Nam economy to ‘flatten out’ in 2019
In an ideal world Namibia could have relied on government to stimulate the economy, but it has no fiscal manoeuvrability.
The Namibian economy will probably show marginally positive growth this year, largely as the result of a “flattening out” of the down-cycle rather than a real recovery, says the chief economist of Capricorn Asset Management (CAM), Floris Bergh.
“The down-cycle has been evident since 2016 and carried over throughout 2017 and 2018. In fact, we expect that the economy as a whole contracted in 2018 in real terms,” Bergh says.
For 2019, he expects growth of 1.5% in real terms.
In a situation like this, a country ideally could use fiscal policy to stimulate the economy, Bergh says.
“Increasing spending on, say, infrastructure or wages gives final demand in the economy a boost and hence lifts the growth rate. However, Namibia does not have any fiscal manoeuvrability – debt levels, spending levels and deficits are already too high and threatens the country’s credit worthiness,” he says.
According to him, a tax cut is another option as this will leave more disposable income in the pockets of tax payers. “They then might opt to increase their spending and hence lift the growth rate.”
However, this means that the government’s deficit will increase and therefore, runs into the same fiscal constraints, Bergh warns.
“In fact, the pressures are such that Namibians are likely facing tax hikes rather than cuts. A tax cut may also worsen the balance of payments deficit if it leads to increased imports.”
Inflation, interest rates
Bergh says it is quite possible that Namibia will have a somewhat higher rate in 2019, before it decreases again in 2020.
“Seasonal patterns in the constituents of the inflation basket as well as low inflation in early 2018, the so-called base effect, will probably contribute to a 6% plus rate at times during the year.
“Thereafter, we expect it to average about 5.5% in 2020. This means that Namibians should not expect wage increases much above 5% - 6%,” Bergh says.
The lower petrol price and a stronger-than-expected currency will also help to ensure that, as in Namibia, there won’t be a break-out in inflation in neighbouring South Africa, he says.
“In fact, the South African Reserve Bank (SARB) lowered its inflation outlook and now does not expect inflation to breach the upper band of 6% at any stage over the next three years.”
This means that policy driven interest rates will largely be stable in Namibia and South Africa for the foreseeable future in the absence of nasty surprises, Bergh says.
“The weakness in the real economy does not justify higher interest rates. On the contrary, it rather calls for policy support, which increases talk that the next move in rates could be down.”
World
Global developments also aligns with lower rather than higher interest rates and do not offer much support for the real economy, Bergh says.
The Chinese economy is slowing due to bruising tariffs, weaker consumer confidence and lower demand for its exports. “This is not good news for commodity exporters.”
Bergh says Europe is beset with issues that are growth negative – Brexit, Yellow Vests and bad loans. Germany, and for that matter, Japan are struggling to prevent an economic contraction. The USA economy seems to be going strong.
“However, deteriorating global sentiment and domestic political shenanigans, coupled with rising interest rates are stoking fears that a recession is not far away,” he says.
According to Bergh the world is experiencing a growth scare similar to that of late 2015 and early 2016. This has affected financial markets badly, especially equity markets – the S&P500, the JSE, Nikkei etc. Markets usually stop panicking when policy-makers start to panic and then, after exhausting all other avenues, decide to do the right thing, he continues.
Investments
As far as investment portfolio implications go a cautious approach is still called for, Bergh says.
“Interest bearing assets should continue to provide a reasonably attractive, nearly risk-free return in a fluid and uncertain macro environment. This means that money market returns and bond yields, generally, remains attractive vs. other asset classes as well as vs. inflation.”
Inflation linked bonds are also an asset class that deserves consideration, he says. It protects income and capital against inflation and as such serves as a hedge against “de-pegging” risk.
“Perhaps the best cautious approach is to stick to a plan and/or a strategy that is in line with one’s personal goals, circumstances, risk tolerance and time horizon,” Bergh says.
“By all means, rebalance a bit. However, bear in mind that asset values have already adjusted and are now discounting to the present (present value) a very bleak outlook (future value). The future may not be what it used to be, but it should prove to be better than what is currently expected.”
Domestic policy
Clarity and sensibility as far as domestic policy issues are concerned is one of the items on CAM’s wish list for 2019.
“It is critically important that these are settled,” Bergh says.
The golden thread that runs through the modern economic system and holds it all together is confidence, he continues. “Confidence is based on clarity of purpose and predictability of policy. Here we refer to things like legislative changes, land reform, NEEEF [New Equitable Economic Empowerment Framework], tax rates and the currency peg – all of which have been hot topics of late.”
Then entrepreneurs will not lose heart, Bergh says.
