Despite downgrade, Nam’s indicators look up

> Magreth Nunuhe

WINDHOEK-NAMIBIA is among countries in Sub-Sahara Africa whose creditworthiness has been downgraded by global rating agency – Moody’s Investors Services.

Moody said in its outlook report 2017 titled ‘Sovereigns – Sub-Saharan Africa: Negative Outlook amid Liquidity Stress, Low Growth, Political Risk’, that the downgrade reflects the liquidity stress facing commodity-dependent countries, subdued economic growth, and persistent political risk.

“We changed the outlook of Namibia (Baa3 Negative) to negative from stable to reflect the risks of fiscal slippage, rising government debt levels and servicing costs,” the rating agency said in a January 9, 2017, report.

Namibia is currently battling a liquidity crisis, which has forced the treasury to slush the 2015/16 budget. Moody expects the negative outlook for sovereign creditworthiness in Sub-Saharan Africa to prevail for over the next 12-18 months.

“Sub-Saharan Africa’s economies will continue to face commodity-induced liquidity stress in 2017, with recurring fiscal deficits amid challenging financing conditions,” Lucie Villa, a Moody’s Vice-President observed.  “These will remain important credit constraints and underpin our negative outlook for Sub-Saharan Africa sovereigns overall.”

Future is Bright

Despite Moody’s negative verdict on Namibia, analysts are optimistic that the local economy will do well this year with sectors like manufacturing and mining projected to pick up momentum, while tourism could be the driver of the economy.

Stockbrokerage and investment firm, Simonis Storm Securities, is of the view that the economic status quo will not prevail as the large sectors will perform this year and improve on tax collection.

The firm is convinced that government spending cuts will reduce the budget deficit to below 5 percent of GDP at current levels.

“We expect tourism and mining to be the sectors that will perform the best in 2017. Since a large part of manufacturing activity comes from the mining sector through diamond polishing, we expect this sector to also pick up,” Purvance Heuer, Simonis Storm Director of Research and Securities predicted.

“At the same time we expect the Swakop Uranium Husab Mine to go into production. That will add significantly to GDP this year. With higher commodity prices, we also see gold mining, zinc mining production to pick up in 2017.”

Klaus Schade, an economic policy analyst shared Simoni Storms’ sentiments, saying that diamond mining is likely to increase with the commissioning of the R2.3 billion new deep water diamond exploration and sampling vessel.

The commissioning of SS Nujoma exploration vessel by De Beers is scheduled to take place in Namibian waters in the first half of 2017.

“If more diamonds are supplied to the domestic market at reasonable prices, then we can expect an increase in diamond cutting and polishing activities. The low uranium prices suggest that uranium production will remain under pressure and that the Husab Mine will not operate at full production capacity,” said Schade.

Namene Kalili, the market research manager at First National Bank of Namibia, is more cautious about the predictions, saying that it will take some time for business confidence to inflect upwards as most sectors underperform.

“We, however, are slightly more optimistic about growth in 2017 (2.6 percent) which is expected to be marginally higher than in 2016 (1.3 percent). This is mainly on the back of improvements in the mining sector with a few more mines coming online,” he maintained.

The recent good rains across the country suggest that the agricultural sector will perform better this year than over the past two years when it contracted.

Also the improved grazing conditions could result in farmers restocking their herds, which could impact negatively on the meat processing sector with fewer cattle sold to abattoirs, Schade noted.

The agricultural sector will take a number of years to recover after years of destocking, Kalili noted.

“Hydrologically, it will take a number of rainy seasons to refill the dams and aquifers, with further need for increased water storage infrastructure to cope with the growing water demand. Hence robust investment into the water sectors is a must, which will undoubtedly increase productive capacities in the medium term,” he said.

Crippling Budget Cuts

The Namibian government has drastically cut on its spending during 2016, which has had immense effect on many industries that contribute significantly to the country’s GDP, such as construction, manufacturing and the mining sector.

There are fears that should the current economic situation prevail, it could deteriorate unless government and the private sector make a concerted effort to mitigate the negative impacts in 2017.

Heuer noted that developmental spending on capital projects decreased substantially as a percentage of overall spending to below 20 percent, while debt grew significantly in the last two years as government debt increased by 417 percent over the last six years.

“We believe that businesses reliant on government as a customer are now more exposed to short term financing as working capital becomes tighter,” said Heuer.

In addition, unsecured lending started increasing in late 2016.

