Namibia: Downgrade from 5/7 to 6/7 for medium- to long-term political risk

• Economic performance weakened gradually over the past decade. 
• Global economic collapse due to covid-19 will lead to 4th recession year since 2016.
• The external debt service burden will transcend sustainable levels.
• Exceptionally high inequality and unemployment rates are a major challenge.
• Exposition to droughts and water supply shortages.

Namibia’s financial and economic indicators weakened gradually over the past decade, leading to downgrades of Credendo’s medium- to long-term (MLT) political risk classification in 2015, in 2019 and again in May 2020. As a consequence, the once vigorous African economy was downgraded to category 6/7, the second highest MLT political risk category (coming from category 3/7 before 2015). The recent collapse in global economic activity owing to the covid-19 pandemic will push Namibia into its fourth recession year since 2016. Due to the consequential drop in export revenues and South African Customs Union (SACU) receipts, public and external debt ratios are expected to further worsen, while the external debt service burden will transcend sustainable levels.

Namibia’s economic performance crumbled steadily over the course of a troubled decade 

Following the 2008-2009 global financial crisis, Namibia adopted a loose monetary stance and introduced expansionary fiscal policies to revive its economy. These were mainly financed through domestic and external public borrowing and foreign direct investments (FDI). These policies encouraged high credit demand (from households and corporate bodies) and large constructions, further stimulated by the commodity price bonanza of 2010-2014. As a result, between 2010 and 2015, real GDP growth averaged around an impressive 5%. Between 2014 and 2016, Namibia was affected by falling international commodity prices, as it is dependent on exports of diamonds and uranium (39% of current account receipts in 2018). As a result, export revenues dropped and weakened Namibia’s external debt sustainability. The government’s 2016 austerity programme, together with the economic stagnation in South Africa and the end of a large investment drive, negatively impacted the economic activity and led to a recession in 2016 (-0.3% real GDP growth) and 2017 (-0.1%). Fiscal consolidation still affects the construction sector due to public investments being limited since 2016. After real GDP growth reached a tight yet positive 0.3% in 2018, another recession emerged in 2019 (-1.4%) due to lower diamond production (closure of Elizabeth Bay mine) and a severe drought affecting agricultural production. Moreover, Namibia’s outsized unemployment rate (33% of labour force) curtails private consumption and savings rates. In 2020, the country was set to pull ahead with economic recovery driven by rising offshore diamond production and revitalised uranium production, making Namibia the world’s third largest uranium producer. Unfortunately, early 2020 the covid-19 pandemic threw a spanner in the works. 

The external balances were already under strain when covid-19 hit

Namibia had reported merely 63 official positive cases (no deaths) of covid-19 on 23 June. Nonetheless, the government declared a national state of emergency and adopted containment measures. The collapse in global economic activity owing to the covid-19 pandemic will push Namibia into another recession year, with an expected economic contraction of 4.8% in 2020. A sharp loss in export earnings (especially diamonds and tourism), less consumer spending during the lockdown period and a fall in public- and private-sector investments explain the sharp growth revision following the covid-19 outbreak. The 2021 rebound projection of 3% GDP growth might be too optimistic depending on the length and gravity of the covid-19 epidemic, particularly in Africa. 

Namibia’s current account deficit to GDP ratio between 2014 and 2016 averaged around 25% of GDP (excluding official transfers) as a result of the large investment drive and lower international commodity prices. To finance mounting current account deficits, Namibia attracted substantial FDI and issued Eurobonds in 2011 and 2015, profiting from large liquidity in the global capital market at the time. Moreover, SACU revenues are worth approximately 11% of Namibia’s GDP (in 2019) and represent a vital part of the country’s disposable financial resources. The current account deficit moderated to about 12% of GDP in 2018 and 2019 (32% of current account revenues). When including the official transfer revenues (mainly SACU), Namibia’s current account deficit remained quite limited in 2018 and 2019 (2.7% and 2.3% of GDP respectively). The impact of covid-19 on the current account balance will be double-natured as export revenues are set to fall but import costs will also drop significantly due to low international oil prices and lower investment-related costs. Adverse business policies and rising global investor risk aversion have negatively impacted the capital account since 2018, translated in a lower inflow of FDI and portfolio investments. Namibia’s foreign exchange reserves are structurally rather low and reached 2.4 months of import cover in February 2020. 

The external debt servicing burden is likely to become unmaintainable

The Namibian dollar lost half of its value against the USD over the past decade due to the downward volatility of the South African rand to which it is pegged. The increase in debt-creating capital inflows (Eurobonds) added to the upward pressure on Namibia’s external debt ratios. External debt to GDP moved from 31% in 2010 to 63% in 2019 and will further swell in 2020. More than half of this external debt is nonetheless issued by the private sector. Namibia’s financial position will further weaken due to the economic downturn and the significant financial needs necessary to deal with the current crisis. Nonetheless, the upper-middle-income country never turned to the IMF since it became a member in 1990 and did not request IMF support in the wake of the covid-19 outbreak. However, the yearly financial burden of servicing its external debt liabilities has been higher than 20% of current account receipts since 2015 and reached 39% in 2019 (31% of current account receipts including official transfers). In 2020 and 2021, debt servicing costs are expected to grow beyond sustainable levels, putting the country in the worst financial position it has been in since its independence. 

Stable political system confronted with socioeconomic predicaments and abating public finances

As Namibia registered large yearly fiscal deficits between 2014 and 2019 (average of -6% of GDP), the public debt sustainability has also been significantly undermined. Years of high government borrowing on both the domestic and the international debt markets pushed the total public debt to 56% of GDP in 2019 (coming from 28% of GDP in 2014), of which more than half is held domestically (denominated in Namibian dollar or South African rand). With the 2020 fiscal deficit expected to surge, public indebtedness is projected to jump to an estimated 67% of GDP this year (more than 200% of this year’s public revenues). The ruling South West Africa People’s Organisation (SWAPO) has been in power since 1990. It is likely to continue to dominate after president Hage Geingob got re-elected in 2019 for a second 5-year term. The country is known for having strong governance standards and a steady institutional framework. Although Namibia has achieved notable progress in reducing poverty since the early 90s, inequality is still among the highest in the world and unemployment affects 33% of the working population. SWAPO’s more radical left wing has been calling for land reforms and redistribution of wealth to tackle the triple challenge of high poverty, inequality and unemployment. In 2019, president Geingob declared a state of emergency due to the rampant drought. As a result, half a million Namibians face food insecurity and water shortages, which calls for great relief efforts. 

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