The Popular Democratic Movement (PDM) has cautioned that Namibia is one notch away from an international credit ratings category where interest on the country’s existing debt will rise sharply; government bonds will be worth less than junk and new bonds will be very expensive to issue.
This is according to PDM’s treasurer general and member of parliament Nico Smit, who was reacting to last week’s downgrade by Moody’s Investors Service of Namibia’s long-term issuer and senior unsecured ratings with a negative outlook.
In a statement, Smit said Moody’s downgrade of Namibia’s government debt comes as no surprise, given the continuously deteriorating position of the fiscus, exacerbated by additional funding requirements as a result of the lockdowns.
Said Smit: “The government’s ability to raise funding as a long-term borrower has been revised down from the previous Ba2 rating to Ba3. This is the last step in the ratings scale before descending to the B and C levels, where government debt is viewed as high-risk investments.
At the new rating of Ba3, the designation is still ‘speculative’ but coupled to a negative outlook. The implication is that Namibia’s debt will enter the high-risk category at the next scheduled ratings assessment”.
Moody’s downgrade came as the ratings agency expressed concern about Namibia’s higher debt burden, which is expected to continue to rise for the foreseeable future while debt affordability is weakening. While the international ratings agency admitted that the coronavirus shock continues to pressure the domestic revenue generation capacity, they noted this is exacerbated by weak growth prospects.
Similar to previous downgrades, Moody’s major concern is a significant escalation in government’s debt with little to zero options left to reduce the debt burden. Government debt is expected to exceed 72% of Gross Domestic Product this year and could come close to 75% next year.
Smit emphasised that these debt levels are based on a national budget deficit of nearly 10% which he called “an unprecedented level in the history of an independent Namibia”.
“However, the main concern for the near and medium-term is the government’s ability to service the interests on its debt load. The IMF benchmark, of 10% of total revenue, has long been surpassed with the 12% mark breached in 2019 and the 16%-mark looming in 2021,” said Smit.
The PDM MP called the current debt scenario very worrisome, adding that the logical conclusion, based on available data, is that Government is already in a situation where some part of its new borrowings is used to pay interest on old debt, despite restructuring the debt maturity profile since the end of 2016.
Said Smit: “Given the external shock that came from Covid-19, all indications are that the government’s fiscal position will deteriorate by between 8% and 10% this year and that the expected return to growth in 2021 is based on very tentative assumptions. Both Moody’s and Fitch share this view, hence their negative outlook”.
He added that Namibia’s fiscal house is not in order and stated that Covid-19 cannot be used as an excuse.
“The government has become so completely dependent on borrowing, that just one more small external shock will put it in a position where it cannot pay the interest on its debt. This will lead to an automatic downgrade to the ‘C’ category according to Moody’s system, which will indicate that the government is either about to or has already defaulted on its financial obligations. When this happens, IMF rescue loans are the only option. At that point, every Namibian will realise that Zimbabwe is no longer just a neighbouring country, but that we have, in fact, become a second Zimbabwe,” said Smit.
Moody’s also expressed concern about the stated gradual reduction of Namibia’s massive civil servant wage bill which was intended to be reduced annually by some 2% through natural attrition.
Said Smit: “Moody’s also thinks that this reduction is politically untenable, which indicates that government finances will continue to slide into the abyss until a Zimbabwe situation is reached. All the danger signs are already there: the budget deficit is out of control, government debt is at a critical level, and growth prospects are bleak”. However, with no immediate solution in sight to reduce the size of the civil service and with very weak economic conditions, Smit is adamant the situation will continue to worsen.
“Both Fitch and Moody’s will downgrade Namibia’s sovereign debt again within the year. The imminent maturity of the first Eurobond early next year can trigger a calamity in the local bond market. At that point, the government will not be able to raise loans through bonds, will not be able to pay the interest on its existing bonds, and will inevitably go into default,” Smit warned.