Surviving on junk

The international credit rating agency Moody’s has added its voice to various local analysts and observers who are increasingly alarmed that Namibia’s economic and fiscal predicament could spark social discontent.

Bumping Namibia’s sovereign credit rating another notch into junk last week, Moody’s the country’s “exposure to social risks is highly negative”.

“High income inequality and high levels of unemployment hamper competitiveness and have the potential to fuel discontent. Namibia continues to suffer from high unemployment despite government efforts to address the issue,” Moody’s said.

With Namibia’s long-term issuer and senior unsecured ratings now on Moody’s first notch of its B1 category (down from Ba3), government’s debt in foreign currency now falls in the rating agency’s “highly speculative” bracket – down from the “speculative” bracket previously. This was the country’s fourth sub-investment downgrade by the international credit rating agency since 2017.

Only two more notches remain before Namibia’s sovereign credit rating sinks into Moody’s Caa1 category, where debt is considered as bearing “substantial risk”.

At Fitch Ratings, Namibia is on the second step of its non-investment grade ladder; its debt viewed as “speculative”.

Persistent low economic growth and government’s high debt burden were highlighted as Moody’s motivation for its latest downgrade decision.

Commenting on Moody’s decision, Cirrus Capital referred to its warning already in the analysts’ Economic Outlook 2020, that Namibia’s weak economic and fiscal position left the country “incredibly vulnerable to any external shocks”. Namibia’s recessionary cycle, which technically ended last year, started in 2016.

ECONOMIC CARNAGE

“The rising debt burden over the forecast horizon has been driven by pandemic-related expenditure (notably in 2020/21 and somewhat in 2021/22), as well as stagnating gross domestic product growth (now growing off an eroded base),” Cirrus says in its analysis on Moody’s rating action.

The analysts continue: “Given the extent of the damage to the economy over the last few years, this leaves Namibia more vulnerable to shocks going forward – particularly with persistent levels of high unemployment, low quality employment, high household indebtedness, increasing poverty and extreme income inequality.”

Cirrus agreed with Moody’s that, given the socio-economic backdrop, slow gross domestic product (GDP) recovery will result in increasing social spending pressures over the next few years and presents greater risk for fiscal slippage.

According to Cirrus, this is particularly the case “with the impact of rising fuel and food prices on the average Namibian, exacerbated by a civil service that has not seen wage adjustments for about five years now”.

ALARM BELLS

The fuel price in Namibia has increased by nearly 52% since the beginning of 2021. Transport, third biggest weight in the national consumer basket, recoded an annual inflation rate of 13.2% in February compared to 0.2% a year ago.

Food, the second biggest item in the consumer basket, printed 5.5% compared to 5.7% in February 2021.

Simonis Storm warned that, “if history repeats itself under similar conditions in 2022, then we can expect to see headline inflation close to 2008’s levels” this year. The figure in 2008, the last time global oil prices were at similar levels, average 9.1%. Overall annual inflation in Namibia in February this year stood at 4.5% compared to 2.7% a year ago.

With government once again postponing the housing and population census, which was scheduled for later this year, due to a lack of money, Namibia has no official clue on the impact of the recession and the Covid-19 pandemic on job losses.

The Namibia Statistics Agency (NSA) last released a Labour Force Survey in 2018, which pegged the unemployment rate at 33.4%. The consensus among local economists is that unemployment current stands at between 40% and 45%.

DEBT

Namibia’s rising debt burden, driven by continued large deficits and larger borrowing requirements - given the government’s maturity profile - severely constrain the sovereign’s ability to absorb shocks, Cirrus said.

Budget documents tabled by finance minister Iipumbu Shimmi in February show Namibia’s total debt is projected to increase to nearly N$140.2 billion in 2022/23 – up from an estimated N$125.8 billion in 2021/21. By 2024/25, it is expected to reach nearly N$165.5 billion.

Moody’s expects Namibia’s debt-to-GDP ratio to reach 75% in 2024/25 – coming from 25.6% in 2014/15, Cirrus pointed out. The rating agency is also concerned about government’s annual gross borrowing requirements of 20%-30%.

“These gross borrowing requirements are materially larger than the fiscal deficits, because of the sovereign’s short average maturity (at about five years). As we have stressed repeatedly, the short maturity profile and large funding requirements leave Namibia at risk of materially higher borrowing costs, as average funding costs converge on marginal funding costs,” Cirrus said.

