Fitch Affirms Namibia at ‘BB-‘ with Stable Outlook
Fitch Ratings Affirmed Namibia’s ‘BB-‘rating with an outlook accorded as stable, saying the ratings are supported by its strong governance indicators and institutional framework, and fiscal financing flexibility supported by the large non-banking financial sector (NBFS).
The global rating agency said these were balanced against elevated fiscal deficits, rigid fiscal structure, high government debt levels, and moderate medium-term growth prospects.
According to the rating, Namibia’s stable outlook reflects Fitch’s view that the government’s fiscal consolidation efforts will limit the rise in government debt and lead to its stabilisation over the medium term.
Fitch estimates the fiscal deficit narrowed to 5.3% of GDP in 2022/23 (ending in March 2023) from 8.1% of GDP in 2021/22, thanks to stronger-than-expected revenue collection and contained spending bill.
It also expects the general government fiscal deficit to further improve to 4.5% of GDP in 2023/24 as Southern Africa Customs Union receipts are projected to increase by 72% year-on-year, which will be partly offset by higher social spending and debt servicing cost.
Namibia’s fiscal risks stem from higher-than-budgeted transfers to SOEs, although these have declined year-on-year in 2023/24, and spending pressure due to the higher cost of living and the general election scheduled in 2024.
The incumbent party remains the dominant political force but faces increasing challenges from other smaller parties. Meanwhile, Fitch expects fiscal deficits to remain at elevated levels of above 4% of GDP in the medium term amid gradual fiscal consolidation.
According to the rating agency, 2023/24 budget did not outline any meaningful revenue mobilisation measures except for the ongoing efforts to improve tax administration and proposed small tax cuts effective in 2024/25 and 2025/26.
It noted that the authorities remain committed to fiscal consolidation, as demonstrated by a four-year public-sector wage freeze before a below-inflation adjustment in 2022/23. However, further consolidation will be challenging in the context of a rigid fiscal structure, low growth, high living cost, and high inequality.
Fitch estimates general government debt rose to 69.8% of GDP at the end of 2022/23 from 56% of GDP at the end of 2019/20, well above the estimated ‘BB’ median of 55.6% of GDP, as a result of the pandemic-related economic contraction and fiscal response.
Analysts forecast that the rigid fiscal structure, rising interest costs, and increasing social spending will lead to a rise in government debt to 72% of GDP by 2024/25 before stabilising around this level over the medium term.
Namibia’s financing flexibility is supported by a well-developed NBFS with assets of over 150% of GDP, regulatory requirements on domestic asset allocation, and access to the South African financial market.
Gross borrowing requirements have been large at 20-30% of GDP since 2020/21 and will spike again in 2025 with the USD750 million Eurobond coming due in October.
The government plans to replenish its sinking funds over the next two years to redeem a portion of the maturing Eurobond and roll over the remainder through international market issuance.
The economy is expected to grow by 2.6% in 2023 after a rebound of 4.6% in 2022, driven by the extractive industry and a broad-based recovery after the pandemic shock.
Namibia’s growth prospects, though, are hindered by weak regional and global growth, tightening global financing conditions, and water and energy supply risks, including the risk of higher energy prices in the event of electricity supply disruptions in South Africa.
Hence, Fitch expects growth to remain around 2.5% in the medium term amidst inflation pressures.
Inflationary pressures have built up since the first quarter of 2022, primarily driven by the depreciation of the exchange rate and elevated food and energy prices.
Market sentiment towards South Africa has led to persistent depreciation pressure on the exchange rate, fuelling imported inflation.
“We expect inflation to average 5.5% in 2023 before easing to 4.5% in 2024. The Bank of Namibia (BoN) hiked its policy repo rate to 7.25% in April 2023, currently 100bp below the policy rate in South Africa”.
Fitch expects the BoN’s monetary policy to be consistent with the sustainability of the long-standing peg arrangement of the Namibian dollar to the South African rand.
Analysts expects the country’s current account deficit to narrow to 8.7% of GDP in 2023 from 12.4% of GDP in 2022, and to remain elevated in the medium term due to machinery and fuel imports related to oil exploration projects.
International reserves stood at USD2.8 billion (about four months of current account payments) in end-April 2023. Fitch expects international reserve coverage to remain consistent with the sustainability of the peg.