Fitch Ratings has affirmed Namibia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively. The Outlooks are Stable. The issue ratings on Namibia's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-' and 'BBB', respectively. The Country Ceiling has been affirmed at 'A-' and the Short-term foreign currency IDR at 'F3'. Fitch has also affirmed the National rating on the South African scale at 'AA-(zaf)' with a Stable Outlook.
KEY RATING DRIVERS
The affirmation and Stable Outlooks reflects the following key rating drivers:
Namibia continues to post solid GDP growth (averaging 5.2% in 2010-14), far exceeding the 'BBB' and 'BB' medians. Although weaker commodity prices affected the mining and manufacturing sectors in 2H14, overall economic performance in 2014 was boosted by strong domestic demand growth, including high public and private investment. Fitch expects economic activity to gather momentum in 2015-16, helped by a projected increase in uranium and gold output, as well as a positive performance in the construction and retail sectors.
Namibia had a smooth political transition following general elections in November 2014, after President Pohamba stood down after serving two terms in office, in line with the constitution. This has reinforced perceptions of a functioning democracy with relatively strong institutions in the regional context. The ruling South West Africa People's Organization (SWAPO) retained the presidency and won an even larger congressional majority than in the last legislative term, assuring policy continuity. The new government wants to prioritise job creation, infrastructure development and increase spending in key social areas, such as education.
Fitch estimates Namibia's budget deficit to have widened slightly in the fiscal year 2014/15 (FY15, from April 2014 to May 2015), to 3.9% of GDP, as expenditure picked up in line with higher wages and transfer outlays. However, the deficit was below the 5.2% of GDP expected in the revised FY15 budget, reflecting both under-spending on capital projects and higher revenue growth, which was boosted by strong non-tax revenue income. Total revenue reached an estimated record of 35.5% of GDP, partly due to improvements in tax collection.
The 2015/16 budget maintains an expansionary bias, in line with the new government's development priorities. The deficit is projected at 5.3% of GDP, but given ongoing challenges in capex implementation Fitch expects the deficit to stabilise around 4% in FY16. The government currently forecasts mild fiscal consolidation to begin in FY17, mainly by halting current expenditure growth. Meeting these targets will be important to stabilise debt ratios and avoid negative rating pressure.
Gross public debt fell slightly in GDP terms, to 22.9% at end-2014, and is well below the 'BBB' median of 42.3%. However, debt reduction in 2014 was largely due to the use of cash balances, with government deposits falling to only 2.2% of GDP in 2014, from 5.6% in 2013. The government plans to stop using cash balances to finance the deficit, instead relying on more debt (primarily on the domestic market). Consequently, Fitch expects public sector debt to rise to close to 30% by end-2016, broadly in line with government projections.
Public guarantees for state-owned companies are also projected to rise over the medium term (from 5.1% of GDP in 2014), but Fitch expects these to remain below the official target of 10% of GDP, as some of the planned infrastructure projects are delayed or fail to materialise.
Namibia's current account deficit (CAD) widened in 2014 to an estimated 6.7% of GDP, as import growth gathered pace on the back of strong domestic demand. Lower oil prices will have a limited impact on the CAD in 2015, as demand for capital imports to complete large mining projects remains high. The gradual coming on-stream of the Husab uranium mine (the second-largest uranium mine in the world) from 2016 is expected to help narrow the CAD over the medium term.
Although foreign direct investment and other capital inflows remain robust, strong import growth and high net government payments abroad led to foreign exchange reserves declining to only 1.6 months of import cover at end-2014, from 2.2 months at end-2013. However, FX reserves still amount to over 3x narrow money and are set to increase gradually. Moreover, large external assets mean that Namibia maintains a comfortable net international position surplus.
Namibia's ratings also reflect the country's sound banking system, which is well capitalised and profitable banks, with a low ratio of non-performing loans (1.5% in 1Q15). However, there has been limited progress in tackling social problems, including extreme division of wealth, low development indicators and persistently high unemployment.
RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the rating are currently balanced. The main risk factors that, individually or collectively, could trigger a rating action are:
Negative:
- Fiscal slippage that leads to a material rise in the public debt to GDP ratio.
- Decline in foreign exchange reserves or a steep increase in net external debt ratios.
- Weaker growth prospects, for example related to significant delays in key mining projects.
Positive:
- Income convergence towards 'BBB' peers in the context of macroeconomic stability.
- Marked improvement in the fiscal and external balances.
- Improvement in the business environment and successful developments of new economic sectors that would reduce dependency on commodities and boost employment.
KEY ASSUMPTIONS
Fitch assumes that there will be no major revision to the Southern African Customs Union (SACU) revenue-sharing formula that could lead to a sharp reduction in SACU revenues to Namibia.
Fitch assumes that the currency peg agreement with South Africa will remain in place and the government will pursue prudent macroeconomic policies consistent with it.
Global assumptions are consistent with Fitch's 'Global Economic Outlook', including the subdued outlook for commodity prices.
