Moody's expresses concern

Moody's expresses concernNamibia urged to reduce debt Moody's is of the opinion that Namibia's public debt to GDP ratio could soar. The ratings agency expressed its concern in a brief market update, saying a decline in foreign reserves might give reason for a downgrade to junk status. While Namibia's Baa3 rating reflects solid medium growth prospects set against credit challenges which include rising public debt, heightened external risks remain which may force the ratings agency Moody's to revise its position of the country's ability to honour its debt obligations.

Moody's analyst Zuzana Brixiovav said: “Namibia's credit challenges include the rapid rise in its public debt levels, which reached 42.3% of Gross Domestic Product in 2016-17 from 26.2% in 2011. The country also faces increasing external risks stemming from persistent current account deficits and relatively low international reserves.” Brixiovav is also of the opinion that Namibia is vulnerable to further tightening in domestic funding conditions if fiscal slippages continue, potentially leading to a substantial increase in its debt-servicing costs.

“The recently approved US$226.5 million loan from the African Development Bank for budgetary reforms will help fund the deficit this fiscal year while the government undertakes gradual fiscal consolidation to address structural challenges,” she said. According to her, Namibia experienced significant fiscal slippage in the fiscal year 2016-17 due in part to overestimated nominal GDP growth and overly optimistic revenue projections. “The government's fiscal slippage has led to a higher borrowing requirement, and in turn to a more rapid accumulation of public debt. Moreover, the need to finance these sizeable fiscal deficits against the background of weaker than expected fiscal consolidation put significant albeit temporary pressure on domestic liquidity conditions,” she said.

Moody's expects government debt to continue to rise marginally and reach 45.4% of GDP in financial year 2018-19, according to her.

“Despite Namibia's rising debt-to-GDP ratio, debt relative to government revenues will remain very slightly below the Baa-rated median across the rating horizon, reflecting the government's relatively strong ability to collect taxes. Nevertheless, since about half of the Namibian public debt is in foreign currency, most notably US dollars, foreign exchange risk has also risen,” said Brixiovav.

“Namibia could return to a stable outlook if the government's commitment to fiscal consolidation were to result in a marked slowing and eventual reversal of debt accumulation,” she said of Moody's expectations.

“A sustainable improvement in the country's twin balances, a sustained easing of funding conditions in the domestic market, and a material increase in foreign exchange reserves comfortably above three months of imports would also generate upward rating pressure.

“In contrast, a sustained decline in foreign-currency reserves and or an increase in funding pressure resulting from reduced market appetite for government securities, leading to a material increase in borrowing costs, would create downward rating pressure,” said Brixiovav.

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