A revised outlook is not a downgrade – Schlettwein



Although the international credit rating institution, Fitch Rating Agency, revised Namibia’s economic outlook from stable to negative at the end of last week, Finance Minister Calle Schlettwein has cautioned against reports that the domestic economy has been downgraded.

In fact, Fitch has reaffirmed the country’s BBB- investment rating, but with a warning that a downgrade may be inevitable if government does not tighten its belt by suspending expenditure on unproductive assets, such as travel allowances, vehicles, office furniture and overtime.

“There have been some comments made in reaction to the release of this ratings opinion. First and foremost, Fitch Ratings has affirmed Namibia’s sovereign credit rating at the investment grade notch of BBB-. In this sense, the word ‘downgrade’ has been misused. This was not a ratings downgrade, as some have implied,” Schlettwein said.

According to the director of research at Simonis Storm Securities, Purvance Heuer, the revision had been expected.
“We’ve been expecting a revision as a minimum due to the growing budget deficit and the increasing debt as a percentage of Gross Domestic Product (GDP) ratio, but for now we believe that the status quo remains, as this wasn’t a downgrade at the moment. In order to project whether a downgrade will happen we must monitor government debt, the budget deficit and GDP.

“Our forecast for GDP for 2016 is 4.1 percent, mainly driven by government spending and upward surprises in the mining sector. Furthermore, it should also be mentioned that this is not a Namibian issue only. It is an emerging economy issue. Emerging economies, or commodities-exporting economies, such as South Africa have being experiencing the wrath of low commodity prices, which have exerted pressure on their export revenue and fiscal positions,” Heuer explained.

Investment strategist at Capricorn Asset Management Suta Kavari also pointed out that an outlook revision is considered a prelude to a downgrade, or is at least indicative of the likely direction of a country’s credit rating. He said basically the outlook revision reflects Namibia’s deteriorating fiscal position.

“Fitch noted that Namibia’s growth trajectory remains a key rating strength, but added that the New Equitable Economic Empowerment Framework (NEEEF), which lacks detail, could hamper growth performance.

“Needless to say, NEEEF has caused a lot of jitters and unease in the local economy, leading to a major slowdown in foreign investment. That slowdown will continue so long as mutterings regarding NEEEF’s implementation continue unabated,” Kavari opined. He further noted that, encouragingly, Fitch reportded that: “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”.

The finance minister meanwhile emphasised the fact that Namibia does not exist in a vacuum.
“The current challenging global growth outlook, depressed commodity prices, and in particular the weak economic performance of our neighbours in the region, have most certainly led to lower growth in Namibia than was previously envisaged,” Schlettwein remarked in Swakopmund yesterday, while addressing delegates at the 39th Annual Conference of the Organisation of Eastern and Southern African Insurers.

According to the Fitch Ratings report, one of the key drivers of the outlook revision to ‘negative’ relates to Namibia’s budget deficit, which widened sharply to 8.3 percent of GDP in the 2015/16 fiscal year. The agency noted that this is well above the government’s five percent target and is in fact the worst on record.

“The deficit has worsened progressively from 0.1 percent in FY12 to 3.4 percent in FY13 and 6.4 percent in FY14, and is well above the ‘BBB’ category median of 2.7 percent. 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 report states.

Fitch continues that the government is targeting a narrowing of the deficit to 4.3 percent 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 percent of GDP by 2018 from 12.4 percent in 2014,” stated the Fitch Ratings report.

Secular is used here as an economic term to refer to market activities occurring over a long-term timeframe.
Said Schlettwein: “One of the major factors in this ratings opinion was the elevated level of public deficit to GDP observed in the 2015/16 financial year. This was chiefly the result of actual government revenue coming in below its target. I agree with Fitch when they identify ‘a secular decline in SACU revenues’ as one of the key challenges to Namibia’s public finances.

“SACU revenues have long constituted a large part of government revenue – around 30 percent in recent years. Many are estimating that the South African economy is bordering on a recession and it is an unavoidable reality that a weaker South Africa means weaker government revenue in Namibia.”

He added that government revenue growth has been constrained by persistently low global commodity prices (particularly in the diamond and uranium industries) and spillovers from the slowing Angolan economy, which curtails consumer demand in Namibia.

“In this more challenging environment, one simply cannot expect to see the strong revenue growth of the 2012-2014 period repeated in the coming few years,” Schlettwein cautioned.

Earlier this year, the finance minister tabled the 2016/17 budget as an instrument of pro-growth fiscal consolidation. He noted that this reflects a continuing commitment to making public service delivery more efficient by reducing wasteful expenditure and achieving better value for taxpayers’ money.

He also noted that allocations to categories, such as travel allowances and overtime, have been reduced significantly, while purchases of vehicles and furniture have been postponed in many cases, which is an approach welcomed by Fitch in its statement.

“Government will continue to address these challenges head-on and the Ministry of Finance will not shirk its duty in maintaining the macro-economic and fiscal sustainability that is crucial to our development. Thus, the government will reinforce its time-tested approach to responsible public finance management, pro-growth fiscal policy and macro-economic stability in the upcoming Mid-Year Budget Review for 2016 and for the next Medium-Term Expenditure Framework (MTEF),” Schettwein said.



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