Borrowing, the exchange rate and the Euro bond issuance for Namibia have been blamed in large part for the escalation of the country’s total debt to N$143 billion, as announced by the Bank of Namibia recently.
This represents a 30.6 percent increase year-on-year, compared to N$109.9bn recorded in the prior year. Debt as a percentage of GDP stands at 38.5 percent, which is above the target of 35 percent.
The private sector has also been struggling and government had to chip in to play a substitute role – an undertaking that requires billions of dollars.
Observers believe the current debt position is unsustainable, yet they foresee a continuation of the situation for a long period. At a debt-to-GDP ratio of 38.5 percent, Namibian is below South Africa, which is at 50.1 percent.
Government is assuming a larger role in the economy, but this requires a strong private sector for sustained economic growth. Yet, worryingly, the private sector – with the exception of mining – actually seems to be contracting, mainly due to subdued consumer spending, drought, inflation and the regional political backdrop.
With the private sector struggling to play its role in the economy to the fullest, government has stepped in by spending big in order to fill the void left by the private sector’s inability to weather the current storm.
In terms of government debt, by the end of the last quarter of 2015/2016, about 46 percent of the debts were owed to foreign investors, while the remaining 54 percent is owed to domestic investors, according to the Bank of Namibia’s Deputy Director for Financial Sector Development Emma Haiyambo.
“In terms of private sector credit extended by lending institutions, about 41 percent is to businesses (corporates) while about 59 percent is to individuals in the form of instalment credit, mortgage, overdraft and others,” she said this week.
Although government debt is above the set ceiling of 35 percent of GDP, it remains well below the median (average) of 40 percent for Namibia’s sovereign rating peer group of BBB-. Haiyambo, therefore, is not ready to panic just yet.
Government is not the only one in debt. “Private debt, while having generally showed an increasing trend over the year, has also remained manageable so far,” she said. Statistics show that private sector debt also rose by 12.1 percent year-on-year, compared to 11.1 percent recorded during May 2016.
“Government is spending a lot at the moment,” Purvance Heuer, director of research and securities at Simonis Storm told New Era Weekend. “If government borrows in the capital markets, then they will owe banks, insurance companies and asset managers that represent pension funds. Private individuals also invest in government debt,” Heuer explained.
On a monthly basis total debt contracted by 0.6 percent, compared to a positive growth of 2.2 percent the prior month. The contraction in total debt can be attributed to a monthly contraction in government debt by 2.9 percent, compared to 5.0 percent recorded in the prior month, as a result of a stronger South African rand, the central bank said last month. This has helped reduce inflationary growth in foreign debt.
The government remains the biggest contributor to increasing total debt levels – and this is perhaps why the country remains is in a grip of panic over this escalation.
“The 49.7 percent month-on-month spike in government debt during September 2015 resulted from the issuance of the two JSE bonds worth N$750 million. Annually, government debt grew by 66.6 percent in June, compared to a 18.9 percent recorded the prior year.
Corporate and household debt grew gradually by 12.7 percent year-on-year and 11.7 percent year-on-year, respectively.
Foreign reserve levels came in 15 percent lower, compared to a N$24.8 billion recorded in May 2016. The Bank of Namibia attributed the slowing foreign reserves to an increase in net government payments, as well as an increase in foreign currency sales to commercial banks.
“We continue to believe that foreign reserves will remain under pressure. Apart from financial strain faced by the Angolan economy, we believe that the strong rand (weaker USD) will affect the value of foreign reserves,” Simonis Storm said in a post-mortem analysis of the central bank’s announcement.
Simonis forecast that GDP growth for 2016 would be at 4.1 percent until second quarter GDP figures are released. Average inflation is pegged at 6.5 percent and no interest rate hikes are forecast for the rest of the year.
Government debt-to-GDP in Namibia averaged 20.50 percent from 1993 until 2015, reaching an all-time high of 27.49 percent in the fourth quarter of 2004 and a record low of 14.22 percent in the second quarter of 2010, according to the Namibia Statistics Agency (NSA).
Generally, government debt as a percent of GDP is used by investors to measure a country’s ability to make future payments on its debt, thus affecting the country’s borrowing costs and government bond yields.