Moody’s downgrades Namibia to non-investment grade
Moody’s Investors Services has downgraded Namibia’s long-term senior unsecured bond and issuer rating from Baa3 to Ba1 with a negative outlook on 11 August 2017. This has moved Namibia from a lower-medium investment grade to a non-investment grade or to ‘junk’ status as it is often referred to. Moody’s Ba1 rating is equivalent to Fitch’s BB+ rating. Namibia has however, so far maintained the investment rating with Fitch at BBB-.
Moody’s cites the following reasons for its decision:
Moody’s points out some valid risks on the revenue side. Lower than expected growth in South Africa could result in a reduction of the SACU Common Revenue Pool and hence in lower transfers to the SACU member states including Namibia. Although the South African rand and hence the Namibia dollar have appreciated against the USD and other currencies until end of July, the currency could come under pressure because of global and regional political events, such as the ANC congress later on this year. A depreciation of the NAD against the USD would result in an increase of the value of the Euro bond in local currency and in interest payments.
However, some of Moody’s arguments seemed to be taken out of context. The increase of the relative share of wages and salaries in the current Financial Year 2017/18 is due to the budget cuts Government has initiated in order to rein the budget deficit and total public debts. Instead of using this increase as a sign for an increased fiscal vulnerability, Moody’s could have used it as a sign for Government’s efforts to reduce expenditure, the budget deficit and total public debts. Furthermore, Moody’s is not taking into account Government’s promise to settle outstanding debts with the private sector, which will reduce the risk of private sector defaults on loans and will improve the cash flow situation of companies and the liquidity in the economy. Finally, Moody’s knew about the upcoming SWAPO congress end of 2017 and the next presidential elections in 2019 and should have taken concerns about expenditure overruns in the last assessment into account. It is not known whether these concerns are based on an analysis of previous budget performances ahead of party congresses and elections. The current budget does not provide any evidence that Government is embarking on an expansionary budget ahead of these two events.
Despite reservations with some of the assessment, the downgrading indicates that Government needs to continue and not relax the fiscal consolidation path. Government has taken serious steps to address a number of issues, such as ‘wasteful’ expenditure and bailouts for State-owned Enterprises (SOEs). However, other structural and policy issues need to be addressed as well in order to improve Namibia’s investment rating:
Some of these steps can cause pain and hence need to be accompanied by mitigating measures. However, they are necessary in order to regain fiscal space, improve the investment climate and support economic growth and job creation.