Following major debt issuance and the depreciation of the rand on unhedged Government debt, Namibia’s debt to GDP ratio looks set to reach and possibly surpass 35% by the end of 2015.
2015 will be a year for the books as far as Namibia’s debt is concerned. In the space of just 12 months, it is estimated that public debt (that taken out by the Government) has increased by over 65%, and over N$20 billion, to a total of N$55 billion. A number of reasons for this exist, however the three major reasons are:
- Government has ambitious spending plans for the year, which it expected to fund through normal revenue channels and through some fairly sizable debt issuance (approximately N$9 billion in 2015/16). However, revenue has been disappointing, both due to very ambitious forecasts, as well as due to a general economic slowdown in the country, weak commodity prices, and less regional trade. As such, many revenue lines of the Government are under pressure, and likely to remain so for the next few years. As revenue is lower than expected, and expenditure remains relatively high, a lot of debt has had to be issued to fund the activities of Government, and the deficit is likely to be notably larger than expected, probably between N$9 and N$12 billion.
- The Government was forced to issue hard currency debt in order to protect the crumbling external position of the country, after an extended period of fiscal and monetary stimulus that drove strong growth in consumption activity, and strong demand for imports. As the external position weakened, the risk of a rating downgrade increased to the point that the Ministry of Finance stepped in and borrowed a large chunk of funds on the international market, massively increasing the country’s hard currency debt, but thankfully staving off a rating downgrade.
- Hard currency debt, of which Namibia now has a lot, has re-priced against Government as the currency has weakened. Over the past year, the Rand (and thus Namibia Dollar) has depreciated in value by over 30%, making the stock of Namibian hard currency debt, which was left unhedged despite the repeated warnings of local experts, significantly larger than it was a year ago.
What this means, however, is that Namibia’s public debt to GDP ratio is likely to approach 35% by the end of the year, with the stock of debt up just under 70% in the space of just 12 months – very frightening numbers. Moreover, hard currency debt is set to make up more than 50% of total debt, and once again, this remains unhedged, a situation that most find unimaginable, but the Ministry of Finance persists with. The vast cost of this decision is, after all, carried by the tax payer.
At the same time, the bank balance of the central government has improved significantly after the recent issuance of the country’s second Eurobond. These funds, however, have been at least partially earmarked to protect the external position, and the remainder will hopefully not be spent on recurrent activities, but saved for infrastructure development.
The bottom line is that the fiscal position of Government remains weak at the current point in time, with revenue expected to remain under pressure for the next few years (not to mention SACU repayments), and debt reaching concerningly high levels, partially due to a decision not to hedge hard currency debt, which is being proved again and again to have been a very bad decision. In addition, efforts to slow spending, while admirable, are falling well short of the required mark. While the Minister of Finance desperately tries to rein in spending, less financially savvy members of the administration appear adamant to continue to spend money we simply no longer have.
Desperately needed is a reprioritisation of Government spending, away from non-core and non-priority issues, towards real priorities such as housing, water, energy and poverty reduction. However, to date efforts to reprioritise have been wholly inadequate, and haven’t seen any meaningful movement of funds to these priorities. Instead, ambitious project after ambitious project is announced by the country’s policy makers, leaving us with the ever more pressing question – “with what funds?!”
We are increasingly concerned that the debt situation of the country is becoming precarious to say the least, and that sustainability may become a serious issue should hard currency bonds remain unhedged, debt issuance continue at current rates, should the economy slow or should commodity prices remain low for an extended period of time.
We desperately need to reduce spending (and hedge our hard currency debt, all of it!) at this time, there are no two ways about it.
