Moody’s Investors Service has downgraded Namibia’s credit rating for a second time this year and is currently maintaining a negative outlook on the country’s ability to access loans and repay debt.
The country was downgraded to the Moody’s Baa3 level.
In a statement, Moody’s said the downgrade reflects a further weakening in Namibia’s fiscal strength despite policy statements of plans to rein in the fiscal deficit.
“The country’s debt burden is now markedly higher, it will continue to rise for the foreseeable future; debt affordability is weakening,” the statement reads.
The COVID-19 pandemic continues to pressure Namibia’s revenue generation capacity. The trend is 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. 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.
Concurrently, Namibia’s long-term local currency bond and bank deposit ceilings were lowered 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.
Moody’s said it expects a sharp widening of the fiscal deficit to 9.6% of GDP over fiscal 2020, remaining elevated at 8.3% in 2021. This will lead to an increase of the debt burden to 72% of GDP by end-2020 and 74% in 2021, up from 56% at end-2019 and nearly triple the level at end-2014. Meanwhile, debt affordability has weakened, with the interest bill set to rise to 15.5% of revenues next 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. Interest costs are set to peak at around 6% of GDP and the foreign currency share at around 1% over the forecast period, leaving debt affordability at a moderate level while ever the interest rate remains lower than nominal growth.
Moody’s said it expects real GDP to contract by 6.9% in 2020, and only grow by 2.4% in 2021 as agricultural production gradually returns after a prolonged and devastating drought, while the mining sector and the travel and tourism industry remain depressed. The weak growth outlook continues to pressure revenue generation, compounded by the forthcoming decline in Southern African Customs Union (SACU) receipts in the next two years. The recovery of SACU receipts starting from 2023 supports a gradual narrowing of the primary balance, allow for stabilization of the debt burden.
The agency said it expects Namibia’s debt burden to peak at around 80% of GDP by 2025, and to remain broadly stable over the medium term, absent significant policy measures to arrest and ultimately reverse the debt accumulation.