By Fitch Ratings, Reuters
Fitch Ratings has affirmed Namibia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively, with Stable Outlooks.
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
Namibia's 'BBB-' rating is supported by steady levels of economic growth and low levels of public debt. The rating is balanced against widening fiscal and external deficits, as growth in recent years has been underpinned by an expansionary fiscal policy and an increase in imports and inward investment to fuel expansion within the mining sector.
Namibia's investment grade rating is also indicative of high levels of political stability and policy coherence among the authorities. In fiscal year 2015/16 (FY15, which runs from April 2015) Fitch forecasts a widening of the fiscal deficit, to 6.7% of GDP, from 6% in 2014, largely due to a shortfall in expected tax revenue.
On 3 November, the Ministry of Finance presented a mid-year budget review and new medium term expenditure framework to the Parliament and Cabinet, in which the Ministry envisages slowing expenditure growth to narrow the fiscal deficit to 5% of GDP by FY16 (Fitch forecast: 5.1%). However, in the present fiscal year, expenditure will remain at the budgeted level.
Medium-term fiscal slippage would erode one of Namibia's rating strengths, namely its low public debt. General government gross debt stood at 24% of GDP as of end-June 2015, well below the 'BBB' median of 43%, with foreign debt composing about 35% of the stock of total public debt.
Namibia's public debt will grow over the coming years as the authorities seek to continue making public investments in the productive sectors of the economy and undertake a developmental agenda (income inequality remains among the highest in the world).
Namibia has increased its domestic and foreign borrowing. In October, the country undertook a Eurobond issuance of USD750m at 5.375% interest, the first time it has accessed international capital markets since 2011. The authorities have stated that they are targeting a ratio of 80:20 domestic-to-foreign debt.
Namibia averaged GDP growth of 5.7% in the years 2011-2014, exceeding the 'BBB' and 'BB' medians. Growth in Namibia's primary industries, most notable mining, began slowing in 2014, largely as a result of a slowdown in global growth and commodity prices. However, large investments in new mining projects spurred growth in construction and other sectors leading to GDP growth of 6.4% (this is reflective of a significant upward revision that the authorities issued in September).
Weakness in the mining sector continued in 1H15 and other investment has begun to taper as many of the ongoing mining projects near completion. As such, Fitch expects growth to drop to 4.8% this year, before rebounding to slightly above in 2016. The combination of expansionary fiscal spending and an increase in imports has led to increased external pressures. As mining exports have decreased and imports increased, the current account deficit (CAD) has widened.
The forecast CAD for 2015 at 12.1% of GDP, is well above both the 'BBB' and 'BB' medians (both about 2.3%). Fitch expects the CAD to widen further in 2016. As mining output increases as a result of present investment, mineral export levels are likely increase and improve the trade balance in 2017 and beyond. Pressure on the current account over the previous few years has led to a draw down in international reserves.
As of end-October, the reserves position was approximately USD1.3bn, (330% of narrow money or 1.7 months of current account payments), down from USD2.1bn (4.7 months of payments) at end-2009. The government has kept a portion of the recent Eurobond issuance at the central bank to help bolster reserves, but both the government and the central bank acknowledge that this is not a viable long-term strategy for reserves management.
The central bank has set a reserves target of three months of import cover within six years and a long-term target of between four and five months. Fitch expects a tightening in the twin deficits will support a gradual increase in foreign reserves in the medium term. The Bank of Namibia's monetary policy reflects its belief that currency depreciation represents the biggest inflation risk and the authorities remain committed to the Namibian dollar's peg to the rand as a means of achieving price stability.
Rapidly increasing housing prices and a concentration of mortgage exposure is a risk to the Namibian banking sector. However, housing prices are largely reflective of increasing demand among Namibia's rapidly urbanising population and a shortage of serviced land within Namibian cities. Furthermore, Namibian banks are largely foreign owned and the agency assumes support from parents outside the country if needed.
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are currently balanced. The main risk factors that, individually or collectively, could trigger a rating action are:
- Underperformance in exports that leads to a larger than expected widening of the current account deficit and/or significant drawdown in international reserves.
- A failure to execute fiscal consolidation measures that leads to continued deterioration in the debt/GDP ratio.
- Income convergence towards 'BBB' peers in the context of macroeconomic stability.
- Marked improvement in the fiscal and external balances.
- Successful development of productive economic sectors that would reduce dependency on commodities and boost employment.
KEY ASSUMPTIONS 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.