THE international credit rating agency, Moody’s said that Namibia’s chance of an upgrade in the near future is unlikely, however, the agency’s negative outlook on the country could be changed by the government’s ability to curb its spending as well as to moderate growth.
The investors’ service agency stated this in a credit opinion on the country on 16 February 2021. Moody’s Rating downgraded the long-term issuer and senior unsecured ratings of the Government of Namibia to Ba3 in December 2020. This is the last step in the rating scale before descending to the B and C levels, where government debt is viewed as high-risk investments.
Following this downgrade, the investor’s service agency has given factors that could lead to an upgrade and added that the negative outlook signals an upgrade is unlikely in the near term.
“We would likely change the outlook to stable if there were signs that growth in the medium term is strengthening. Stronger growth would in turn be supportive of rebuilding fiscal buffers and bolstering foreign exchange reserves which would enhance Namibia’s capacity to absorb shocks. Even in a context of subdued growth, indications that fiscal consolidation will stabilize and eventually lower the debt burden would also support the rating,” the ratings agency noted.
Moody’s further stated that Namibia’s credit profile is characterized by low growth, albeit moderate wealth levels that support the economy’s moderate shock-absorption capacity.
It further stated that the relative strength of the country’s institutions is supported by recent adherence to fiscal consolidation objectives.
Moody’s however noted that Namibia’s very high public wages and salaries bill, vulnerability to potential shocks (including as a result of subdued growth in South Africa (Ba2 negative), a shock to commodity prices, and a marked and prolonged tightening in external financing conditions), and the onset of the coronavirus outbreak, have all weakened its credit profile.
The ratings agency noted that factors that could lead to a downgrade mainly point at Namibia’s liquidity risks, as the country’s capacity to source financing for its very large funding needs at moderate costs erodes has become constrained.
“Moreover, an increased likelihood that the debt burden will continue to rise markedly faster and higher than we project would also put negative pressure on the rating,” Moody’s noted.
The ratings agency further assessed Namibia’s fiscal strength as “caa1”, two notches below the initial score of “b2” to reflect the sharp debt increase (approximately 15 percentage points) in 2020.
“We expect a sharp, though temporary, widening of the fiscal deficit to 10% of GDP over fiscal 2020 but paring back to 8% in 2021 as the fiscal situation normalizes. We anticipate debt will increase significantly to between 75-80% of GDP in the absence of any fiscal consolidation in the medium term.” Moody’s projected.
The ratings agency further noted that the government achieved robust consolidation when the government successfully reduced its spending bill by 10 percentage points of GDP between 2015 and 2019 on the back of drastic cuts in non-wage current expenditures, albeit that leaves minimal scope for further spending reduction other than the politically-sensitive public sector wage bill.
The final fiscal strength score is below the initial, reflecting adjustments in anticipation of the deterioration of the financial metrics in 2020 partly offset by reduced foreign currency exposure taking into account the share of external debt denominated in rand (to which the Namibian dollar is pegged at a 1:1 rate).