Namibia’s 2025/26 Budget outlook: Risks, realities, and market sentiment

In the intricate process of budget formulation the balance between projected revenues, expenditures, and borrowing costs is often treated as a precise science. However, beneath this veneer of rationality lies a far more unpredictable force: the psychology of markets. Keynes’s concept of animal spirits reveals that economic decisions are rarely based solely on cold, hard facts - they are driven by instinct, emotion, and sometimes irrational exuberance.

A country’s budget, therefore, isn’t just a matter of numbers; it’s vulnerable to the whims of investor sentiment and global market psychology. The sentiment around Namibia’s fiscal health has been remarkably positive over the last 18 months as interest rates remained relatively low, the economy saw a boost in economic activity on the back of foreign direct investment and the budget has been successfully executed. However, this optimism must not be taken for granted.

UNEXPECTED TWISTS AND TURNS

When optimism turns to anxiety or speculative fervour overtakes caution, the cost of borrowing can soar, sending interest expenses spiralling beyond expectations. This psychological turbulence, often lurking just below the surface of fiscal planning, can turn a seemingly stable budget into a financial minefield, where interest payments become the hidden drain on the fiscus,

More specifically, there exists a notable opportunity for market sentiment to temper investor

exuberance, particularly considering several critical factors. A revenue shock - where government revenues fall short of expectations - coupled with the government’s cash-strapped position, can significantly undermine investor confidence. This is further exacerbated by a large local maturity profile, where substantial debt repayments loom on the horizon, creating additional fiscal pressure.

ANTICIPATED SPENDING

Moreover, an ambitious spending plan, if perceived as overly optimistic or unsustainable given the current fiscal constraints, can heighten concerns about the government’s ability to meet its financial obligations. These factors can combine to shift market sentiment from optimism to caution, leading investors to reassess risk, demand higher yields, and reduce their exposure to government debt, all of which can drive borrowing costs higher than initially projected.

The ministry of finance (MoF) expects the deficit to grow to 4.6% of gross domestic product (GDP) in the fiscal year (FY) 2025/2026, resulting in a deficit of N$12.8 billion - N$1.1 billion above the mid-year estimate. This has cascaded down and resulted in a downward revision of the primary surplus from N$1.3 billion to N$915 million (to 0.3% of GDP) in FY25/26.

Government deficit

Thereafter, the deficit is expected to decrease over the forecasted period moving down to 4% and 3% of GDP in the subsequent financial years. There is a risk associated with the widening deficit, mainly since revenue drivers (SACU Receipts and diamond mining related taxes) have come under immense pressure.

Furthermore, Namibia’s deficit as a percentage of GDP is expected to print at similar

levels to South Africa into FY25/26 although South Africa only expects GDP growth of 2% whereas Namibia expects GDP to grow at 4.5%. In addition, a large amount of debt obligations is due this year and next, it is likely the government may face fiscal challenges.

CURRENT FINANCIAL POSITION

The government’s latest financial position stands at N$7 billion, but the large repayment due in October is expected to significantly reduce their bank balances. In 2021 the first Eurobond payment was executed and as a result the government bank balances experienced a sharp negative shock. If the same is to be expected following this year’s Eurobond redemption; lower government balances are to be expected and could force a slowdown in expenditure, which would reduce liquidity in the economy, delay payments to

contractors and workers alike, and amplify the broader economic impact.

*John-Morgan Bezuidenhout is the portfolio manager at Momentum Investments**