Uncertainty over N$36,8 billion bond downgrade

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Bullish… Treasury has promised to immediately address the concerns raised by Fitch.

Desie Heita

Windhoek-The latest downgrading of Namibia’s sovereign rating has put in a predicament institutions holding Namibia’s N$36,8 billion in bonds and notes, amidst looming expectation of a decline in investor confidence.
Fitch Ratings downgraded all of Namibian debt instruments floating the market to BB+ from BBB-, which is essentially a note to those holding the bonds that such bonds are prone to changes in the conditions of the Namibian economy.

While such a rating is still positive, and is above the BB rating that indicates an elevated vulnerability to default risk, it still pose challenges to institutions whose investment policy dictates that they only hold high yield bonds that are AAA rated and not less.

Even the local market would now find itself considering how long to hold onto the bonds that are not rated according to their investment policies. Further, analysts are warning that the costs of financing public debts are poised to shoot up, eating further in the Treasury purse.

“Globally there are funds with appetite for high yielding bonds (on a risk adjusted basis) so we do not expect a complete aversion to government sovereign paper. We probably should be more concerned about local funds and institutions whose investment policies appear to in general only accommodate instruments with an investment grade. All in all our traditional perceptions of risk will certainly be tested,” says Ngoni Bopoto, an investment strategist at Broadside Capital.

The debt instruments downgraded by Fitch range from N$140 million in local currency, bonds and notes worth N$1,49 billion in South African rand and bonds N$35,18 billion in US dollars. The maturity levels range from June 2020 to April 2035, at a rate ranging from 10.51 percent to 3.55 percent. Finance minister Calle Schlettwein says the downgrading of the long-term non-rand foreign currency bonds to sub-investment grade BB+, with a stable outlook, “is better than the outlook assigned by Moody’s Investor Serve in August this year and reflects material improvements in a number of key indicators.”

He is however bullish that not only would government be able to work on correcting the factors that led to the downgrade but that Treasury would be able to immediately address the concerns raised by Fitch.

“Among the key policy interventions are the targeted measures to support domestic economic growth objectives, protecting spending in the social sectors, maintaining the fiscal consolidation, albeit in a gradual manner, and implementing structural policy reforms to reinforce the impact of the policy interventions,” Schlettwein said.
The factors driving the downgrade on the foreign currency denominated bonds include weaknesses in fiscal outcomes, lower economic growth, and interruption in the previously announced fiscal consolidation stance due to increased spending as a result of the previously unbudgeted spending arrears.

The high deficit realised after the tabling of the mid-term review budget and the high level of public debt over the medium-term are also other factors. The mid-term budget that was tabled last month increased government expenditures to N$61,6 billion from N$51,5 billion, doubling budget deficit to 6,3 percent of the GDP from 3,6 percent.

It also pushed the public debt to 44 percent from the earlier anticipated 38 percent. Government’s own debt benchmark is 35 percent of the GDP.

Bopoto warned that going forward, government could expect the cost of financing public debt to rise in line with the increase in perceived risk.

“The principal concern is in our view dented credibility of government’s fiscal consolidation stance and by extension a diminished ability to lower or stabilise macro-prudential ratios,” Bopoto said.

“Given obvious constraints in managing the expenditure side; government’s ability to generate additional revenue through partial privatisation of SoEs, broadening the tax base and improving collection remains key to a sustainable near to medium-term turn around. Political will is crucial in driving the former strategy.”

Indileni Nanghonga, an analyst at local stock brokerage, Simonis Storm, said: “The major impact on bond yields and currency will only be felt through after South Africa gets downgraded on the 24th of November 2017. In addition, structural problems such as high unemployment (specifically youth unemployment), shrinking private sector, overregulation of many industries, excessive increase in overall debt in past 10 years and lack of skills will drag on economic growth and widen the income distribution.”

“We are not surprised by the downgrade as government failed to adhere to fiscal consolidation by increasing expenditure during the midterm budget.” -Additional reporting by Edgar Brandt.

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