Policy interventions place economy on credible recovery path – Schlettwein

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Edgar Brandt

Windhoek-Following the downgrading by Fitch Ratings of Namibia’s credit rating to junk status on November 20, Finance Minister Calle Schlettwein on Tuesday told parliament that government is confident that its policy interventions are broad-based and indeed place the economy on a credible recovery path.

While Fitch Ratings retained Namibia’s long-term rating on the South African scale at an investment grade (AA+), with a stable outlook, it downgraded the long-term non-rand foreign currency bonds to sub-investment grade BB+, from BBB- investment grade, but assigned a stable outlook, which, Schlettwein pointed out, is better than the outlook assigned by Moody’s Investor Services in August this year and reflects material improvements in a number of key indicators.

“The initially sharp consolidation measures were very necessary to stop a slide into unsustainable macroeconomic fundamentals. As a result our broad fundamentals are now stronger than a year ago and with the more gradual consolidation, improved liquidity, stronger external position and stabilizing debt we can look into the future with cautious optimism,” said Schlettwein.

He added that because the government recognizes the policy significance of these rating actions raised by credit ratings agencies with their recommendations to address the macro-fiscal weaknesses, it has proposed a package of policy interventions in the 2017/18 Mid-Year Budget Review to address these concerns, consistent with the principle policy stance implemented since the 2016/17 Mid-Year Budget Review. Among the key policy interventions are the targeted measures to support domestic economic growth objectives, protect spending in the social sectors, maintain the fiscal consolidation, albeit in a gradual manner, and implement structural policy reforms to reinforce the impact of the policy interventions.

In its report, Fitch recognized material improvements in the macroeconomic and fiscal policy metrics, such as: an improvement in liquidity and government financing conditions, with liquidity increasing four-fold since 2016; a reduction in the current account deficit, from a high of 14.5 percent of GDP in 2016, to an average of about 7 percent over the medium-term; improved international reserves to an average of 4.2 months of import cover over the medium-term, from 3.1 months in 2016; and continued political stability and strong governance, which Schlettwein said remain the hallmarks of Namibia’s democratic governance.

“The stated factors driving the downgrade on the foreign currency denominated bonds include weaknesses in fiscal outcomes, lower economic growth, interruption in the announced fiscal consolidation stance due to increased spending to cover previously un-budgeted spending arrears, the resultant higher than projected budget deficit and public debt over the medium-term. Improvements in these metrics will be important in improving the rating in the medium-term,” Schlettwein explained.

Namibia’s creditworthiness is rated by two reputable international rating agencies, namely Fitch and Moody’s. Both agencies conduct annual assessments of the country’s economy and its sovereign creditworthiness. Moody’s on their part commenced with a rating action three months ago, downgrading Namibia’s long-term non-rand foreign currency bonds to Ba1 with a negative outlook, while maintaining investment grade ratings for the domestic and rand denominated bonds.

Fitch Ratings Agency visited the country for the ratings assessment from October 31 to November 1, 2017. The assessment and rating action were part of the annual ratings, which Fitch as the second ratings agency assessing Namibia, undertakes every year.

Weighing in on the latest downgrade by Fitch, Ngoni Bopot, a research analyst at Namibia Equity Brokers, noted that globally there are funds with an appetite for high yielding bonds, on a risk adjusted basis, so he does not expect a complete aversion to government bonds.

“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,” Bopoto stated.

Executive director for the Economic Association of Namibia, Klaus Schade, warned that the downgrading is expected to increase the future costs of borrowing, which will increase the allocation to statutory expenditure and reduce the funds available for other vital expenditure. However, he emphasised that borrowing costs are most likely not affected in the short-term, since the financial markets have to some extent factored in the possible downgrading. Schade also noted that the downgrading could result in foreign direct investors reviewing their investment decisions and expecting a higher return that compensates for the increased risks.

The downgrading, said Schade, could also affect Namibia’s attractiveness for public-private partnerships since some financial institutions might be prevented from financing PPP’s in countries that do not have an investment grade.
“However, not all is doom and gloom. The downgrading is again a reminder that we need to do things differently and break with old, bad habits … Other areas include the lack of accountability in some parts of the public sector and state-owned enterprises that prevent the taxpayer from reaping the benefits from tax payments and prevents the economy to grow faster. With the right policies in place and mechanisms implemented to improve the business climate and competitiveness, Namibia will be able to turn the tide although it will take a few years probably to regain an investment grade,” Schade said.

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