June 19, 2017 / 9:11 AM / a year ago

Fitch Affirms Namibia at 'BBB-'; Outlook Negative

(The following statement was released by the rating agency) HONG KONG, June 19 (Fitch) Fitch Ratings has affirmed Namibia's Long-Term Foreign- and Local-Currency Issuer Default Ratings (IDRs) at 'BBB-' with a Negative Outlook. The issue ratings on Namibia's senior unsecured foreign- and local-currency bonds have also been affirmed at 'BBB-'. The Country Ceiling has been affirmed at 'BBB' and the Short-Term Foreign- and Local-Currency IDRs have been affirmed at 'F3'. Fitch has also affirmed Namibia's National Long-Term Rating on the South African scale at 'AAA(zaf)' with a Negative Outlook. The issue ratings on Namibia's bonds with a National rating have been affirmed at 'AAA(zaf)'. KEY RATING DRIVERS The 'BBB-' rating reflects Namibia's strong growth potential and record of political stability, balanced by high fiscal and external deficits. The Negative Outlook reflects uncertainties about the growth outlook and the ability of the government to reverse the rise in debt. The Namibian authorities have committed to a significant front-loaded adjustment that will likely narrow the fiscal deficit in the coming two years. Fitch forecasts the gross general government deficit to narrow to 4.2% of GDP in FY17 and 3.1% in FY18, against the government targets of 3.6% and 2.5%. High public expenditure growth coupled with underperforming revenues from Namibia's Southern African Customs Union (SACU) proceeds and from the domestic mining sector, pushed the deficit to 8.5% of GDP in FY15 (ending March 2016). The deficit fell to 6.3% of GDP according to official estimates in FY16, much higher than the initial budget target of 4.3%, but a substantial achievement against the backdrop of stagnant GDP growth. According to the 2017/18 Budget Statement, fiscal consolidation this year will be achieved primarily through expenditure cuts across goods and services and capital spending. Fitch forecasts general government expenditures to fall by to 2% of GDP. The government's fiscal tightening will be aided by an expected one-off increase in SACU revenues in FY17. Namibia's large deficits in recent years have substantially increased the public debt burden, to 42% at end-2016 from 26% at end-FY12, against a 'BBB' median of 41% of GDP. Fitch believes that debt levels have likely plateaued. In 2016, the Namibian economy experienced consecutive quarters of negative growth for the first time since 2009 and, at 0.2% for the full year only narrowly avoided a contraction. Fitch forecasts a recovery in growth in 2017, to 2.0%, notwithstanding slow growth in neighbouring South Africa. Over the medium term, we expect growth to return to around 5% or higher, similar to the 2010-2015 levels. The recovery will be supported by an end to drought conditions and associated increase in agricultural output, as well as an expected increase in uranium and gold mining. However, tight fiscal policy and low global commodity prices have put downward pressure on growth and will continue to present downside risks. CPI inflation peaked at 8.2% in January 2017, as two years of drought conditions contributed to rising food prices. With food and fuel inflation declining, Fitch forecasts inflation to drop to 6% by end-2017. We expect the Bank of Namibia to hold the policy rate at its current level through the year to support the currency peg to the South African rand. Better performance in the mining sector will narrow the current account deficit to 8.3% of GDP, from 10.5% in 2016, but the external deficit remains a weakness to the sovereign ratings. By comparison, the 'BBB' current account median is a deficit of 1.8% of GDP. Namibia's current account deficit has steadily increased since first going into deficit in 2008, eroding Namibia's external creditor position. Fitch forecasts Namibia to become a net external debtor by end-2017. External vulnerability is somewhat mitigated by the structure of external debt; much of the debt is intercompany, with parent companies funding Namibian mining operations. At just above three months of current external payments, foreign reserves are low compared with the 'BBB' median of six months. Slowing private sector credit growth signals that the Namibian banking sector is adjusting after rapidly increasing housing prices fuelled an expansion in credit. The central bank imposed measures aimed at reducing risks from mortgages and other retail lending, including a maximum loan/value ratio of 80% on second homes and a 90% loan/value ratio on auto loans. Non-performing loans stood at 1.6% of total loans as of end-2016. Namibian banks are generally well-capitalised and have a return on equity of around 20%. Namibia's ratings are supported by a track record of political stability and governance indicators that are slightly higher than peers. Government plans to implement the New Equitable Economic Empowerment Framework, which would seek to increase the economic participation and ownership levels of racially disadvantaged persons, represent a modest risk to Namibia's business and investment climate. The draft law has been published for consultation, but uncertainties remain about what will ultimately be approved as legislation. Fitch analysis assumes policies to address inequality will be formulated in a way that avoids deterring foreign investors on a large scale. SOVEREIGN RATING MODEL (SRM) and QUALITATIVE OVERLAY (QO) Fitch's proprietary SRM assigns Namibia a score equivalent to a rating of 'BB+' on the Long-Term FC IDR scale. Fitch's sovereign rating committee adjusted the output from the SRM to arrive at the final LT FC IDR by applying its QO, relative to rated peers, as follows: Macro: +1 notch, to reflect the medium-term growth potential and credible macroeconomic policies, including substantial fiscal tightening despite much lower than expected growth. Fitch's SRM is the agency's proprietary multiple regression rating model that employs 18 variables based on three year centred averages, including one year of forecasts, to produce a score equivalent to a LT FC IDR. Fitch's QO is a forward-looking qualitative framework designed to allow for adjustment to the SRM output to assign the final rating, reflecting factors within our criteria that are not fully quantifiable and/or not fully reflected in the SRM. RATING SENSITIVITIES Future developments that could result in a downgrade include: - A failure to narrow the fiscal deficit sufficient to put the government debt/GDP ratio on a downward trajectory. - Failure to narrow the current account deficit or significant drawdown in international reserves. - Weaker than expected economic growth, for example, due to a worsening of the business environment. Future developments that could result in the Outlook being revised to Stable include: - A narrowing of the budget deficit consistent with a downward trajectory of the government debt/GDP ratio. -A marked improvement in the current account balance and increase in foreign exchange reserves. KEY ASSUMPTIONS Global assumptions are consistent with Fitch's 'Global Economic Outlook,' including a subdued outlook for commodity prices. Contact: Primary Analyst Jermaine Leonard Director +852 2263 9830 Fitch (Hong Kong) Limited 68 Des Vouex Road Central Hong Kong Secondary Analyst Mahmoud Harb Director +852 2263 9917 Committee Chairperson Stephen Schwartz Senior Director +852 2263 9938 Media Relations: Wai-Lun Wan, Hong Kong, Tel: +852 2263 9935, Email: wailun.wan@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Country Ceilings (pub. 16 Aug 2016) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Sovereign Rating Criteria (pub. 18 Jul 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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