…Government clears itself from any wrong doing
By Mathias Haufiku
Fitch Ratings agency’s decision to revise Namibia’s outlook to negative from stable has validated what many Namibians have been trying to tell Government in recent months that the manner in which the country’s finances are being handled is unsustainable.
Although the revision does not automatically lead to a ratings downgrade, economists have warned that the revision must be an eye-opener to those managing the national purse.
Fitch Ratings has revised Namibia’s outlooks to negative from stable while affirming the Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘BBB-’. The issue ratings on Namibia’s senior unsecured foreign- and local-currency bonds are also affirmed at ‘BBB-’.
The economic turbulence that Namibia is currently battling is far from over, however, despite Treasury pulling all stops to assure the public, investors and businesses that Government has the situation under control and that a further ratings downgrade will not hit Namibia.
Finance minister Calle Schlettwein blamed the changed outlook on the decreased SACU revenue, slowdown in domestic revenue and the crash of oil prices, which impacted Namibia’s trading partner Angola severely.
“The deficit did not increase because of additional spending, but rather because of a shortfall of revenue that forced us to borrow more to fund the budget,” he explained.
His Cabinet colleague, economic planning minister Tom Alweendo, defended government saying the current economic situation of the country is not a result of wrong policies adopted in the past but rather because of a changing economic environment.
“The central message is that we find ourselves in a changed economic environment. The situation is not brought upon because the policies that were followed were wrong, but because times have changed,” he said, adding that cutting expenditure should not be done to the detriment of the economy.”
Despite these assurances, Namibia’s eyes will now have to look across the border to South Africa that has been on a ratings watch since the beginning of this calendar year and a potential downgrade in South Africa later in the year will have a negative impact on Namibia’s ratings as well.
A local economist has warned Government against focusing on creating a strong welfare system but rather to focus on industrialisation, which could propel the country to fast economic growth.
“The revision is a serious issue that should not be taken lightly. We must not become a welfare model country. Look at what happened to Brazil, they were downgraded to junk status because they wanted to solve their social problems with social grants and by developing huge welfare system. We must not follow the same path because it crowds out the production side,” warned Makalani Fund manager Salomo Hei during an interview this week.
Hei stressed the need to increase production by pursuing industrialisation and subsequently setting realistic targets.
“In Namibia we are talking of fiscal consolidation…we need to see this consolidation instead of it just being theory,” he lamented.
Hei also accused government of spending too much money on non-essential projects.
“The trade ministry is building new office, one cannot help but ask if they really need a new office in the current economic times?” he questioned.
“Spending on non-essentials is crippling the country because the money is not used to create permanent jobs and it is not pro-industrialisation. We must push for economic growth activities that will subsequently ensure job creation. This will give our people more purchasing power, which will translate to demand for goods and services,” he suggested.
Hei also underscored the need for government to ensure that tax revenues are collected optimally.
“If taxes are collected optimally Government will have money to spend on essentials. Chinese companies that continue to rake in millions from tenders must also be targeted to ensure that taxes due to government are collected,” he said.
He concluded that the upcoming mid-term budget review scheduled for next month should focus on enhancing tax collection and revisiting the country’s welfare system.
Meanwhile, Ernst & Young Namibia Executive Director Tax Friedel Janse van Rensburg said the new directive is aimed at ensuring that taxpayers comply with the country’s tax obligations and does so by determining whether tax filings and payments of taxpayers doing business with government are up to date.
“The challenge will be that Inland Revenue works with a manual system that is not always up to date and information is sometimes incorrectly captured. You might have paid your PAYE, which may have been captured as a VAT payment or a first provisional for the current year may have been captured as a top up for the previous year,” he noted.
He added: “This is why taxpayers should continuously check their tax records to ensure the records are accurate as Inland Revenue will not inform taxpayers of outstanding, late payments, penalties or interest.”
Van Rensburg however feels that now that the taxman can go after individuals in financial management and shareholders of companies and close corporations in terms of the recently introduced recovery provisions, it will no longer be as easy to simply close one company and open another to evade tax obligations.
“While the directive may put further pressure on business it will not in itself kill businesses provided that they ensure that they remain tax compliant,” he said.
Asked whether tax collection will not suffer as a result of the recent Fitch reclassification, he said: “Tax collection will definitely suffer in a faltering economy because businesses will not generate as much revenue like they used to. In a commodity driven market where the mining industry for instance suffers it will even be harder. Tax collection does not happen in a vacuum, therefore the economic environment needs to be conducive to ensure maximum tax collection.”
What Fitch really said…
The revision of outlook to negative reflects the following key rating drivers and their relative strength:
– Namibia’s budget deficit widened sharply to 8.3 percent of GDP in fiscal year 2015/16 (FY15, which runs from April 2015), well above the government’s 5 percent target and the worst on record. The deficit has worsened progressively from 0.1 percent in FY12 to 3.4 percent in FY13 and 6.4 percent in FY14, and is well above the ‘BBB’ category median of 2.7 percent.
The overshoot in the deficit in 2015 primarily reflected weaker-than-expected revenues from domestic sources, including company tax and lower-than-expected income tax. The government is targeting a narrowing of the deficit to 4.3 percent of GDP in FY16.
Outturns for the first few months of the current fiscal year indicate revenue has grown strongly. The Ministry of Finance is exerting greater control over expenditure at all ministries and is cutting overtime, travel and capital spending.
However, meeting deficit targets will prove challenging, particularly amid a secular decline in revenues from the Southern African Customs Union (SACU), which the government projects will fall under 7 percent of GDP by 2018 from 12.4 percent in 2014.
-Gross general government debt (GGGD) increased sharply to 38.2 percent of GDP at end-2015 from 23.2 percent at end-2014, albeit partly due to an increase in government deposits following the issue of a US$750 million Eurobond and exchange rate depreciation. Fitch forecasts GGGD to rise further to 39 percent of GDP at end-2016. It is now roughly in line with the peer median of 41 percent, having previously been a rating strength. We expect government guarantees to peak at 5.8 percent of GDP in FY16, below the government’s 10 percent limit.
Namibia’s current account deficit deteriorated to 14.1 percent of GDP in 2015, from 8.9 percent in 2013, and well above the ‘BBB’ category median of 1.3 percent. However, much of the deficit has been financed by external borrowing from parent mining companies, reducing external vulnerabilities
Fitch warned that future developments that could result in a downgrade include failure to narrow the fiscal deficit leading to continued rise in the government debt/GDP ratio; failure to narrow the current account deficit or significant drawdown in international reserves and deterioration in economic growth.
Future developments that could result in the outlook being revised to stable include narrowing of the budget deficit consistent with a stabilisation of the government debt/GDP ratio.