An economic expert has warned that the Fitch rating agency could follow in the footsteps of Moody’s with the downgrade of Namibia to junk status within the coming months. That is if the country does not put its house in order.
If that happens, Namibia faces the risk of losing investors. This means that certain international investors will have to pull their investments from Namibia or else they will be in breach of their portfolio mandates. It takes two rating agencies to make a country officially junk status for these rules to kick in.
Past trends have shown that rating agencies’ ratings follow similar trends. Namibia’s credit is currently rated by Moody’s and Fitch.
“You should consider the fact that all rating agencies make use of data presented by companies and countries, therefore you could safely assume that the data presented is more or less similar.
Therefore if Moody’s could pick up some anomalies based on the data presented, it is almost guaranteed that the other agencies will pick it up as well. So Namibia should not be surprised if it is downgraded to junk by Fitch in the near future,” warned the expert who preferred to remain anonymous.
Moody’s Investors Service downgraded Namibia on Friday August 11th of 2017. Namibia’s credit rating altered to ‘Ba1’ from ‘Baa3’ and maintained the negative outlook, citing the erosion of Namibia’s fiscal strength due to fiscal imbalances and an increasing debt burden; limited institutional capacity to manage shocks; and risk of renewed government liquidity pressures as the key drivers behind the two-notch downgrade. In general, a credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of a country thus having a big impact on the country’s borrowing costs.
The rating agency’s last two rating actions (December 2015 and December 2016) which affirmed the rating were based on the expectation of a policy response in the form of sustainable fiscal consolidation that would rely on reducing the deficit through expenditure cuts and changing the structure of outlays.
In the last two fiscal years, the country posted deficits that were sharply above the government’s original targets due to the absence of effective fiscal consolidation.
The deficit reduction in the current budget relies mostly on SACU revenue increases and hence is unlikely to be sustainable. Moreover, by raising the already high share of recurrent spending, especially wages, at the expense of infrastructure, the current budget will hinder medium-term growth and hence domestic revenues.
The lack of an effective policy response has led Moody’s to lower its assessment of the country’s institutional strength, one of the four major rating factors under its sovereign bond methodology.
Finance minister Calle Schlettwein was rather perturbed by the downgrade, saying little has changed from December 2016 to date, and could therefore not understand why the country was downgraded.
At a press briefing this week, Schlettwein said there is need for more deliberate actions to ensure private sector-led growth in the country.
The reasons that necessitated the downgrade, according to Moody’s, seem to point to the fact that Namibia’s reduction strategy is overly dependent on SACU income while little attention is paid to reducing expenditure. This effectively means that Namibia’s consolidation plan is incoherent, coupled with an inefficient policy response.
Although Schlettwein listed the recent increase of the country’s international reserves as one of the improvement indicators of the country, he admitted that the sudden increase was primarily a result of the loan from the African Development Bank. He further admitted that it is not sustainable.
Following Bank of Namibia’s (BoN) announcement on Wednesday that it has cut the repo rate by 25 basis points (0.25 per cent) to 6.75 per cent.Economic analyst at Capricorn Asset Management, Claudia Boamah welcomed the reduction but indicated that the monetary policy will have to be relaxed a little more to stimulate private demand and business activity.
“Most central banks in developed economies have turned dovish which tilts interest rate differentials in our favour and supports capital inflows. The outlook for global growth is quite positive which couldn’t have come at a better time in light of the recovery in the agricultural and mining industry. As usual there are a few factors that could thwart our growth prospects; on the international front we have to look out for rising protectionist sentiment and closer to home we will have to pay close attention to the political developments of our southern neighbor,” she said.
She added: “The dire condition of the domestic economy as evinced by: the recession, falling inflation, high unemployment and weak credit growth has long since necessitated rate cuts. However, the central bank also had to keep in mind the protection of the Namibian dollar’s link to the rand.
Fortunately, recent data on the level of our international reserves indicates that the peg can be sustained for almost half a year thanks to injections from the National Bank of Angola and the AfDB loan.”
Economic activity has slowed down significantly in the last year as can be concluded from weakness in credit growth; BON reports that the PSCE grew by 8.5% in the first half of this year compared to 12.5% during the same period in 2016.
Speaking at the second Monetary Policy announcement for 2017, BoN Deputy Governor Ebson Uanguta said the Bank decided to support domestic economic growth, while maintaining the one-to-one link between the Namibia Dollar and the South Africa Rand.
Uanguta said the domestic economy remained weak during the first six months of 2017.
“The performance was mainly reflected in the construction, manufacturing, wholesale and retail trade, as well as transport sectors,” he said.
He acknowledged that there were a few pockets of improvement in sectors such as mining, communications and livestock marketed during the same period that provided some stimulus to the real economy.
The BoN took into account Namibia’s inflation rate that averaged at seven per cent during the first six months of 2017, compared to 6.3 per cent during the same period last year.
A large part of the slowdown in inflation since the beginning of the year was attributed to lower food inflation, while growth in the private sector credit extension continued to slow down.
“The annual rate of PSCE (private sector credit extension) growth stood at 8.5 per cent on average during the review period, lower than the 12.5 per cent recorded over the same period in 2016.”
He said the slower growth in private sector credit extension was primarily due to the reduced growth in credit advanced to both the household and corporate sector, especially in the form of mortgage and instalment credit.
This means Namibians are buying less on credit and thinking twice about signing a mortgage.
He said the increase to Namibia’s international reserves is mainly due to the inflow of a loan from the African Development Bank, repayments by the National Bank of Angola and local financial institutions’ decisions to repatriate funds.
The repo rate is the cost at which the central bank lends money to commercial banks and an increase or decrease in that rate is most likely to affect the interest rate that commercial banks charge consumers.