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Moody’s downgrades Namibia (again)
from FlyNamibia May 2022
On 5 April, the ratings agency Moody’s Investors Service (Moody’s) announced that it had downgraded the government of Namibia’s long-term issuer and senior unsecured ratings one notch from Ba3 to B1, with the outlook changed from negative to stable. This article seeks to answer why Moody’s took the decision, what the downgrade means, how it impacts us and what the government can do to improve its rating going forward.
Let us start with why Moody’s took the decision to downgrade Namibia. Ratings agencies like Moody’s regularly evaluate countries to judge financial strength and the ability to pay back debt. The downgrade to a B-rated level implies that the ratings agency considers an investment in government debt as speculative and subject to high credit risk, that is to say a higher likelihood that the government will not be able to pay back its debt.
Moody’s cited Namibia’s low economic growth and high debt burden as factors constraining the sovereign’s shock absorption capacity – something that was already a concernprior to the pandemic. Moody’s expects the country’s debt-to-GDP ratio to increase to 75% in 2025, from below 30% a mere decade ago. Moody’s made the argument that the country is unlikely to see a meaningful reversal in income per capita in the coming years, which will lead to higher social spending pressures for the government and “the risk of fiscal slippages.” Moody’s also believes that debt affordability will deteriorate further with interest/revenue expected to increase to almost 17% by 2024 from the pre-pandemic 11.9% level, which will weigh on the government’s overall fiscal strength.
Now, it should be noted that large deficits and high debt levels are not necessarily concerning in a global environment where most governments are in a similar situation. However, the debt maturity profile is heavily weighted to the short term with 33% or N$36.2 billion worth debt maturing by year end. Much of this debt is in treasury bills and should be comfortably rolled in the current environment where there is a lot of liquidity in the market, but the risk remains that the commercial banks will opt to rather lend out this money to private clients, since interest rates are increasing, rather than to invest it in government securities.
Secondly, the cost of debt remains high in Namibia and the rapidly increasing debt levels mean that the government will spend 15% of its revenue on debt servicing costs, almost double the amount that is allocated to the development budget. There are few productive assets to show for the over N$100 billion worth of debt that has been raised in the past eight years, and it is becoming increasingly difficult to argue that Namibia is not in the midst of a debt trap.
In his national budget speech earlier in the year, finance minister Iipumbu Shiimi made the point that “Government is committed to redirect much of the revenue increases in the coming years, as the economy recovers, towards debt redemption and reducing the borrowing requirement. At the same time, we recognise that the scope for further expenditure consolidation has thinned significantly, and we thus shift the policy focus towards entrenching sustainable economic growth.”
The first point regarding redirecting increases in revenue toward debt redemption and reducing the borrowing requirement was not reflected in the projected budget figures. Furthermore, in order to pay down debt, the government would need to be running a budget surplus and not a deficit. This is clearly not the case, and the projected deficits remain large over the medium term.
While the country might not feel an immediate impact of the downgrade, the lower rating will play a role once the time comes for the government to replace (or ‘roll’) its foreign debt when maturities start looming closer. Investors taking on new government debt will take the lower rating into consideration, and will require a higher risk premium (rate of return) as they are lending money to an institution that has a higher credit risk. This will make it even more expensive for the governmentto service and repay its debt, something Moody’s is already concerned about.
For the country to improve its credit rating going forward, investor-friendly policy reforms are needed from the government for the country to see material economic growth. The government needs to comprehend that investors will only invest capital into the country if it is easy and profitable for them to do so.
In our view, the only component in the GDP equation (personal consumption + private sector investment + government spending + net exports) that can currently drive growth is investment. Low revenue growth and fiscal consolidation means that the government is not currently in a position to drive economic growth and distressed consumers are also not able to spur growth. It is currently only through foreign and local direct investment that positive economic growth can return to the economy. Net exports are contingent on investment growing Namibia’s exports and shrinking the trade gap. Investment will only increase if the government introduces policies that will boost business and consumer confidence, giving them an incentive and the confidence to invest in the economy.
Danie van Wyk – Head: Research
