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Economic Research

Fitch Revises Namibia’s Outlook to Negative; Affirms at ‘BBB-‘

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The below press release is from the Fitch Ratings website:

Fitch Ratings-London-02 September 2016: Fitch Ratings has revised Namibia’s Outlooks to Negative from Stable while affirming the Long-Term Foreign and Local Currency Issuer Default Ratings (IDR) at ‘BBB-‘. The issue ratings on Namibia’s senior unsecured foreign- and local-currency bonds are also affirmed at ‘BBB-‘. The Country Ceiling is affirmed at ‘BBB’ and the Short-Term Foreign and Local Currency IDRs at ‘F3’.

Fitch has also revised the Outlook on Namibia’s National Rating on the South African scale to Negative from Stable and affirmed the Long-Term rating at ‘AA+(zaf)’. The issue ratings on Namibia’s bonds with a National rating have been affirmed at ‘AA+(zaf)’.

The revision of Outlook to Negative reflects the following key rating drivers and their relative strength:

HIGH

Namibia’s budget deficit widened sharply to 8.3% of GDP in fiscal year 2015/16 (FY15, which runs from April 2015), well above the government’s 5% target and the worst on record. The deficit has worsened progressively from 0.1% in FY12 to 3.4% in FY13 and 6.4% in FY14, and is well above the ‘BBB’ category median of 2.7%. The overshoot in the deficit in FY15 primarily reflected weaker-than-expected revenues from domestic sources, including company tax and lower-than-expected income tax.

The government is targeting a narrowing of the deficit to 4.3% of GDP in FY16. Outturns for the first few months of the current fiscal year indicate revenue has grown strongly. The Ministry of Finance is exerting greater control over expenditure at all ministries and is cutting overtime, travel and capital spending. However, meeting deficit targets will prove challenging, particularly amid a secular decline in revenues from the Southern African Customs Union (SACU), which the government projects will fall under 7% of GDP by 2018 from 12.4% in 2014.

MEDIUM

Gross general government debt (GGGD) increased sharply to 38.2% of GDP at end-2015 from 23.2% at end-2014, albeit partly due to an increase in government deposits following the issue of a USD750m Eurobond and exchange rate depreciation. Fitch forecasts GGGD to rise further to 39% of GDP at end-2016. It is now roughly in line with the peer median of 41%, having previously been a rating strength. We expect government guarantees to peak at 5.8% of GDP in FY16, below the government’s 10% limit.

Namibia’s current account deficit deteriorated to 14.1% of GDP in 2015, from 8.9% in 2013, and well above the ‘BBB’ category median of 1.3%. However, much of the deficit has been financed by external borrowing from parent mining companies, reducing external vulnerabilities.

Merchandise exports should start to grow in the coming years as big mining projects come online. Moreover, imports should fall as capital goods demand decreases (data for 1H16 already show a slowdown in all import categories). Fitch expects the current account deficit to narrow to 6.9% of GDP by 2018. Foreign exchange reserves increased to around 3.4 months of import cover by mid-2016, although this is still below the peer median of 5.7%.
KEY RATING DRIVERS
Namibia’s ‘BBB-‘ ratings also reflect the following factors:

Growth performance remains a key rating strength. The economy grew 5.7% in 2015, and Fitch expects it to expand 4.4% this year (BBB median five-year average: 2.5%). New mining capacity is rapidly coming online, notably the Husab uranium mine, which is expected to begin production by end-2016, and is expected to add around 5% to GDP. The continued strong growth performance is particularly impressive given the continued drought, weak performance in key trading partners (notably South Africa and Angola) and higher interest rates.

A major reform, the New Equitable Economic Empowerment Framework (NEEEF), was announced by the President at the beginning of the year and seeks to increase the involvement of previously disadvantaged citizens in the private sector. While lacking in details, it is likely that the law will be approved by parliament (although the Supreme Court might end up blocking it). This has caused some unease in the business community and could slow down foreign investment in manufacturing and services.

The rapid growth in house prices in recent years has created certain risks for the banking sector. However, given the introduction of macro prudential measures and falling demand from Angola, it is likely that the housing market will cool from here, with a slowdown at the top end of the market already visible. Asset quality is fairly good, with non-performing loans (NPLs) at around 1.6% of total loans at end-2015. The system’s capital position is sound, with a risk- weighted capital ratio of 14.3% in December 2015.

Namibia’s ratings are supported by a track record of political stability, slightly stronger governance indicators than rated peers, a net external creditor position, financing flexibility enhanced by access to the deep South African capital markets and a liquid banking system. However, it has a fairly low level of GDP per capita and economic development, high unemployment and inequality, and is vulnerable to shocks to commodity prices.

