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Wide divergence on debt dynamics between Ministry of Finance and private analysts

Wide divergence on debt dynamics between Ministry of Finance and private analysts

Over the medium to longer term, an international research company does not buy the Namibian Government’s projections that total debt as a percentage of Gross Domestic Product, will come down significantly.

While the Ministry of Finance projects the deficit for this year at 2.5% of GDP, and at 1% for next year, BMI Research, a unit in the Fitch group, sees a 5% deficit for this year, and a slightly bigger 5.1% for next year.

Releasing their 10-year view of the Namibian economy on Tuesday, 09 January 2018, BMI expects only a few major elements to have the biggest impact on the economy this year.

On the positive side, the researchers expect the economy to improve significantly due to the large jump in uranium production, but this will be tempered by lacklustre VAT receipts, and a decline in transfers from the revenue pool of the Southern African Customs Union (SACU). Furthermore, the economy will continue to be dragged down by the government’s massive wage bill resulting from the over-sized, inefficient civil service.

“We expect Namibia’s budget deficit to narrow in FY2018/19 as increased activity in the mining sector boosts revenues . That said, progress towards fiscal consolidation will slow thereafter, as shortfalls in Value Added Tax (VAT) collection and falling Southern African Customs Union (SACU) receipts will weigh on revenues,” BMI stated.

On the civil service drag, BMI said “The government estimates recurrent expenditure growth to slow sharply in the years ahead – largely on the back of plans to freeze the public wage bill and reduce the number of civil servants by 2%. However, we see significant upward pressure on the wage bill ahead of the 2019 general elections.”

Despite the elevated debt levels, BMI does not see the government defaulting, stating that a credit event is unlikely, but this does not considers the government’s cost of borrowing. “Currency and roll-over risks will remain present over a multi-year timeframe,” they said.

Overall, BMI expects government revenues to rebound this year, boosted by the increased uranium production at the Husab Mine, but due to base effects, growth will moderate in 2019 and 2020. Their medium term outlook for SACU revenues is also negative although they point out that political uncertainties in South Africa make it difficult, if not impossible, to model reliable forecasts.

“Traditionally accounting for around 30% of total [Namibian] government revenues , SACU receipts will slow due to continued sluggish real GDP growth in South Africa, as a challenging regulatory environment will continue to stymie investment in the mining and manufacturing sectors,” BMI stated.

Given the importance of SACU receipts for the Namibian economy, BMI expects slower growth in government revenue, also in 2019 and 2020.

Warning about the danger of sacrificing investment for the sake of maintaining current expenditure, BMI said “Ultimately while we expect the administration to continue cutting infrastructure projects to avoid a consistent widening of the deficit, [but] we don’t think this will be enough to offset the rise in recurrent expenditures going forward.”

BMI expects total government debt to remain close to 45% of GDP for at least the next five years.


 

 

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