Moody’s Downgrades Namibia to Sub-Investment Grade
On Friday 11 August Moody’s Investors Service downgraded Namibia from Baa3 to Ba1, sub-investment grade. While the timing was unexpected, the downgrade was not. At the start of the year we voiced our concern that Namibia would lose its investment grade rating. We thus concur with the reasoning behind the ratings downgrade. The points raised are reflective of the facts and we trust that Namibians will view this through a constructive lens.
Moody’s statement can be found here: https://www.moodys.com/research/Moodys-Downgrades-Namibias-rating-to-Ba1-maintains-negative-outlook–PR_370993
Factors contributing to the downgrade:
1. Erosion of Namibia’s fiscal strength due to sizeable fiscal imbalances and an increasing debt burden
We agree with this point. Debt issuance over the past two years has been substantial. Debt to GDP has gone from just over 26% in June 2015 to 41.9% at present (MoF numbers). Add in the portion of the African Development Bank loan received already and this goes up further. This debt was raised partially to fund government expenditure and partially to support the external position of the country. Effectively government’s leveraged balance sheet makes it more difficult to secure further financing should it be needed in the event of any shock to the economy.
2. Limited institutional capacity to manage shocks and address long-term structural fiscal rigidities
Agree. The argument posted by Moody’s is very clear here. Examples of the erosion of fiscal strength are provided and spot on. Budget deficits in 2015/16 and 2016/17 were larger than expected due to overoptimistic revenue forecasts which did not materialise. The consumptive, recurrent portion of the budget continued to grow during these years, while the development budget shrunk. The wage bill is given as an example of this recurrent expenditure. This recurrent expenditure is very difficult to reduce in many cases and thus limits discretionary expenditure such as infrastructure projects when revenue collection is under pressure as it is now. Limited spending on necessary infrastructure projects acts as a drag on growth as pointed out by the ratings agency.
3. Risk of renewed government liquidity pressures in the coming years
Agree. Should revenue again disappoint and debt issuance increase in order to fund larger than expected deficits, we could see liquidity dry up in the same way as it did in 2016.
Thus we agree with the points made by Moody’s. Structural changes need to be made to government’s expenditure profile in order to return the public budget to a sustainable path. The minister of finance made a good point that this process will take time and that government has started and is committed to making the necessary changes.
Moody’s has to provide accurate and timely information to its clients (holders of debt – government and corporate – this includes almost everyone with a pension in Namibia) and thus has to act on what is happening in the present with a view on how this will affect the financial stability of the country and government’s ability to honour its debt obligations. The downgrade was therefore inevitable as initial efforts to drive structural changes have not been immediately evident. Indeed, the opposite has been witnessed as government has struggled to pay outstanding invoices to the private sector. The inability to pay invoices is what would have been most concerning to Moody’s as it brings into question the ability of government to honour its debt obligations. Much of these invoices have been settled as government has pointed out, but there was a substantial delay in satisfying many of these obligations, which is concerning.
We are cognisant of the fiscal measures implemented by government thus far and expect to see further commitment to these in the mid-term budget review scheduled for October. The Moody’s downgrade should not be seen as a failure of government but rather a warning to correct course after slowly straying from a sustainable path for the better part of a decade. For the man on the street the Moody’s downgrade should have little impact if the correct policy decisions are made going forward. Structural changes to the fiscal budget will not be easy to effect but are vital if Namibia is to return to a path where sustainable social and economic progress is made.