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 Foreign Currency IDR scale.

Fitch’s sovereign rating committee adjusted the output from the SRM to arrive at the final Long-Term Foreign Currency IDR by applying its QO, relative to rated peers, as follows:
Macro: +1 notch, to reflect strong medium-term growth potential and credible macroeconomic policies consistent with its exchange rate regime.

RATING SENSITIVITIES
Future developments that could result in a downgrade include:
– A failure to narrow the fiscal deficit leading to continued rise in the government debt/GDP ratio.
– Failure to narrow the current account deficit or significant drawdown in international reserves.
– Deterioration in 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 stabilisation of the government debt/GDP ratio.
-A marked improvement in the current account balance and increase in foreign exchange reserves.

KEY ASSUMPTIONS
Fitch assumes that the currency peg agreement with South Africa will remain in place and the government will pursue prudent macroeconomic policies consistent with it.

Global assumptions are consistent with Fitch’s ‘Global Economic Outlook,’ including a subdued outlook for commodity prices.

 

PSCE – July 2016

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Overall

 Total credit extended to the private sector increased by N$667.4 million or 0.8% in July, taking total credit outstanding to N$82.3 billion. On an annual basis, PSCE growth slowed down, increasing by 11.1% in July compared to 11.7% in June. A total of N$8.2 billion worth of credit has been approved over the last 12 months with N$3.5 billion worth of credit being approved in 2016 thus far. Of this N$8.2 billion worth of credit issued during the last 12 months, approximately N$3.9 billion was taken up by businesses, while N$4.2 billion was taken up by individuals.

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Credit extension to households

Credit extension to households expanded by 0.5% on a monthly basis and 9.7% on an annual basis in July. Credit extension to households has continued to slow as interest rate hikes change consumer trends. It is worth remembering however that the transmission mechanism between rate hikes and PSCE contractions is relatively slow, particularly when interest rate increases are small.

During the month household mortgage loans expanded by 0.6% month on month and 10.4% year on year, down from 0.7% month on month and up from 11.5% year on year and continue to make up the majority of credit extended to households. Of the N$47.6 billion credit extended to individuals, 67% is mortgage loans.

Instalment credit, the second largest component of loans extended to individuals (15%), grew at 11.6% year on year in July, down from 12.0% in June and well off the long term average growth for this component of PSCE. On a month on month basis instalment credit grew by 1.3%, down from 0.9% in June. The lackluster instalment credit growth on a yearly basis can be attributed to tighter monetary policy as well as a slowdown in credit extension by credit providers due to less than ideal liquidity conditions. The overall liquidity position of the banking industry declined further at the end of July 2016. The overall liquidity position of commercial banks declined by 41.3% to an average of N$2.1 billion during July 2016 when compared to the preceding month.

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Credit extension to corporates

Credit extension to corporates registered a lower but positive growth of 12.8% from 12.9% on a year-on-year basis. On a monthly basis, credit extensions to corporates increased by 1.3% month-on-month in July, up from 0.9% in June. Credit extended to corporates during July was again primarily driven by exceptional growth in mortgage loans, up 13.4% year on year and 0.7% month on month. Instalment credit extended to corporates grew at a rate of 4.5% year on year and rose 1.1% on a month on month basis, while overdraft facilities grew by 3.1% year on year and declined 3.7% on a month on month basis. Although corporate credit has been growing at a far quicker rate than credit extended to individuals, the relatively low base from which this growth stems means that the majority of private sector credit still sits with the individual.

Foreign Reserves

Foreign reserves rose 8.5% to N$22.8 billion at the end of July 2016. The higher growth stemmed from SACU inflows of N$3.5 billion received during July 2016, coupled with interest received on investments.

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Outlook

Private sector credit extension has slowed considerably on a year to date basis as a result of the current interest rate hiking cycle. Interest rates in South Africa and Namibia have been at or near historically low levels since the global financial crisis. Rates bottomed out in 2012 with the Namibia repo rate dropping to 5.5% during the year. Since then, the Bank of Namibia has administered six rate hikes of 25 basis points each. Thus, following a sustained period of expansive monetary policy, the tightening cycle has now come into full effect. The recent hikes in Namibia, however, have been driven by the South African Reserve Bank’s position, rather than by domestic forces. Following extensive rand weakness through 2015, driving expectations of an inflation blowout, the South African Reserve Bank started hiking rates aggressively in early 2016. The Bank of Namibia was required to follow these hikes in order to ensure that the reserve position of the country remained tenable, and that capital outflows did not occur.

