September 23, 2024
Economy

Moody’s downgrades Namibia’s rating, but what does it really mean?

April 06, 2022
Moody’s downgrades Namibia’s rating, but what does it really mean?

Ratings agency Moodys has downgraded Namibia's long-term issuer and senior unsecured ratings to B1 from Ba3 and moved the outlook from negative to stable.

The B1 rating, according to the rating’s agency, is a result of a stagnating trend in growth and the continued increase in the debt ratio projected over the next three years, to 75% of GDP in fiscal year 2024.

Namibia's local-currency ceiling was lowered to Baa3 from Baa2, maintaining a 4-notch gap with the sovereign rating, while the foreign-currency ceiling remained at Ba1.

But what does this really mean?

According to Simonis Storm Economist, Theo Klein, the downgrade was expected and means Namibia is now considered “highly speculative with high credit risk”.

“This means that Namibia will find it harder to source or attract capital from foreign investors and due to the higher perceived risk from Moody’s, borrowing costs are likely to increase. We therefore expect bond yields to rise on this news, “higher risk, higher returns” as the saying goes,” he said.

“The downgrade by Moody’s is not too surprising given that the typical fiscal metrics they look at are forecasted to worsen going forward.”

Klein said higher borrowing costs have the potential to place further strains on government finances going forward.

“Debt servicing costs as a percentage of revenue is expected to rise further from about 15% in FY2022/23, to about 17% in FY2023/24 and 16% in FY2024/25. Also, total debt as a percentage of GDP is expected to increase from 69% in FY2021/22 to 71% in FY2022/23 and 73% in FY2023/24. Lastly, GDP growth is expected to remain below its long run average in 2022 and 2023, forecasted at 2.8% for 2022 and 3.4% for 2023 by the Ministry of Finance,” he said.

The famed economic expert said the size of the public wage bill remains of concern, including a decline in the country’s ease of doing business.

“Public wages remain a significant portion of the budget and we continue to see a deterioration in the ease of doing business. This means that wages paid to public administration workers have a low return on investment. In the last two years, Namibia’s ease of doing business index worsened from 59 to 71 index points, where 1 is perfect ease of doing business. This remains a significant growth risk,” he said.

“With the lack of public administration reforms to improve the ease of doing business that will allow a private sector led economic growth, it is understandable that Moody’s is not positive on our economy’s future prospects.”

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Last modified on Thursday, 07 April 2022 17:39
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