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What does Namibia’s downgrade by Fitch mean?

June 27, 2022
What does Namibia’s downgrade by Fitch mean?

Namibia's creditworthiness continues to slide following Fitch's decision to downgrade the economy's sovereign credit rating, the second downgrade from the ratings agency in three years.

On Friday, Fitch downgraded Namibia's Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB-' from 'BB'.

The international credit rating agency said Namibia’s modest growth prospects and a rigid expenditure profile will maintain high fiscal deficits relative to 'BB' peers. 

To get an understanding of what the development means to the domestic economy and the person on the street, we spoke to our economic analysts and here’s their view on the development.

Simonis Storm Economist Theo Klein said the country downgrade will increase the cost of borrowing for the government.

“The Fitch rating downgrade could lead to a further rise in government bond yields, which will increase the cost of borrowing for the government. This increase in cost of debt will in turn weigh on public finances, allowing slightly less to be spent on alternative budget items,” he told The Brief.

He warned that due to high debt costs, the government will have less funds to spend on education and healthcare, negatively impacting the average Namibian.

“Due to rising debt costs, we could see debt servicing costs taking a larger portion of public funding. This means that the government will have slightly less money available for alternative spending such as education, Healthcare facilities, roads, etc. So the average man on the street will see less public spending on certain necessary public services,” Klein said.

On the investment front, the Economist said the development could deter international investment into the country.

“The Fitch downgrade also implies that foreign investors might be less willing to invest in Namibia due to the heightened perceived risk from Fitch. Also, if foreign investors are deterred from investing in Namibia due to the junk status rating, less jobs can be created to employ Namibians,” he said.

IJG’s Head: Research, Danie van Wyk told The Brief that the downgrade means the government’s debt is viewed as a riskier investment and that it has an elevated vulnerability to default risk, particularly in the event of adverse changes in business or economic conditions over time.

“The reasons given by Fitch for the downgrade, namely, elevated fiscal deficits, weak economic growth prospects and high and rising debt levels, are not new concerns and have been highlighted several times in the past,” he said.

Van Wyk noted that although the downgrade will not have an immediate effect on the country, the higher risks will play out when it comes to government borrowing.

“While the country might not feel an immediate impact of the downgrade, the lower rating will play a role once the time comes for the government to replace (or ‘roll’) its foreign debt. Investors taking on new government debt will take the lower rating into consideration, and will require a higher risk premium (rate of return) as they are lending money to an institution that has a higher credit risk. This will make it even more expensive for the government to service and repay its debt, something Fitch is already concerned about,” Van Wyk said.

PSG Namibia expects that, “a positive rating action from either Fitch or Moody’s is unlikely in the coming 12 months and that risks to Namibia’s sovereign credit ratings are still skewed to the downside. In the medium- to long term, Namibia's credit rating could improve again, assuming that the country can maintain fiscal prudence, improve its economic competitiveness, and exploit its offshore crude oil reserves and green hydrogen potential.”

Fitch forecast the domestic economy to grow by 2.8% in 2022 and 3.1% in 2023, supported by additional increases in mining production and continued recoveries in secondary and tertiary industries, with global growth prospects and energy prices as well as tighter global financing conditions threatening the recovery.

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Last modified on Tuesday, 28 June 2022 20:37
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