“We desperately need them to create, or, at least, maintain, jobs. This is an environment where we must all show our mettle and draw on the reservoirs of goodwill that exist within the nation,” he says.
“The down-cycle has been evident since 2016 and carried over throughout 2017 and 2018. In fact, we expect that the economy as a whole contracted in 2018 in real terms,” Bergh says.
For 2019, he expects growth of 1.5% in real terms.
In a situation like this, a country ideally could use fiscal policy to stimulate the economy, Bergh says.
“Increasing spending on, say, infrastructure or wages gives final demand in the economy a boost and hence lifts the growth rate. However, Namibia does not have any fiscal manoeuvrability – debt levels, spending levels and deficits are already too high and threatens the country’s credit worthiness,” he says.
According to him, a tax cut is another option as this will leave more disposable income in the pockets of tax payers. “They then might opt to increase their spending and hence lift the growth rate.”
However, this means that the government’s deficit will increase and therefore, runs into the same fiscal constraints, Bergh warns.
“In fact, the pressures are such that Namibians are likely facing tax hikes rather than cuts. A tax cut may also worsen the balance of payments deficit if it leads to increased imports.”
Inflation, interest rates
Bergh says it is quite possible that Namibia will have a somewhat higher rate in 2019, before it decreases again in 2020.
“Seasonal patterns in the constituents of the inflation basket as well as low inflation in early 2018, the so-called base effect, will probably contribute to a 6% plus rate at times during the year.
“Thereafter, we expect it to average about 5.5% in 2020. This means that Namibians should not expect wage increases much above 5% - 6%,” Bergh says.
The lower petrol price and a stronger-than-expected currency will also help to ensure that, as in Namibia, there won’t be a break-out in inflation in neighbouring South Africa, he says.
“In fact, the South African Reserve Bank (SARB) lowered its inflation outlook and now does not expect inflation to breach the upper band of 6% at any stage over the next three years.”
This means that policy driven interest rates will largely be stable in Namibia and South Africa for the foreseeable future in the absence of nasty surprises, Bergh says.
“The weakness in the real economy does not justify higher interest rates. On the contrary, it rather calls for policy support, which increases talk that the next move in rates could be down.”
World
Global developments also aligns with lower rather than higher interest rates and do not offer much support for the real economy, Bergh says.
The Chinese economy is slowing due to bruising tariffs, weaker consumer confidence and lower demand for its exports. “This is not good news for commodity exporters.”
Bergh says Europe is beset with issues that are growth negative – Brexit, Yellow Vests and bad loans. Germany, and for that matter, Japan are struggling to prevent an economic contraction. The USA economy seems to be going strong.
“However, deteriorating global sentiment and domestic political shenanigans, coupled with rising interest rates are stoking fears that a recession is not far away,” he says.
According to Bergh the world is experiencing a growth scare similar to that of late 2015 and early 2016. This has affected financial markets badly, especially equity markets – the S&P500, the JSE, Nikkei etc. Markets usually stop panicking when policy-makers start to panic and then, after exhausting all other avenues, decide to do the right thing, he continues.
Investments
As far as investment portfolio implications go a cautious approach is still called for, Bergh says.
“Interest bearing assets should continue to provide a reasonably attractive, nearly risk-free return in a fluid and uncertain macro environment. This means that money market returns and bond yields, generally, remains attractive vs. other asset classes as well as vs. inflation.”
Inflation linked bonds are also an asset class that deserves consideration, he says. It protects income and capital against inflation and as such serves as a hedge against “de-pegging” risk.
“Perhaps the best cautious approach is to stick to a plan and/or a strategy that is in line with one’s personal goals, circumstances, risk tolerance and time horizon,” Bergh says.
“By all means, rebalance a bit. However, bear in mind that asset values have already adjusted and are now discounting to the present (present value) a very bleak outlook (future value). The future may not be what it used to be, but it should prove to be better than what is currently expected.”
Domestic policy
Clarity and sensibility as far as domestic policy issues are concerned is one of the items on CAM’s wish list for 2019.
“It is critically important that these are settled,” Bergh says.
The golden thread that runs through the modern economic system and holds it all together is confidence, he continues. “Confidence is based on clarity of purpose and predictability of policy. Here we refer to things like legislative changes, land reform, NEEEF [New Equitable Economic Empowerment Framework], tax rates and the currency peg – all of which have been hot topics of late.”
Then entrepreneurs will not lose heart, Bergh says.
“We desperately need them to create, or, at least, maintain, jobs. This is an environment where we must all show our mettle and draw on the reservoirs of goodwill that exist within the nation,” he says.
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