Namibia is struggling to curb rising debt levels

Following the global financial crisis in 2007-2008, Namibia introduced expansionary fiscal policies and a loose monetary stance, encouraging high credit demand (by households and corporates) and temporary large constructions in the mining sector. This underpinned strong economic growth performance between 2010 and 2015, averaging at 5.7% of GDP. Being overly dependent on the exports of minerals, Namibia has been affected by lower international commodity prices since 2014. The consequential accretion of large current account deficits raised external financing needs to complement the large inflow of SACU (South African Custom Union) transfers, which covered a substantial 12% of GDP in 2015. As of 2016, an austerity program was introduced to address large external and budget deficits and bring public finances back onto a sustainable path. However, economic stagnation in South Africa, together with the drop in government spending and the conclusion of the large investment drive, negatively impacted economic activity. As a result, Namibia tumbled into recession in 2017 (- 0.8% GDP growth) and was merely expected to have reached 1.1% growth in 2018. Over the coming years, GDP growth is expected to moderately recover to 3%, muffled by weak growth in South Africa and Angola, restricted fiscal space, limited mining investment projects and weak export commodity prices, especially uranium.

To finance mounting current account deficits, Namibia attracted substantial FDI and issued Eurobonds in 2011 and 2015 profiting from the favourable global financing conditions at the time. Since 2009, the Namibian dollar has lost about half of its value against the USD due to the downward volatility of the South African rand (SAR) to which it is pegged. Consequently, the external indebtedness as a percentage of GDP doubled between 2010 and 2018 to more than 60%. About 2/3 of this external debt is nonetheless issued by the private sector. The debt servicing burden has been particularly volatile and is projected to grow beyond 30% of current account receipts (including official transfers) as of 2019, a significant yearly financial cost.

Besides the external debt profile, also the public debt sustainability has degraded significantly since 2015. In 2014, the general government debt reached 25% of GDP, a large share being domestically held. By the end of 2018, total public debt increased to an estimated 47% of GDP. In a pessimistic scenario of the IMF, fiscal consolidation efforts would remain limited, leading to yearly budget deficits that could mount to 9% of GDP and an ongoing accumulation of public indebtedness beyond 70% of GDP by 2023.

Downgrade of the medium- to long-term (MLT) political risk classification from 4/7 to 5/7

Namibia is known to be politically one of the most stable countries in the region and the political environment is expected to remain broadly unchanged in the near term. The ruling SWAPO party is likely to continue to dominate politics after the 2019 general elections. However, unemployment reaches 23.3% of the total labor force and inequality is among the highest in the world. Consequently, as in a number of countries in southern Africa, the radical left wing fractions have been calling for land reforms and thorough redistribution of wealth. The structural deterioration of Namibia’s macroeconomic fundamentals since 2015 led to a first MLT political risk downgrade from 3/7 to 4/7 in December 2015. In February 2019, the MLT political risk classification was downgraded again after projections further deteriorated due to the financial and fiscal vulnerabilities mentioned above. In addition, mounting global interest rates could nurture (re)financing costs, both for the private and public sector, and lower capital inflows due to reduced investors’ risk appetite.

Analyst: Louise Van Cauwenbergh  – l.vancauwenbergh@credendo.com