Brexit could compromise Namibia’s pursuit of fiscal consolidation

by Mally Likukela

Brexit could compromise Namibia’s pursuit of fiscal consolidation

Windhoek

The most crucial and yet subtle impact of Brexit on Namibia is the resultant increase in the total public debt driven by the growth in the external debt component. Namibia’s external debt stock is set to increase further if the local currency continues to weaken as the result of uncertainty caused by Brexit.

The UK on 23rd June 2016 voted in a referendum on the country’s EU membership, and 51.9 percent of voters chose the option of leaving the EU, frequently referred to as Brexit. This development sent many currencies around the globe tumbling against the US Dollar and the local currency experienced one of the weakest episodes in many years.



The resultant weakening in the local currency gave rise to fears that the weakening currency will result in the expansion of the external debt, which is mostly denominated in US dollar. Furthermore, the depreciation could also push up the cost of servicing these debts, a situation which will place additional pressure on the already constrained fiscal capacity and can ultimately challenge Namibia’s pursuit of fiscal consolidation.

Eurobond dominates Namibia’s external debt profile
Government’s external debt stood at N$27.5 billion at the end of the fourth quarter of 2015/16, which is 16.6 percent of gross domestic product (GDP). This is the portion of the government’s debt that was borrowed from foreign lenders, which could include commercial banks, governments or international financial institutions.

Accordingly, these loans, including interest, must usually be paid in the currency in which the loan was made. Namibia’s external debt stock has grown over the past 12 months due to the issuance of the Eurobond and JSE bond, as well as the depreciation of the local currency against major currencies, particularly the US dollar, in which the Eurobond is denominated. The Eurobond continues to dominate the external debt portfolio as it accounted for 68.1 percent.

Bilateral loans made up the second largest portion of the total external debt, accounting for about 13.0 percent. Furthermore, multilateral loans accounted for 10.2 percent, while the JSE listed bonds made up the remaining 8.7 percent.

Weakening local currency will result in the expansion of the total debt, and the cost of servicing South Africa’s rand dropped the most since 2008 against the dollar as the United Kingdom (UK) voted to leave the European Union (EU), rocking markets globally. The currency slumped the most amongst emerging markets, losing as much as 7.6 percent before recovering somewhat a few days after the announcement. The most worrying concern in the aforesaid development is that the local currency weakened against the currency in which most of government’s debts are denominated.

The US dollar continued to be the dominant currency in the government’s total external debt portfolio as at the end of the fourth quarter of 2015/16. Government debt denominated in US dollar accounted for 68.9 percent, followed by the rand that only accounted for 9.8 percent. Given the above debt structure, it follows that any further weakening in the local currency translates into an increase in the debt stock when converted into the denominated currency, in this case the US dollar, and furthermore, the cost of servicing the debt also increased accordingly.

Erratic and uneven debt repayments can undermine long-term development strategies
As Namibia embarks on various long-term development strategies (Harambee Prosperity Plan, Vision 2030, NDP5, etc.) it is important to note the dangers of erratic and uneven debt repayment situations. Erratic and uneven debt repayments can undermine the long-term development strategy of a country. Large debt service payment imposes a number of constraints on a country’s growth prospects. It drains a country’s limited resources and curtails financial resources for domestic developmental needs. Large debt servicing obligations and debt burdens can depress investment, and hence economic growth through its illiquidity and disincentive effects.

The illiquidity effect can result from the fact that there are only limited resources to be divided among consumption, investment, and external transfers to service existing debt. The disincentive can arise because expectations of future tax burdens which tend to discourage current private investment. This is so because new investors are reluctant to resume activity for fear that they will soon share in defaults with creditors on old debt.

High public debt if left unchecked could be detrimental to sovereign credit profile

Namibia is already on a dangerous budget path, hence the government’s emphasis on fiscal consolidation. Current spending (39.7 percent of GDP) and debt (36.0 percent of GDP which is above the government ceiling of 35.0 percent of GDP) are dangerously high and future spending and debt are on track to rise even higher, in large part due to increasing social sector spending that is aimed at eradicating poverty and inequality, as well as the weak local currency.

High public debt if left unchecked could be detrimental to the sovereign credit profile (credit rating); it could also crowd out private investments and raise inflation. The implications would be severe and pronounced for all Namibians, but most especially for the poor, the elderly, and the middle class.

Higher debt in general is a drag on economic growth
Even more concerning is the slower economic growth, weaker job markets that could potentially result from high debts and costs of servicing. If the cost of debt servicing rises, a greater portion of the government’s budget will go toward interest payments, leaving fewer dollars for other, more economically stimulating types of spending, such as building roads or providing tax incentives for small businesses.

*Mally Likukela is Standard Bank’s Manager of Economic and Market Research.

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