Change in economic mood
Moody’s feeling upbeat
Government's credit rating for its debt in foreign currency is still labelled as junk, but Moody's has changed its outlook from stable to positive.
Moody's has given Namibia a positive economic outlook for the first time since it began rating the country in 2011, driven by higher commodity prices, renewed investments in mining, and the potential for significant new developments in hydrocarbon and renewable energy resources over the rest of the decade.
The global credit rating agency recently changed the outlook on government from stable to positive. In the previous years, Moody’s labelled Namibia’s outlook either as stable or as negative.
Moody’s latest credit rating, however, kept Namibia’s long-term issuer and senior unsecured ratings on the first notch of its B1 category. This means government’s debt in foreign currency remains in Moody’s “highly speculative” bracket and is still regarded as junk.
Changing the outlook in its latest rating action, Moody’s said it “reflects Namibia's improved growth prospects supported not only by cyclical factors like higher commodity prices in a post-pandemic environment and renewed investments in the traditional mining industries, but by the prospect of significant new hydrocarbon and renewable energy resource developments over the remainder of this decade that could prove transformational for the economy”.
The rating agency, however, added that these developments were at “an early stage”. “The nature and significance of the credit benefits to arise from development of hydrocarbons and renewable energy are highly uncertain,” Moody’s cautioned.
Fiscus
In the past fiscal year, which ended in March, government recorded its first primary budget surplus reading since 2012. Moody’s estimates the primary surplus at 1.7% of GDP, supported by a strong revenue contribution from the pool of the Southern African Customs Union (SACU), which amounted to about 10 percentage points (pp) of GDP or 30% of total revenue.
Moody's said it expects the government's initiatives to address existing spending rigidities—including efforts to further consolidate the wage share, reduce the subsidies/transfers bill to state-owned enterprises (SOEs) via operational efficiency improvements and follow sound procurement practices—to mitigate the fiscal impact of volatile SACU revenue.
Moody's estimates that the debt/GDP ratio has declined to below 64% of GDP in fiscal 2023 after peaking just below 70% of GDP in fiscal 2021.
“A shift to a higher potential growth rate, if sustained by the expansion of new projects, would help reduce the debt/GDP ratio further to about 60% in fiscal 2025. A renewed build-up of fiscal buffers would strengthen the credit profile after an increase in the debt/GDP ratio by over 50 percentage points recorded in 2010-2021,” it added.
The agency said it will assess the extent to which the cyclical growth improvement and expansion in new natural resource projects is likely to help sustain the shift to fiscal primary surpluses and maintain the debt to gross domestic product (GDP) ratio on a declining trajectory.
“Moody's will also monitor the development and implementation of a robust resource management framework that will be key to avoid an unbalanced depletion of these natural resources,” it added.
Debt
Moody’s affirmed Namibia’s sovereign B1 long-term foreign and local currency issuer and senior unsecured ratings in its latest action.
This captures the government's relatively high debt burden and elevated cost of debt compared to higher-rated peers, in addition to its comparatively large gross financing needs, Moody’s said.
“The affirmation of the B1 rating captures the government's comparatively high cost of debt at 4.8% of GDP in fiscal 2023 and the debt burden at over 60% of GDP in comparison with higher-rated peers where the median debt/GDP ratio is below 50%,” the agency said.
Eurobond
It also reflects government's comparatively large gross financing needs at about 20% of GDP annually, including a temporary jump to over 25% of GDP in fiscal 2025 reflecting the upcoming U$750 million Eurobond maturity on 29 November 2025.
“Namibia's government liquidity risk is mitigated by the large domestic funding base, including the banking and non-bank financial sector comprising insurance companies and pension funds. Rollover risk is also being reduced by the gradual lengthening of the average term to maturity to 7.5 years in the domestic market from 5 years since 2022,” Moody’s said.
The agency expects government to meet the upcoming Eurobond maturity without significantly drawing down the economy's foreign reserves at US$2.8 billion as of February 2024, including by partially refinancing the bond in international capital markets and/or by resorting to a debt-for-asset swap operation with the Government Institutions Pension Fund (GIPF). This will be similar to the transaction performed with the US$500 million November 2021 Eurobond maturity in the face of disrupted international capital markets.