However, he does not expect to see significant changes on the public wage bill over the medium term in 2017, he said.

Figures provided by Simonis Storm indicate that the public wage bill as a percentage of total spending steadied around 42 percent in 2015 and just above 36 percent in 2016, while the operational budget spending as a percentage of the total budget increased significantly in 2015 as new Ministries and SOEs were introduced and the monthly old age grant allocation was increased from R400 to R1,000, which is expected to increase by R200 during the 2016/17 fiscal year.

On the other hand, Schade opined that the budget cuts were inevitable in order to improve the macro-economic and fiscal environment.

“Cutting wasteful expenditure, addressing S&T, overtime pay as well as a clearer prioritisation of programmes and projects will strengthen the economy. The budget cuts will, of course, have negative impacts in particular on the construction sector and hence on employment. Reduced economic activities will impact on government revenue,” he said.

Nonetheless, Kalili argued that the mid-term budget review cuts were not deep enough to narrow the deficit and therefore deeper cuts are necessary to avert a downgrade.

“This process, albeit painful, is necessary to safeguard long-term funding costs and maintain the current infrastructure development program,” he added.

Beyond that, the business climate and the weakening South African Rand continue to impact on Namibia’s economy as well.

Global Uncertainties

Schade maintained that global uncertainties surrounding the direction the Brexit negotiations could take and the (Donald) Trump presidency, as well as further interest rate hikes in the USA coupled with the current economic and political situation in South Africa are expected to result in exchange rate fluctuations.

The Namibia Dollar has appreciated slightly against the US Dollar and British Pound, but depreciated slightly against the Euro since the beginning of the year after a recovery by more than 13 percent against major currencies in 2016, according to Schade.

Kalili is convinced that the South African economy is firmly back on the recovery trail and expects the rand to be much firmer in 2017 amidst less political noise and hence contribute to a stable recovery platform.

Simonis Storms predicts that South Africa will hike the interest rates once in the first quarter of 2017, while Namibia is expected to increase its rates twice, that is, in the first quarter and the third quarter of this year.

“Overall we expect Namibian monetary policy to follow that of South Africa’s closely,” said Heuer.

Namibian and South African repo rates are currently at 7 percent.

Simonis Storm expects inflation to average around 6.8 percent for 2017, which is mainly on the back of higher fuel prices and continuous tariff hikes.

However, the First National Bank predicts inflation hovering around 7.3 percent with very few downside risks to inflation expectations.

“Higher pump prices along with rental adjusts in January, excise duties increase in March, electricity hikes in July and protectionist pricing policies (cereal, fruits, vegetable, pasta and poultry) are expected to keep inflation upwardly sticky in 2017,” said the bank.

Simonis Storm has forecasted GDP growth of 2.8 percent in 2017.

Heuer said that the private sector has been in a recession since 2012 if construction is excluded, which means that government spending and construction have been the main drivers of economic growth since 2009.

In fact, the private sector grew only in 2010 and 2012 after the great recession, according to him.

Bond yields have risen by 200bps on average across the yield curve since December 2014; supply of bonds in 2016 was higher than in 2015 as the Namibian government has had to fund more spending on the back of lower tax collections and a slowing economy.

“At the same time demand has decreased to below supply and even less was raised. We expect the yield curve to steepen in 2017 and yields to rise across maturities,” Heuer stressed.

Schade predicts the construction sector to experience a contraction because of government’s significant budget cuts, which will in turn impact on manufacturing activities that are linked to the construction sector, such as cement production and metal fabrication.

The decline in construction activities will also affect the transport sector negatively, he points out.

Kalili substantiated Schade’s claim saying that construction sector performance is expected to remain weak due to the completion of key projects and fiscal consolidation.

“Performance in the manufacturing sector will also struggle due to persistent high production costs and weak consumer demand. The mining sector is expected to buoy the economy in 2017 as new mines come online and as diamond prices recover relative to prices in 2016,” he                reckoned.

In an annual economic survey conducted by Simonis Storm Securities, respondents have however painted a gloomy picture of Namibia’s economic prospects with the majority saying that they expect slower economic growth, higher interest rates, increased inflation, lower Foreign Direct Investment (FDI), lower property prices, increased unemployment and higher rainfall in 2017.

The survey also indicated that respondents were most concerned about government policy and regulation, fiscal position, regional political instability, drought and unemployment.

January 2017
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