Fitch Ratings-Hong Kong-13 August 2018: Fitch Ratings has affirmed Namibia's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'BB+' with a Stable Outlook.
A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS
Namibia's 'BB+' rating is weighed down by weak medium-term growth prospects and wide budget and external deficits relative to rating peers. This is balanced against public and net external debt ratios below the current 'BB' median and relatively strong governance indicators. The affirmation and Stable Outlook take into consideration the government's stated commitment to stabilising debt and undertaking fiscal reforms, as well as signs of a modest economic recovery. They also reflect the challenges to fiscal consolidation in a difficult economic and social environment.
GDP contracted by 0.8% in 2017 and the economy will recover only modestly in 2018, driven by the pick-up in mining and other tradable sectors, amid subdued domestic demand. We have revised our growth projections down and now expect GDP will rise by 0.6% in 2018 (previously 2%) and 1.8% in 2019 (previously 3%), due to a deeper than expected contraction in domestic demand in 2017, renewed delays in the ramping-up of the Husab uranium mega-mine production to full capacity and low rainfall at the start of the current season. The economy's susceptibility to external risks and weather hazards is compounded by the lack of fiscal space to cushion exogenous shocks while monetary policy is constrained by the exchange rate peg. Moreover, medium-term growth prospects are constrained by structural bottlenecks, including low education outcomes and a business climate that is somewhat weaker than rating peers.
Against this backdrop, fiscal consolidation is advancing only slowly as the government strives to protect economic growth amid pressures to tackle high inequality and unemployment. The authorities are attempting to enhance revenue collection and curb non-priority recurrent outlays. They foresee cumulative savings of 0.5% of GDP over two years by improving the efficiency of health spending and a reduction of personnel costs through hiring restraint and incomplete adjustment of salaries to inflation. Containing the high government wage bill of 16.4% of GDP is a major hurdle for consolidation efforts given the importance of the public sector for the economy. Addressing transfers to state-owned enterprises (SOEs) of around NAD5 billion (2.7% of GDP) per year requires broad reforms that are yet to come.
Fitch forecasts the central government (CG) deficit will overshoot budget projections, narrowing from 5.1% of GDP (on a cash basis) in fiscal year 2017 (FY17, year to end-March 2017) to 4.9% in FY18, and further to 4.1% in FY20, against an official target of 2.3%. Fitch projects that current spending/GDP will decline, albeit at a slower pace than assumed by the authorities, while domestic tax revenues will rise as growth slowly recovers and recently announced tax measures are implemented. This will offset a fall in transfers from the South African Customs Union (SACU) reflecting lacklustre regional growth and overpayment in FY17 as well as a gradual rise in capital spending/GDP (including foreign-financed outlays).
The fiscal consolidation measures set forth by the government will not be sufficient to achieve the official goal of stabilising and eventually reducing public debt/GDP, in Fitch's view. Fitch projects CG debt to remain on an upward trajectory, rising to 51% of GDP in FY20 from 43.4% in FY17.
The government's plan to "leverage the assets" of some profitable SOEs and increase their involvement in the execution of public investment could weaken transparency and undermine the balance sheets of the affected enterprises. The high debt of SOEs presents a significant contingent liability for the sovereign, with a stock of 25% of GDP at end-FY17, of which 7.5% of GDP is government guaranteed. Some loss-making SOEs, notably in the transport sector, could require re-structuring supported by the sovereign. The expected liquidations of the troubled SME bank and Road Contractor Company are still pending judicial approval but will generate only modest costs for the budget. A capital injection of around 0.3% of GDP is also expected at the public Agribank.
The Public Enterprise Governance Act Amendment bill will streamline the institutional framework of SOEs. Its approval in parliament is likely in 2018. The partial privatisation and listing on the domestic stock exchange of MTC, the telecoms operator, is expected in the coming months. Additional privatisations of major government-owned assets seem unlikely in the medium term.
Short-term refinancing risks are moderate but could intensify from 2020 should the budget deficit remain wide, as substantial amounts of market debt reach maturity. Nearly two-thirds of public debt is held domestically by a captive investor base and liquidity has been bolstered by the rise in the regulatory domestic asset requirement for institutional investors from 35% to 45% of total assets. Rollover risks arise from the upsurge in the stock of short-term treasury bills at 12% of GDP in June 2018, double its level five years earlier, reflecting a low market appetite for long-term government notes.
