Namibia’s Credit Rating downgrade “We are not junk”
Analysis and opinion by the Namibia Chamber of Commerce and Industry on the Moody’s downgrade of Namibian government debt.
On the 11th of August, Moody’s Investors Service (“Moody’s”) downgraded Namibia’s long-term senior unsecured bond and issuer ratings to Ba1 from Baa3 and maintained the negative outlook.
The key factors for downgrading the rating were: 1) Erosion of Namibia’s fiscal strength due to sizeable fiscal imbalances and an increasing debt burden; 2) Limited institutional capacity to manage shocks and address long-term structural fiscal rigidities; and 3) Risk of renewed government liquidity pressures in the coming year
OUR THESIS
The Chamber has received many emails and a few calls from members, asking one question: What are the consequences of the downgrade?
In summary:
We respectfully consider Moody’s downgrade a nonevent as it is based on retrospective information. In fact, financial markets ignored the ratings downgrade with our credit spreads only widening by 4-6 basis points as investors digested the news, but we have seen spreads beginning to stabilize. It is also important to note that despite this widening, in historical context terms, spreads are 50-100 bps tighter since the beginning of the year and more than 130 bps tighter since January 2016. That is the market’s assessment of the credit risk of the Namibian Government. It has improved since January 2016.
In our view, except for the increasing ratio of our foreign debt burden in relation to the average amount of our foreign currency reserve holdings, Moody’s reasons for Namibia’s downgrade are misleading and appear uninformed. Their thesis appears to be based on the assumption that Namibia is a banana republic (politically unstable economy dependent on limited resource product like bananas). However, this is far from the truth and hence factors 2 and 3 cited by Moody’s are not true and consequently Namibia is not junk.
The only downgrade that will really matter to our cost of borrowing in the long run is the one imposed by the bond markets. Credit agency ratings are important in the short run, because their ratings are deeply embedded in the financial system by regulators, but in the longer run it is the markets’ own ratings that will matter. Markets will perform their own credit analysis of our country and will do their own debt downgrading, i.e., they’ll demand higher interest rates if things really deteriorate.
Given the current fiscal stance and general macroeconomic stability, Namibia is probably one of the only true investment grade nations in the world with a debt-to-GDP ratio around 43 percent. This view does not mean there are no areas of improvement for our policy makers. To deny our apparent and current problems is to be untrue to ourselves and our cause, which is to fight poverty and inequality. For one, the ratings downgrade should be a wakeup call for us to re-examine our debt strategies. Quite frankly, we doubled the stock of the Namibian Government debt in three and half years and the sovereign debt management strategy rule, which aimed at an 80:20 ratio of domestic debt to foreign debt.
At present, foreign debt is around 34 percent of total sovereign debt. This could qualify as “irrational exuberance” in the words by Sir Allan Greenspan. The growth in foreign debt from almost nothing to N$22.5 billion, in the same period is material for a N$150 billion economy, especially when looked at in relation to our Foreign Exchange Reserves, which is averaging N$25 billion. This is particularly a concern given our small size and open nature of our economy while our currency is not a reserve currency. If that debt becomes due when there is a dislocation in the credit markets, the impact on reserve position and liquidity could be crippling.
Namibia’s next Moody’s scheduled rating review is on the 10th of November 2017 and they have highlighted that a revision of the outlook to stable is likely if fiscal consolidation leads to a marked slowdown and/or reversal of debt accumulation, an improvement in twin balances supported a sustained easing of funding conditions in the domestic market, and increased foreign reserves.