Current account
According to Moody’s, the B1 rating also captures the renewed widening in the current account deficit to 15% of GDP in 2023 - though it is fully funded by inflows in net foreign direct investment (FDI) in contrast to previous instances of similarly large savings/investment imbalances in 2015/16.
“In addition to the traditional diamond and uranium industries, the investments in 2023 also reflect new industry developments, including exploration and appraisal activity in the hydrocarbon sector.
“Looking forward, Moody's expects the current account deficit to remain elevated and mainly financed by FDI to the extent that the continued development in new industries fuel the savings/investment imbalance,” the credit rating agency said.
Social inequalities
“Entrenched social inequalities that exacerbate skill mismatches and the unemployment rate at about 20% in 2023, as well as weak access to basic services for large parts of the population, remain a constraint on the rating,” Moody’s said.
“These constraints will be alleviated over time to the extent that the development of the new, mainly foreign-funded industries translates into growth and development engines for the local economy in areas such as universal access to affordable electricity, skill upgrading, business services provision, local input manufacturing and construction, and expansion of local value chains in the mining sector,” it added.
Local currency
Moody’s left Namibia's local-currency ceiling at Baa3 in its latest rating agency, incorporating a four-notch gap with the sovereign rating.
“The comparatively strong predictability of institutions and contained domestic and geopolitical risk exposure support the business environment, as does the comparatively narrow footprint of the government in the economy.
“The foreign-currency ceiling remains at Ba1, a one-notch difference with the local-currency ceiling, and reflects limited transfer and convertibility risks, taking into account Namibia's participation in SACU with a high degree of trade and financial integration, supported by an adequate foreign exchange reserve buffer,” Moody’s said.
ESG risks
Moody’s take environment, social and governance (ESG) factors into consideration for all credit ratings, granting a credit impact score (CIS). CIS is rated on a scale of one (positive) to five (very highly negative).
Namibia received CIS-4 credit impact score in its latest rating.
According to Moody’s, Namibia’s CIS is driven by environmental and social risk, as well as moderate governance constraints.
“Water risk is the key challenge from an environmental perspective, whereas social risks are caused by the very unequal income distribution that generates extreme contrasts between income groups,” the agency said.
Environmental considerations weigh on Namibia's economic strength and credit profile especially through its exposure to water risks, Moody’s said.
“This is exemplified by the impact of drought, which has affected both livestock and crops in recent years. The lack of sustained rains has also affected the availability of potable water as well as water to generate power in hydroelectric plants. Potential water supply interruptions also remain a long-term challenge to mining production.
“In response to these challenges, the government is expanding its renewable energy capacity, including wind and solar energy, which currently covers about 20-25% of final energy consumption according to International Energy Agency (IEA) data.”
Namibia's profile score further reflects high income inequality and high levels of unemployment -in particular youth unemployment—which hamper competitiveness and have the potential to fuel social discontent, Moody’s said.
“Pervasive skill mismatches prevent the small and dispersed population of three million to take advantage of opportunities in the mining and energy sectors,” it added.
Namibia's modest governance and institutional constraints, coupled with a stable political environment, present limited influence on the overall credit profile, the agency said.
Factors
Moody’s said increased confidence in improved investment and growth prospects that would translate into the likelihood of tangible improvements in Namibia's credit metrics would support a credit rating upgrade.
“Continued primary surpluses and a further reduction in the debt ratio to levels in line with higher-rated peers would also be consistent with a higher rating. Meanwhile, the finalisation of a robust resource management framework that prevents an unbalanced depletion of natural resources would buttress Namibia's credit profile.”
On the other hand, a renewed reversal in investment activity and growth prospects due to reduced confidence in the viability of Namibia's hydrocarbon and renewable energy developments, for example in response to commodity price volatility or increased risks of stranded assets, would likely lead to a return in the outlook to stable, Moody’s said.
