Namibia and DRC Gets Contrasting Fitch Ratings

Windhoek – Namibia and the Democratic Republic of Congo (DRC) received contrasting ratings getting a ‘BBB’ Outlook Stable and a ‘B’ Outlook Negative respectively, ratings released by Fitch Ratings this week shows.

Namibia’s rating of BBB – stable is equal to the ratings given to South Africa, while Botswana received the A+ stable from S&P and a A2 stable rating from Moody’s rating agencies. Fitch rating did not rate Botswana, but rated Zambia whom it rated at B negative and Angola at B+ stable.

The key drivers for Namibia’s ratings are that the country balances strong and sustained levels of economic growth, a relatively low public debt load and a high level of political stability, against large fiscal and external deficits.

Fitch Ratings also noted that Namibia has a sizeable general government deficit, which Fitch estimates at 6 percent of GDP in fiscal year 2015/16, similar to the 6.1 percent shortfall in 2014.

The favourable ratings for Namibia were also helped by the fact that in February 2016, the government announced plans to tighten fiscal policy to reduce the budget deficit to 3 percent of GDP over the medium term, in line with the International Monetary Fund recommendations.

The consolidation will involve a reduction in expenditure by around 8 percentage points of GDP by 2018, focussed on reducing expenditure on materials and supplies, subsidised travel, overtime, equipment and some capital spending.

Fitch Ratings however states that the fiscal consolidation will be challenging in the context of an expected fall in revenues from the Southern African Customs Union (SACU), which is expected to fall from around 10 percent GDP in 2015 to under 7 percent by in 2018.

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The international rating agency also expects the deficit to narrow to 4.9 percent of GDP in 2016 and 4.0 percent in 2017, somewhat higher than the government’s targets.

The Institute for Public Policy Research (IPPR) associate researcher, Klaus Schade said all is not well expressing his concerns that currently the country’s foreign reserves are not doing that well.

The international benchmark for foreign exchange reserves is three-month import cover; the Southern Africa Development Community (SADC) benchmark is six-month import cover. This means a country should be in a position to pay the import bill for at least three months even if there is no inflow of foreign exchange.

“Namibia’s foreign exchange reserves are below these benchmarks, which could result in a downgrading in the rating of agencies such as Moody’s and Fitch. A lower rating could result in increasing borrowing costs on international markets,” said Schade.

For now Namibia is still able to honour her foreign loan obligations and to pay the import bill.

But Schade noted that low commodity prices combined with low commodity demand and lower than expected transfers from SACU Common Revenue Pool imply that foreign exchange reserves are not likely to recover soon.

“We therefore need to find effective ways to reduce unproductive imports and prioritise the importation of goods that can stimulate exports.

“Furthermore, the involvement of more Namibian companies, which have a proven track record and the capacity to deliver, in infrastructure projects will contribute to keeping more financial resources in the country instead of profits being repatriated by foreign companies,” he said.

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BoN’s Director of Strategic Communications and Financial Sector Development, Ndangi Katoma said the country’s economy is doing well as highlighted by the Fitch ratings of BBB. He said this shows that Namibia has maintained its international ratings and remains amongst the top three countries in Africa in terms of investment climate and other factors.

“This also implies that the economy is generally doing well in comparison to its peers and therefore has access to international financial markets for funds should that be required.

“This means that, for as long as Namibia has access to both domestic and international capital markets, it would not be accurate to state that Namibia is facing financial distress. In addition, Namibia’s foreign reserve levels are still sufficient to enable her to fulfil her foreign payment obligations,” he said.

DRC ‘B’ Outlook Negative

Fitch Ratings has downgraded the Democratic Republic of Congo’s long-term foreign and local currency Issuer Default Ratings (IDR) to ‘B’ from ‘B+’. The Outlooks are Negative.

The issue ratings on the country’ senior unsecured foreign currency bonds have also been downgraded to ‘B’ from ‘B+’. The Country Ceiling has been affirmed at ‘BBB-’ and the Short-term foreign currency IDR at ‘B’.

The downgrade of the Republic of Congo’s IDRs reflects the depleting sovereign and external assets due to a rapid deterioration in fiscal accounts resulting from the sharp fall in oil prices since 2014 and the lack of a policy response.

The Negative Outlook reflects uncertainties around the financing options for the budget deficit in the context of a high-spending 2016 budget.