activities will increase tax revenue from individuals and corporate income tax, and thus support the government's efforts to reduce the budget deficit and public debts. As argued earlier, a thorough review of all government structures, not only OMAs (offices/ministries/agencies) with the aim to develop a leaner, more efficient public sector should be the starting point,” he continued.
Weighing in on the topic, PSG Namibia head of research Eloise du Plessis noted that Fitch said future developments which could result in a positive rating action include lower government and external debt-to-GDP ratios, a narrower current account deficit, and stronger-than-expected medium-term growth.
“We expect that a positive rating action from either Fitch or Moody's is unlikely in the coming 12 months and that risks to the sovereign credit rating are skewed to the downside.
“Although growth is expected to recover over the medium-term, it will be hampered by fiscal consolidation, structural problems such as high unemployment, a large skills shortage, a lack of investment in value-added sectors, as well as the ongoing global trade frictions,” she stressed.
Although demand for imports weakened significantly due to the economic downturn, oil prices are expected to increase further, and the domestic currency has weakened, which will place pressure on the import bill and inflation.
“Furthermore, the South African economy's expected meagre growth will weigh on Southern African Customs Union revenues, and new multilateral loans to boost infrastructure spending and support the government budget will put pressure on the debt-to-GDP ratios,” Du Plessis added.
Economics lecturer at the University of Namibia, Omu Kakujaha-Matundu, said it is a good thing that Fitch did not further downgrade the country, but instead kept it at sub-investment grade.
“This is also good news for investors and lenders, and it shows that the economy might improve. But there is no way that the country will regain an investment grade anytime soon because the economy still faces hardships. The Bank of Namibia had earlier in the year said economic growth would average 1,6%, but now they have had to revise down their outlook,” he observed.
He said one other way for the country to be at investment grade is to reduce expenditure, and cut out corruption, to get an improved rating.
– charmaine@namibian.com.na
Page no: 1
by Charmaine Ngatjiheue
Photo: racyja.com
THERE is doubt that Namibia would regain a positive investment grading, following Fitch Ratings maintaining the country's rating at junk status.
Analysts said this is because the economy is still faced with hardships, from both the domestic and global front.
In November last year, the ratings agency downgraded the country's credit rating from BBB- to BB+.
Fitch maintained the current rating because it took into consideration the government's commitment to stabilising the debt and fiscal reforms, while the domestic economy is showing signs of a modest recovery.
“They also reflect the challenges to fiscal consolidation in a difficult economic and social environment,” a statement said yesterday.
Fitch noted that the modest economic recovery in 2018 projected at 0,6%, compared to a contraction of 0,8% in 2017, also played an essential part in avoiding a further downgrade.
Meanwhile, the high wage bill, as well as transfers to public enterprises, remain major challenges for the country to regain a positive outlook.
Fitch predicted that the central government's deficit would exceed budget projections, narrowing from 5,1% of GDP in the 2017 fiscal year (ended March) to 4,9% of GDP in 2018, and further to 4,1% in 2019 against a target of 2,3%.
Furthermore, the agency regarded Namibia's long-standing political stability as a major credit strength. However, the upcoming land conference, as well as the revised New Equitable Economic Empowerment Framework could create some policy reservations.
CONFIDENCE LEVELS
Economic Association of Namibia's research associate Klaus Schade agreed that the current review maintains the 2017 rating, and thus remains one notch below the investment grade of BBB-.
“Earlier in May and July, Fitch affirmed the ratings for the Development Bank of Namibia at BB+ with a stable outlook as well as the rating for NamWater respectively. In general, institutions cannot be rated better than the overall country rating,” he said.
Schade stressed that there are no quick-fix solutions, and it usually takes countries a couple of years to regain an investment grade.
“However, to regain an investment grading, the government should address the high wage bill, which prevents it from investing in necessary infrastructure, ranging from transport to water, which can attract domestic and foreign private sector investment.
“Investment in infrastructure will create short-term jobs in the construction sector and afterwards jobs in the private sector, owing to additional investment.
“Additional business activities will increase tax revenue from individuals and corporate income tax, and thus support the government's efforts to reduce the budget deficit and public debts. As argued earlier, a thorough review of all government structures, not only OMAs (offices/ministries/agencies) with the aim to develop a leaner, more efficient public sector should be the starting point,” he continued.
Weighing in on the topic, PSG Namibia head of research Eloise du Plessis noted that Fitch said future developments which could result in a positive rating action include lower government and external debt-to-GDP ratios, a narrower current account deficit, and stronger-than-expected medium-term growth.
“We expect that a positive rating action from either Fitch or Moody's is unlikely in the coming 12 months and that risks to the sovereign credit rating are skewed to the downside.
“Although growth is expected to recover over the medium-term, it will be hampered by fiscal consolidation, structural problems such as high unemployment, a large skills shortage, a lack of investment in value-added sectors, as well as the ongoing global trade frictions,” she stressed.
Although demand for imports weakened significantly due to the economic downturn, oil prices are expected to increase further, and the domestic currency has weakened, which will place pressure on the import bill and inflation.
“Furthermore, the South African economy's expected meagre growth will weigh on Southern African Customs Union revenues, and new multilateral loans to boost infrastructure spending and support the government budget will put pressure on the debt-to-GDP ratios,” Du Plessis added.
Economics lecturer at the University of Namibia, Omu Kakujaha-Matundu, said it is a good thing that Fitch did not further downgrade the country, but instead kept it at sub-investment grade.
“This is also good news for investors and lenders, and it shows that the economy might improve. But there is no way that the country will regain an investment grade anytime soon because the economy still faces hardships. The Bank of Namibia had earlier in the year said economic growth would average 1,6%, but now they have had to revise down their outlook,” he observed.
He said one other way for the country to be at investment grade is to reduce expenditure, and cut out corruption, to get an improved rating.
– charmaine@namibian.com.na
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