“Moreover, the materialisation of significant and unforeseen fiscal costs related to the development of new infrastructure for the development of Namibia's natural resources would also exert negative pressure on the rating, as would the government's inability to enforce a balanced resource management framework,” it added.
The global credit rating agency recently changed the outlook on government from stable to positive. In the previous years, Moody’s labelled Namibia’s outlook either as stable or as negative.
Moody’s latest credit rating, however, kept Namibia’s long-term issuer and senior unsecured ratings on the first notch of its B1 category. This means government’s debt in foreign currency remains in Moody’s “highly speculative” bracket and is still regarded as junk.
Changing the outlook in its latest rating action, Moody’s said it “reflects Namibia's improved growth prospects supported not only by cyclical factors like higher commodity prices in a post-pandemic environment and renewed investments in the traditional mining industries, but by the prospect of significant new hydrocarbon and renewable energy resource developments over the remainder of this decade that could prove transformational for the economy”.
The rating agency, however, added that these developments were at “an early stage”. “The nature and significance of the credit benefits to arise from development of hydrocarbons and renewable energy are highly uncertain,” Moody’s cautioned.
Fiscus
In the past fiscal year, which ended in March, government recorded its first primary budget surplus reading since 2012. Moody’s estimates the primary surplus at 1.7% of GDP, supported by a strong revenue contribution from the pool of the Southern African Customs Union (SACU), which amounted to about 10 percentage points (pp) of GDP or 30% of total revenue.
Moody's said it expects the government's initiatives to address existing spending rigidities—including efforts to further consolidate the wage share, reduce the subsidies/transfers bill to state-owned enterprises (SOEs) via operational efficiency improvements and follow sound procurement practices—to mitigate the fiscal impact of volatile SACU revenue.
Moody's estimates that the debt/GDP ratio has declined to below 64% of GDP in fiscal 2023 after peaking just below 70% of GDP in fiscal 2021.
“A shift to a higher potential growth rate, if sustained by the expansion of new projects, would help reduce the debt/GDP ratio further to about 60% in fiscal 2025. A renewed build-up of fiscal buffers would strengthen the credit profile after an increase in the debt/GDP ratio by over 50 percentage points recorded in 2010-2021,” it added.
The agency said it will assess the extent to which the cyclical growth improvement and expansion in new natural resource projects is likely to help sustain the shift to fiscal primary surpluses and maintain the debt to gross domestic product (GDP) ratio on a declining trajectory.
“Moody's will also monitor the development and implementation of a robust resource management framework that will be key to avoid an unbalanced depletion of these natural resources,” it added.
Debt
Moody’s affirmed Namibia’s sovereign B1 long-term foreign and local currency issuer and senior unsecured ratings in its latest action.
This captures the government's relatively high debt burden and elevated cost of debt compared to higher-rated peers, in addition to its comparatively large gross financing needs, Moody’s said.
“The affirmation of the B1 rating captures the government's comparatively high cost of debt at 4.8% of GDP in fiscal 2023 and the debt burden at over 60% of GDP in comparison with higher-rated peers where the median debt/GDP ratio is below 50%,” the agency said.
Eurobond
It also reflects government's comparatively large gross financing needs at about 20% of GDP annually, including a temporary jump to over 25% of GDP in fiscal 2025 reflecting the upcoming U$750 million Eurobond maturity on 29 November 2025.
“Namibia's government liquidity risk is mitigated by the large domestic funding base, including the banking and non-bank financial sector comprising insurance companies and pension funds. Rollover risk is also being reduced by the gradual lengthening of the average term to maturity to 7.5 years in the domestic market from 5 years since 2022,” Moody’s said.
The agency expects government to meet the upcoming Eurobond maturity without significantly drawing down the economy's foreign reserves at US$2.8 billion as of February 2024, including by partially refinancing the bond in international capital markets and/or by resorting to a debt-for-asset swap operation with the Government Institutions Pension Fund (GIPF). This will be similar to the transaction performed with the US$500 million November 2021 Eurobond maturity in the face of disrupted international capital markets.