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Going forward, it appears that we are approaching the top of the interest rate cycle, as a weak regional growth outlook and improving rand and inflation outlooks -largely due to the Brexit vote and resultant lower-for-longer interest rate positions of the UK, US and Eurozone- mean more monetary space exists for interest rate easing.

Our base case scenario sees interest rates remain flat for the remainder of 2016, as fund flows into South Africa support the Rand, alleviating some of the inflationary pressures, while weak economic growth keeps the SARB on hold. The threat of a ratings downgrade in December is likely prevent the Reserve Bank from cutting rates in 2016 in order to stimulate growth.

Our second scenario is built around a ratings downgrade by at least two of the ratings agencies. This immediately leads to fund flows out of South Africa leading to a violent depreciation in the Rand. Inflationary pressures driven by a spiraling currency force the hand of the SARB, which immediately hikes rates by 50 basis points followed by further hiking through the year. Should we see such a reaction to a ratings downgrade, we may see much more aggressive hiking than we currently predict.

A third scenario, fueled by the British exit from the European Union leads to worldwide economic weakness and monetary easing in the UK and Japan. Looser monetary policy leads to fund flows into EM nations including South Africa lending support to the Rand and allowing the SARB to focus on stimulating the South African economy. The SARB cuts rates on two occasions during 2017.

Should we see further rate hikes in the SA market, we will see further rate hikes from the Bank of Namibia as well. This will put further pressure on the consumer which will in turn affect corporates. Further impacting the current economic climate is the drought experienced in the central region. Water restrictions may limit business activities and deter further investment, all of which has a negative impact on credit extension. We thus expect PSCE to continue to slow down, possibly topping out in the not too distant future.

New vehicle sales – July 2016

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1

A total of 1,570 vehicles were sold in July, 1.2% less than the number of vehicles sold in June and 18.8% down compared to the number of vehicles sold in July 2015. Since January this year, 10,437 vehicles have been sold, down 19.3% from the number of vehicles sold over the comparable period last year. Vehicles sales is currently trending down on a year-on-year basis. This suggests that this trend is likely to continue going forward.

3

For the past 12 months, the number of vehicles sold on a cumulative basis in Namibia has been declining, posting negative since December 2015. On a 12-month cumulative basis, 18,747 vehicles were sold up to the end of July 2016, 16.5% less than the number of vehicles sold over the same period last year and 1.9% less than the cumulative number of vehicles sold in the 12 months to June this year.

3

On a monthly basis, total passenger vehicle sales rose by 1.6% to 653 in July. On an annual basis however, total sales of passenger vehicles declined 16.5% from 782 in July 2015. The number of commercial vehicles sold decreased on a year-to-date and year-on-year basis, down 17.5% and 20.3% respectively. The decrease in the number of commercial vehicles sold was mainly driven by a contraction in light and medium commercial vehicle sales. On a month-on-month basis, the number of commercial vehicles sold declined by 3.1% in July from 946 in the preceding month.

4

Toyota and Volkswagen continue to dominate the passenger vehicle segment with Toyota selling 207 (31.7%) vehicles and Volkswagen selling 158 (24.2%) of the 653 passenger vehicles sold. Toyota was the market leader in light commercial vehicle sales with 46.8% of the sales in this segment, followed by Ford with 15.4% and Isuzu in third place with 12%. Commercial vehicle sales continue to come in higher than passenger vehicle sales as has been the long term trend.

The Bottom Line

Throughout the period of 2014 all the way to mid-2015, we have seen robust growth in vehicle sales, which was driven by a strong consumer base supported by expansionary fiscal and monetary policy and real wage growth in those periods. However, recent data indicates that this is no longer the case as vehicles sales contractions have been seen. Strong growth in vehicle sales over the last couple of years has significantly increased the base on which vehicle sales growth is calculated and this has contributed to the contractions seen in vehicle sales on a 12-month cumulative basis and year-to-date basis. That said the number of vehicles sold on an annual basis is still fairly strong.

The slowdown in the number of vehicles sold has been driven by a number of factors. For instance, higher interest rates and inflation levels, reduction in government spending (directly on vehicles and otherwise), and a weaker economic climate at large have adversely impacted the demand for vehicles. In addition, the amendment to the Credit Agreement Act made on 20 July, enforcing a mandatory 10% deposit on all passenger vehicles and reducing the maximum repayment period to 54 months will further drive down vehicle sales and growth thereof going forward.