According to the analysts, Namibia’s large requirement for funding over the medium-term and concerns around successfully sourcing this domestically add upside pressure to the cost of funding.

Interest on debt is set to slurp up between 15% and 16% of revenue in the three fiscal years to 2024/25.

‘LOCAL IS LEKKER’

The domestic funding requirement has decreased substantially from the last two years, which is a positive move, but remains materially higher than pre-Covid levels, Cirrus said.

Domestic borrowing is down from N$17.7 billion in 2021/22 to a projected N$13.6 billion this fiscal year and nearly N$11.5 billion in 2023/24. Domestic debt is set to increase from and estimated N$93.6 billion in 2021/22 to N$125.2 billion in 2024/25.

According to Cirrus, demand for domestic debt over the last few years was largely supported by the increased domestic asset requirement for pension funds introduced in late 2018.

“Subsequently, the pension fund industry was more than sufficiently allocated to Namibia in the second quarter and third quarter of 2021. The slowing demand saw spreads increase dramatically in late 2021 and early 2022, as government became more of a price taker in primary auctions,” Cirrus said.

They elaborated: “Given the current high exposure to Namibia for pension funds, the quantum of inflows (and thus demand) from pension funds is expected to slow dramatically. Slowing demand will put further upward pressure for domestic borrowing costs, despite the slower increase in new issuances (relative to the last two years).”

This is exacerbated by the global rate hiking cycle, which is generally increasing funding costs and reducing the relative attractiveness of funding government vis-à-vis private sector credit extension, Cirrus said.

ROLL OVER

Said Cirrus: “Including treasury bills (which are rolled, and will be rolled into high rates), the government has approximately N$70 billion in debt maturing over the next five years.

“Given this quantum and the state’s low cash reserves, it will have to roll much of this debt as it matures (or nears maturity). However, we have also seen the trend in these ‘switch auctions’ that the cost of funding tends to increase quite dramatically.”

The analysts pointed out that Namibia’s external debt will also fall due during this period, including repayments of the Rapid Financing Instrument (RFI) of the International Monetary Fund (IMF), which boosted state coffers during the brunt of the Covid-19 pandemic. These repayments will have to honoured quarterly, starting from June 2024 until June 2026.

Namibia’s second Eurobond of US$750 million must be redeemed in October 2025.

“However, we believe that Namibia will, at minimum, partially roll the second Eurobond. Rolling (at least partially) of the Eurobond will also place less pressure on the foreign exchange reserve position (given other repayments, e.g. IMF RFI),” Cirrus said.

SINKING

Moody’s, in its latest rating report, said government’s quarterly replenishment of its sinking fund in US dollars will not be enough to cover the full redemption of the Eurobond in 2025.

“As we understand it, the US-dollar sinking fund is not being replenished after its depletion with the [first] Eurobond redemption in Nov 2021. As Moody’s notes, there are quarterly contributions into the South African-rand (ZAR) sinking fund. Moody’s believes this mitigates refinancing risks of domestic debt,” Cirrus said.

This sinking fund had a balance of about N$1.8 billion, with quarterly contributions of N$200 million from revenues of the Southern African Customs Union (Sacu) pool, Cirrus said. This is in anticipation of the NAM01 redemption of N$1.56 million on 19 November this year.

“We do not believe this sinking fund will mitigate refinancing risks of domestic debt, as government is running low on cash (excluding the ZAR sinking fund) and is largely reliant on successfully rolling domestic debt as it matures over the medium term,” Cirrus said.

POLICY

According to Cirrus, a material concern remains Namibia’s policy environment – “not just with policy uncertainty, but the role policy plays as a deterrent to local and foreign investment”.

“This not only inhibits investment, but also job creation and value addition, which in turn reduces the state’s potential revenue,” the analysts said.

“Recent discourse on natural resources has been concerning, particularly given the potential this has to see the state look at weakening property rights or looking to draconian amendments to maximise rents.”

Cirrus does not believe Moody’s rating decision will have a material impact on government’s cost of borrowing in the domestic market, “as this is more closely linked to movements in the South African Government Bond curve (which has seen positive ratings sentiment) and several other domestic factors as highlighted above (demand vs supply, cash flow constraints, etc.)”.

“However, these ratings actions and outlooks will have some consideration in pricing for hard currency debt placements,” the analysts concluded.