Current account
According to Moody’s, the B1 rating also captures the renewed widening in the current account deficit to 15% of GDP in 2023 - though it is fully funded by inflows in net foreign direct investment (FDI) in contrast to previous instances of similarly large savings/investment imbalances in 2015/16.
“In addition to the traditional diamond and uranium industries, the investments in 2023 also reflect new industry developments, including exploration and appraisal activity in the hydrocarbon sector.
“Looking forward, Moody's expects the current account deficit to remain elevated and mainly financed by FDI to the extent that the continued development in new industries fuel the savings/investment imbalance,” the credit rating agency said.
Social inequalities
“Entrenched social inequalities that exacerbate skill mismatches and the unemployment rate at about 20% in 2023, as well as weak access to basic services for large parts of the population, remain a constraint on the rating,” Moody’s said.
“These constraints will be alleviated over time to the extent that the development of the new, mainly foreign-funded industries translates into growth and development engines for the local economy in areas such as universal access to affordable electricity, skill upgrading, business services provision, local input manufacturing and construction, and expansion of local value chains in the mining sector,” it added.
Local currency
Moody’s left Namibia's local-currency ceiling at Baa3 in its latest rating agency, incorporating a four-notch gap with the sovereign rating.
“The comparatively strong predictability of institutions and contained domestic and geopolitical risk exposure support the business environment, as does the comparatively narrow footprint of the government in the economy.
“The foreign-currency ceiling remains at Ba1, a one-notch difference with the local-currency ceiling, and reflects limited transfer and convertibility risks, taking into account Namibia's participation in SACU with a high degree of trade and financial integration, supported by an adequate foreign exchange reserve buffer,” Moody’s said.
ESG risks
Moody’s take environment, social and governance (ESG) factors into consideration for all credit ratings, granting a credit impact score (CIS). CIS is rated on a scale of one (positive) to five (very highly negative).
Namibia received CIS-4 credit impact score in its latest rating.
According to Moody’s, Namibia’s CIS is driven by environmental and social risk, as well as moderate governance constraints.
“Water risk is the key challenge from an environmental perspective, whereas social risks are caused by the very unequal income distribution that generates extreme contrasts between income groups,” the agency said.
Environmental considerations weigh on Namibia's economic strength and credit profile especially through its exposure to water risks, Moody’s said.
“This is exemplified by the impact of drought, which has affected both livestock and crops in recent years. The lack of sustained rains has also affected the availability of potable water as well as water to generate power in hydroelectric plants. Potential water supply interruptions also remain a long-term challenge to mining production.
“In response to these challenges, the government is expanding its renewable energy capacity, including wind and solar energy, which currently covers about 20-25% of final energy consumption according to International Energy Agency (IEA) data.”
Namibia's profile score further reflects high income inequality and high levels of unemployment -in particular youth unemployment—which hamper competitiveness and have the potential to fuel social discontent, Moody’s said.
“Pervasive skill mismatches prevent the small and dispersed population of three million to take advantage of opportunities in the mining and energy sectors,” it added.
Namibia's modest governance and institutional constraints, coupled with a stable political environment, present limited influence on the overall credit profile, the agency said.
Factors
Moody’s said increased confidence in improved investment and growth prospects that would translate into the likelihood of tangible improvements in Namibia's credit metrics would support a credit rating upgrade.
“Continued primary surpluses and a further reduction in the debt ratio to levels in line with higher-rated peers would also be consistent with a higher rating. Meanwhile, the finalisation of a robust resource management framework that prevents an unbalanced depletion of natural resources would buttress Namibia's credit profile.”
On the other hand, a renewed reversal in investment activity and growth prospects due to reduced confidence in the viability of Namibia's hydrocarbon and renewable energy developments, for example in response to commodity price volatility or increased risks of stranded assets, would likely lead to a return in the outlook to stable, Moody’s said.
“Moreover, the materialisation of significant and unforeseen fiscal costs related to the development of new infrastructure for the development of Namibia's natural resources would also exert negative pressure on the rating, as would the government's inability to enforce a balanced resource management framework,” it added.
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