Windhoek-Moody’s downgrading of Namibia’s foreign debt to sub-investment grade came as a surprise, as it was unscheduled and at a time when green shoots are just starting to emerge. This is according to a report released by FNB Namibia yesterday.
The report noted that although the foreign debt rating is now at sub-investment grade, the local debt remains at investment grade.
“This reflects rising FX (foreign exchange) risk in meeting international debt obligations and thereby relegating Nam Eurobonds to speculative grade,” read the FNB report.
The reasons cited by Moody’s are three-fold: First, absence of progress on fiscal consolidation which saw debt to GDP increase to 42 percent; second, limited institutional capacity to manage shocks (SACU revenue, ZAR weakness and FX reserves); and third, risk of renewed government liquidity pressures.
“Central to the downgrade was government debt and the bloated wage bill, the latter having impeded consolidation efforts thus far.
“Essentially there has been only limited fiscal consolidation; having largely only decelerated the rate at which we accumulate debt. Be that as it may, the downgrade highlights external frailties and structural inefficiencies within the economy, which will prolong Namibia’s economic recovery,” read the report.
The report further noted that paramount is Namibia’s expenditure efficiencies. “From each tax dollar collected, 50c goes to wages, 13c goes to SOEs, 9c goes to interest payments, leaving 11c for the provision of public goods and services. Since the Group had conservatively included a downgrade into our core view, there are no material changes to our outlook.
Taking market sentiment, consumer confidence and national financial attitudes into account, the downgrade is a shock reminder that a longer-term through the cycle view is required when implementing the necessary public sector cost diligence and structural expenditure adjustments to steer Namibia back to the high growth trajectory, which we have all enjoyed over the past seven years,” read the report.