Nam downgraded to ‘junk status’ . . . Government to limit its borrowing to the Rand

By Magreth Nunuhe

WINDHOEK – Namibia’s Minister of Finance, Calle Schlettwein, says that limiting government’s borrowing to the South African Rand will be a good approach if the country wants to improve the capacity of its domestic market and its currency, the Namibian dollar.   

Schlettwein hinted that the Namibian government could pursue that strategy by limiting its borrowing to the Rand.

“We have ventured into the South African market through issuing JSE (Johannesburg Stock Exchange) bonds for two consecutive years, which were quite successful. Others were very much over-subscribed,” said the Minister.

Over R1 trillion Namibian bonds are listed on the JSE, with the listing on the stock exchange bringing positive benefits, such as transparency (from an issuer disclosure perspective), more trade after listing and secure settlement, increased transparency of trading prices and improved regulation.

Namibian government also gains easy access to a wide range of intermediaries and end-investors through the network of JSE members and their clients.

Schlettwein made these remarks during a press conference in reaction to Moody’s, the international rating agency, which on 11 August 2017 downgraded Namibia to sub-investment category, also referred to as “junk status”.

Moody’s demoted the country’s long-term senior unsecured bond and issuer ratings to Ba1 from Baa3 with the key factors for downgrading being “erosion of Namibia’s fiscal strength due to sizeable fiscal imbalances and an increasing debt burden; limited institutional capacity to manage shocks and address long-term structural fiscal rigidities and the risk of renewed government liquidity pressures in the coming years.”

Namibia’s long-term local currency bond and bank deposit ceilings were lowered to A2 from A1. The long-term foreign currency bank deposit ceiling to Ba2 from Baa3, and the long-term foreign-currency bond ceiling to Baa2 from A3.

“While an upgrade in the near term is unlikely, we would stabilize the outlook on Namibia’s rating if the government demonstrated commitment to fiscal consolidation that would result in a marked slowdown and eventual reversal of debt accumulation. A structural improvement in the twin balances, a sustained easing of funding conditions in the domestic market and a permanent increase in foreign exchange reserves would be also positive,” Moody’s said.

South Africa was also downgraded to junk status by global ratings agency Standard & Poor’s (S&P) on 3 April 2017 – a first since 2000 – after a huge Cabinet reshuffle by President Jacob Zuma, in which Finance Minister Pravin Gordhan and his deputy Mcebisi Jonas were dismissed from their ministerial positions, among others.

Zuma also reshuffled 20 posts of 10 ministers and 10 deputy ministers to his national executive.

As a result, the long-term foreign currency sovereign credit rating on South Africa was lowered to ‘BB+’ from ‘BBB-’and the long-term local currency rating to ‘BBB-’ from ‘BBB’.

Since 1994, the South African government has been careful with the succession of the Finance Minister as it gave investors’ confidence, but that confidence was shaken in December 2015, when Zuma fired the respected Nhlanhla Nene as finance minister, replacing him with an unknown backbencher.

Moody’s further announced the downgrade of South Africa’s major banks in June 2017, following country’s sovereign rating downgrade and cited as reasons economic slowdown and weakening institutional strength.

The downgrades lower Namibia and South Africa’s creditworthiness and make financing harder and more expensive to source, while their ability and willingness to repay their debt will at best be viewed with suspicion and would dramatically increase the interest rate at which the two governments can borrow.

A non-investment grade also means a country has a higher risk of being unable to honour its debt commitments, which results in investors requiring higher compensation for the risk taken.

As a consequence, interest rates would also rise for the ordinary person, which may lead to increase in bad debts, insolvencies and even bankruptcies.

Investors may accordingly disinvest in such a country, because in many cases investors are prohibited from investing in countries with a junk status credit rating.

But the Namibian Finance Minister dismissed the “junk-status” rating for Namibia and was adamant that the domestic economic conditions do not warrant a downgrade at this point in time, given that the macroeconomic fundamentals have improved relative to 2016.

“This assessment and ratings action is mainly based on Moody’s interpretation of the impact of outstanding invoices amounting to N$2.1 billion which the Government has decided to fully pay in a fast-tracked manner by the end of August 2017,” said an unyielding Schlettwein.

“We consider the action to be narrowly focused, speculative, missing recent key fundamental developments in our economy and, indeed, not preceded by the usual stakeholder engagement to inform the ratings review,” he lashed out.

Government debt-to-GDP in Namibia averaged around 20.50 percent from 1993 until 2015.

For the most part of 2016, Namibia was in a slump when its budget deficit almost reached an all-time high of 9.1 percent of GDP and debt escalated to approximately 46 percent of GDP.

This was exacerbated by poor growth, descending from 5.7 percent in 2015 to 1.3 percent in 2016 as a result of a decrease in commodity prices and drought distressing large sections of the economy, including agriculture and construction.

Global rating agency Moody’s Investors Services downgraded many countries in Sub-Saharan Africa to negative at the beginning of 2017 and also changed the outlook of Namibia to Baa3 Negative from stable to reflect the risks of fiscal slippage, rising government debt levels and servicing costs.

In order to avoid credit rating jeopardy, Namibia forced Treasury to cut the 2015/2016 budget in order to maintain debt servicing costs, the current account and other macro-economic balances.

Schlettwein said there were no “quick fixes” in the adjustment process and the fiscal consolidation policy framework is geared towards aligning expenditure closer to revenue.

Expectations are that Namibian GDP growth will increase from an estimated 1.3 percent in 2016 to 2.5 percent in 2017 and 3.7 percent in 2018, driven by recovery in primary industries such as the mining sector, agricultural subsector as drought conditions subsides, sustained growth for the tertiary services sector and continued robust growth in the tourism sector.

“We collected 40 percent of total revenue this year. Our revenues show we are spending better than expected,” said the Finance Minister, adding that SACU revenue was very secure and they have collected N$4.7 billion per quarter this year, while improving on revenue by 10 percent to counter reliance on SACU.

“We are confident if we compare the situation as evaluated in December 2016. We have evidence that we are doing better. Our revenue reserves are better,” he added.

He assured that the economy was starting to show improvement “because of the consolidation path we took.”

“If we go into the market, sectors like tourism, agriculture and construction are doing well. Paying debt improved. Our economy has found its feet. It is important to follow through with what we have started. Since last year, we have been directly engaging with the private sector. The consultative process has been fruitful – one to wither the storm,” he pointed out.

August 2017
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