Fitch Revises Namibia's Outlook to Negative; Affirms at 'BBB-'
Fitch has also revised the Outlook on Namibia's National Rating on the South African scale to Negative from Stable and affirmed the Long-Term rating at 'AA+(zaf)'. The issue ratings on Namibia's bonds with a National rating have been affirmed at 'AA+(zaf)'.
The revision of Outlook to Negative reflects the following key rating drivers and their relative strength:
Namibia's budget deficit widened sharply to 8.3% of GDP in fiscal year 2015/16 (FY15, which runs from April 2015), well above the government's 5% target and the worst on record. The deficit has worsened progressively from 0.1% in FY12 to 3.4% in FY13 and 6.4% in FY14, and is well above the 'BBB' category median of 2.7%. The overshoot in the deficit in FY15 primarily reflected weaker-than-expected revenues from domestic sources, including company tax and lower-than-expected income tax.
The government is targeting a narrowing of the deficit to 4.3% of GDP in FY16. Outturns for the first few months of the current fiscal year indicate revenue has grown strongly. The Ministry of Finance is exerting greater control over expenditure at all ministries and is cutting overtime, travel and capital spending. However, meeting deficit targets will prove challenging, particularly amid a secular decline in revenues from the Southern African Customs Union (SACU), which the government projects will fall under 7% of GDP by 2018 from 12.4% in 2014.
Gross general government debt (GGGD) increased sharply to 38.2% of GDP at end-2015 from 23.2% at end-2014, albeit partly due to an increase in government deposits following the issue of a USD750m Eurobond and exchange rate depreciation. Fitch forecasts GGGD to rise further to 39% of GDP at end-2016. It is now roughly in line with the peer median of 41%, having previously been a rating strength. We expect government guarantees to peak at 5.8% of GDP in FY16, below the government's 10% limit.
Namibia's current account deficit deteriorated to 14.1% of GDP in 2015, from 8.9% in 2013, and well above the 'BBB' category median of 1.3%. However, much of the deficit has been financed by external borrowing from parent mining companies, reducing external vulnerabilities.
Merchandise exports should start to grow in the coming years as big mining projects come online. Moreover, imports should fall as capital goods demand decreases (data for 1H16 already show a slowdown in all import categories). Fitch expects the current account deficit to narrow to 6.9% of GDP by 2018. Foreign exchange reserves increased to around 3.4 months of import cover by mid-2016, although this is still below the peer median of 5.7%.
KEY RATING DRIVERS
Namibia's 'BBB-' ratings also reflect the following factors:
Growth performance remains a key rating strength. The economy grew 5.7% in 2015, and Fitch expects it to expand 4.4% this year (BBB median five-year average: 2.5%). New mining capacity is rapidly coming online, notably the Husab uranium mine, which is expected to begin production by end-2016, and is expected to add around 5% to GDP. The continued strong growth performance is particularly impressive given the continued drought, weak performance in key trading partners (notably South Africa and Angola) and higher interest rates.
A major reform, the New Equitable Economic Empowerment Framework (NEEEF), was announced by the President at the beginning of the year and seeks to increase the involvement of previously disadvantaged citizens in the private sector. While lacking in details, it is likely that the law will be approved by parliament (although the Supreme Court might end up blocking it). This has caused some unease in the business community and could slow down foreign investment in manufacturing and services.
The rapid growth in house prices in recent years has created certain risks for the banking sector. However, given the introduction of macro prudential measures and falling demand from Angola, it is likely that the housing market will cool from here, with a slowdown at the top end of the market already visible. Asset quality is fairly good, with non-performing loans (NPLs) at around 1.6% of total loans at end-2015. The system's capital position is sound, with a risk - weighted capital ratio of 14.3% in December 2015.
Namibia's ratings are supported by a track record of political stability, slightly stronger governance indicators than rated peers, a net external creditor position, financing flexibility enhanced by access to the deep South African capital markets and a liquid banking system. However, it has a fairly low level of GDP per capita and economic development, high unemployment and inequality, and is vulnerable to shocks to commodity prices.
SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO)
Fitch's proprietary SRM assigns Namibia a score equivalent to a rating of 'BB+' on the Long-Term Foreign Currency IDR scale.
Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows:
Macro: +1 notch, to reflect strong medium-term growth potential and credible macroeconomic policies consistent with its exchange rate regime.
Future developments that could result in a downgrade include:
- A failure to narrow the fiscal deficit leading to continued rise in the government debt/GDP ratio.
- Failure to narrow the current account deficit or significant drawdown in international reserves.
- Deterioration in economic growth, for example, due to a worsening of the business environment.
Future Developments that could result in the Outlook being revised to Stable include:
- A narrowing of the budget deficit consistent with a stabilisation of the government debt/GDP ratio.
-A marked improvement in the current account balance and increase in foreign exchange reserves.
Fitch assumes that the currency peg agreement with South Africa will remain in place and the government will pursue prudent macroeconomic policies consistent with it.
Global assumptions are consistent with Fitch's 'Global Economic Outlook,' including a subdued outlook for commodity prices.