The current account deficit shrunk to 3.3% of GDP in 2017 from 15.7% in 2016, due to higher SACU transfers and import compression. We project it to widen to 5.2% of GDP in 2020 due to the rise in the cost of energy imports, a modest recovery in domestic demand and a fall in SACU receipts. Net external debt turned to a debtor position in 2016 and will rise to 14.6% of GDP in 2020, under our baseline. Although inflation is hovering well below its long-term average of around 6%, we expect the Bank of Namibia (BoN) will maintain higher policy rates than the South African Reserve Bank to forestall capital outflows and protect international reserves which we nonetheless forecast to fall to 3.2 months of current account payments in 2020 from 4.4 months in 2017.
Policy uncertainty has somewhat eased following the November 2017 congress of the governing South West African People's Organization (SWAPO), in line with our expectations. The party elections were won by the incumbent president's slate and were followed by a minor government reshuffle. We do not expect the 2019 presidential elections to lead to a significant shift in policies given SWAPO's dominant position in the political landscape. Namibia's governance indicators are a major credit strength, at well above the 'BB' median, reflecting long-standing political stability and a robust institutional framework.
The government has retracted the controversial provision of the National Economic Equitable Empowerment (NEEE) draft bill that required a 25% stake in the capital of private companies to be reserved for "previously disadvantaged persons". We expect a revised NEEE draft bill to be submitted to parliament ahead of the 2019 presidential election. A land reform conference is scheduled to be held in October 2018, and might lead to some policy uncertainty amid calls for expropriation without compensation, a measure that is opposed by the government. These demands and the withdrawn controversial provisions of the NEEE draft bill illustrate the lingering policy risks resulting from Namibia's high inequality.
The weak macroeconomic environment has reduced the profitability of the banking sector and caused an uptick in the ratio of non-performing loans to a still low level of 2.9% in March 2018 from 1.5% in 2016. The strong interconnectedness of banking and non-banking financial institutions is a source of liquidity risk amid high bank dependence on wholesale funding from the latter. The financial system is exposed to the domestic housing market (with housing prices falling modestly since the end of 2017) against the background of high household debt (at 83% of disposable income in 2017) as well as to regional and international equity prices. These risks are mitigated by the banking sector's adequate capitalisation levels based on the BoN's and IMF's stress tests.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Namibia a score equivalent to a rating of 'BB+' on the Long-Term Foreign-Currency (LT FC) IDR scale.
Fitch's sovereign rating committee did not adjust the output from the SRM to arrive at the final LT FC IDR.
Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three-year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM.
RATING SENSITIVITIES
Future developments that could result in positive rating action include:
-The government debt-to-GDP ratio firmly placed on a downward trajectory
-Marked improvement in the current account balance consistent with a stabilisation of external-debt-to GDP ratios
-Stronger medium-term growth resulting from better prospects for the mining sector or implementation of structural reforms
Future developments that could result in negative rating action include:
-Deterioration in debt dynamics beyond our current forecasts
-Wider-than-expected external deficits or emergence of external funding pressures
-Lower-than-forecast economic growth, for example due to an aggravation of policy uncertainty or weaker mining activity
KEY ASSUMPTIONS
We expect global economic trends and commodity prices to develop as outlined in Fitch's Global Economic Outlook.
The full list of rating actions is as follows:
Long-Term Foreign-Currency IDR affirmed at 'BB+'; Outlook Stable
Long-Term Local-Currency IDR affirmed at 'BB+'; Outlook Stable
Short-Term Foreign-Currency IDR affirmed at 'B'
Short-Term Local-Currency IDR affirmed at 'B'
Country Ceiling affirmed at 'BBB-'
Issue ratings on long-term senior unsecured foreign-currency bonds affirmed at 'BB+'
Issue ratings on long-term senior unsecured local-currency bonds affirmed at 'BB+'
Namibia's National Long-Term Rating on the South African scale affirmed at 'AA+ (zaf)'; Outlook Stable
Issue ratings on Namibia's bonds with a National rating affirmed at ' AA+(zaf)'
