More junk from Moody’s

Jo-Maré Duddy – Scepticism about government’s success in implementing its fiscal plans amid added pressure from the Covid-19 pandemic persuaded Moody’s to downgrade Namibia to three notches below investment grade.

Government’s debt affordability is weakening, Moody’s said Friday night when it downgraded Namibia from Ba2 to Ba3, with a negative outlook. Ba-ratings at Moody’s means debt has speculative elements and are subject to substantial credit risk.

The negative outlook signals an upgrade is unlikely in the near term, Moody’s said.

Government’s long-term foreign debt, excluding the rand, was first slated as junk by Moody’s in August 2017 when it downgraded the country from Baa3 to Ba1. In December 2019, Moody’s downgraded Namibia further to Ba2, but with a stable outlook. In May, Moody’s affirmed the Ba2 rating, but changed its outlook from stable to negative.

Moody’s Friday said government’s debt burden is “now markedly higher” and it will continue to rise for the foreseeable future.

“The downgrade reflects a further weakening in Namibia's fiscal strength despite policy statements of plans to rein in the fiscal deficit,” the international credit rating agency said.

It added: “The coronavirus shock continues to pressure Namibia's revenue generation capacity, a trend exacerbated by Namibia's weak growth prospects, notwithstanding moderate institutional adjustment capacity and external buffers that backstop creditworthiness.”

The negative outlook reflects risks remaining slanted to the downside, Moody’s continued.

“Implementation of the government's fiscal consolidation plans will invariably prove challenging in a low growth environment, particularly as the government targets reducing the large but politically challenging public sector wage bill. Moreover, very large gross borrowing requirements, given the sovereign's continued reliance on short-term funding, point to material liquidity risk.”

Moody’s lowered Namibia's long-term local currency bond and bank deposit ceilings to Baa2 from Baa1. The long-term foreign currency bank deposit ceiling was lowered to B1 from Ba3, and the long-term foreign-currency bond ceiling was lowered to Ba1 from Baa3.

‘SHARP WIDENING'

Moody’s said it expected a “sharp widening” of government’s budget deficit, which will lead to an increase in the debt burden to 72% of gross domestic product (GDP). Finance minister Iipumbu Shiimi in his mid-year budget review in October estimated a debt burden of 69.6% of GDP for 2020/21.

Moody’s pointed out that government’s interest bill will rise to 15.5% of revenue in the current fiscal year, up from 5% five years ago.

“The increase in debt is driven by the primary deficit and interest costs: both representing a drag on debt dynamics over the coming five years, while growth will provide only a moderate offset starting from 2021,” Moody’s said.

The ratings agency expects real GDP to contract by 6.9% in 2020 and only grow by 2.4% in 2021.

‘CREDIT SUPPORTS’

The deterioration in government’s credit profile is balanced by a number of credit supports, Moody’s said.

“The relative strength of the country's institutions was evident in the three years immediately prior to the onset of the coronavirus outbreak with the authorities achieving fiscal consolidation of four percentage points of GDP which arrested the previous increase of general government debt after large fiscal deficits in 2014-16.”

Lower exports have been offset by reduced imports, keeping the current account deficit contained, Moody’s said.

“Namibia's net international reserves are expected to remain stable and modest, covering just above four months of imports, which translates to approximately US$2 billion.”

The agency added: “While fiscal and external financing needs will remain elevated over the forecast period, the large public pension fund [Government Institutions Pension Fund] provides Moody's with some level of confidence in the ability of the government to continue to meet its liabilities should it be unable to access the international capital market and/or to draw from new credit lines from development partners.

The domestic banking system is robust, well-capitalised and liquid, and coupled with the liquidity in the pension funds sector, can adequately fund the government's operations into the medium term.”

REVENUE, BORROWING

Moody’s believes implementation of government's improved tax administration and increased tax revenue generation will invariably prove challenging in a low growth environment.

“Moreover, the intended reduction in the large public sector wage bill through a combination of attrition and early retirement will invariably prove politically challenging, posing risks to the realisation of ambitious fiscal consolidation plans to arrest the upward debt trajectory.”

Moody’s described government gross borrowing requirements as “very high”, with high and increasing reliance on short-term financing raising government liquidity risks.

“Namibia's gross borrowing requirements will rise to about 38% of GDP in 2021 (from 30% this year and an average of 15-20% over the past five years) before declining slightly in the following years”.

It expects Namibia to finance most of its borrowing requirements domestically while additional external funding from the official sector will help meet the higher borrowing requirements.

“Nevertheless, higher short-term financing reliance leaves Namibia vulnerable if and when interest rates rise, either through monetary policy tightening or a widening in spreads,” Moody’s warned.

OTHER CONSIDERATIONS

Environmental considerations weigh on Namibia's economic strength and credit profile, Moody’s said.

“Given the prominence of agriculture in the economy and reliance on rainfall to drive irrigation, recurring droughts can have a significant negative impact on agriculture,” it elaborated.

Social considerations are also material to the rating, Moody’s said.

“High income inequality and high levels of unemployment hamper competitiveness and have the potential to fuel social discontent,” the agency said.