As the memories of the global recession fade in our minds, so we become complacent, and start to believe that the worst is over, behind us. However, as 2016 starts to grip, it appears that the clouds are once again building, and the frosty headwinds once again gaining force.
China is in turmoil, we all know it and have been aware of its coming for a number of years. A “triple bubble” appears to have started deflating, led by a stock market meltdown, with risks of contagion to the property and credit markets the major concern. Debt levels are too high, growth is too low. The shift from central driven investment lead growth, to large scale consumption lead growth, is proving a bumpy ride, to say the least.
Europe remains troubled, bouncing from one crisis to the next with little real resolution, and as the various cans get booted ever further down the track, the rainclouds build. Grexit, Brexit, debt crises aside, the refugee crisis looks set to derail the “European dream”, as vastly different views as to the European response see borders being once again erected, and the popularity of key leaders (notably Ms. Merkel) waning to unprecedented levels.
Snowstorms in the US (literally and figuratively) illustrate an economy that remains fragile, with little real growth in core sectors of the economy (notably manufacturing), and a fragile employment story to tell (low participation rates). The first interest rate hike in almost a decade has not gone down well, as both the stock market and economy appear to be somewhat shaken, and struggling to adjust to the new interest rate (just 0.25% above those of the past 7-odd years).
South Africa continues to teeter on the 3D precipice of high inflation, low growth (recession?) and a credit rating collapse. The causes, while too many to detail, include but are not limited to energy, leadership, commodity prices, labour unrest and capital outflows. With economic deterioration, rating downgrades and an ongoing rand rout, the outlook for our southern neighbour looks increasingly precarious, with many economists seeing “junk” status and recession as inevitable. The SARB is stuck between a rock and a hard place, as its mandate of price-stability stands to push the country into recession, while protecting the value of the rand for those that have some, but making it ever harder for those that do not, to get some.
Namibia too stands in the midst of a storm, where unlike the events of the late noughties, the outlooks for Namibia and South Africa have become notably more correlated. Limited policy space (debt-to-GDP at over 35% for the first time, for example), infrastructure challenges, rating risks, and current account weakness spell doom and gloom for the Namibian economy, but perhaps unlike our southern neighbour, the pain may be short-felt, if handled correctly. With our hand forced on interest rates, and a probable credit rating downgrade, cautious management of the fiscus will be required to ensure that the downturn it temporary. Efforts to keep the spending party going may well spell long term doom for the country, as the deficit will blow out, taking with it the cost of funding, and the debt stock, and making longer term recovery a sizable challenge. On the other hand, fiscal tightening will add fuel to an already slowing economy, making the fiscal tightrope a challenging one to traverse.
Hotspots of growth are to be few and far between, more on account of the exceptionally high base created in the local economy after the five consecutive boom-years from 2010 to 2014, than any great wrongdoing. Drought and commodity price weakness do little to help the cause, however remain largely out of the control of players in the local space.
The downturn will likely leave the pockets of consumers somewhat less padded, and with expected tax increases (solidarity tax and potentially others), and higher debt servicing costs, little growth is expected in the areas of consumer discretionary goods, particularly those considered most luxurious.
The external position is to remain under sizable pressure, both on account of rand weakness and import costs increasing (but volumes decreasing), slow growth in exports and limited FDI inflows. Net outflows are expected to continue in 2016, as was the case in 2015 (if the Eurobond flows are set aside for comparative purpose), leaving the already battered reserve position weaker once again.
The year 2017 should see some respite, all things being equal, as the vast Husab mine ramps up towards full production, adding extensively to mineral output and exports. In addition, our base case scenario sees the end of the current drought in 2016/17, and a slow recovery in agricultural activity, off the low, drought-level, base.
Energy and water remain key concerns, however with limited major increases expected in demand for the former, coupled with the relatively small consumption figures for the country and ongoing efforts to expand production, we expect to see energy issues resolved without a major hiccup. Water, however, remains of great concerns, as the security of supply, particularly for the mines at the coast and the central area, remains in the hands and the wills of the gods at present.
The good news for Namibia, however, is that much space still exists to improve the bang-for-buck spending of the national budget, while at the same time, certain state owned enterprises can be wholly or partially privatized, in order to free up some liquid capital for the state. In addition, the funds raised in Namibia’s last Eurobond issue remain available to the country to ward off the unwelcome advances of recession, and to protect the external position from further degradation. Moreover, while under pressure, Namibia’s key export minerals, namely diamonds, uranium and gold, have been far less badly affected by the recent commodity price rout, and when viewed in Namibia dollar terms, have actually seen price increases. Finally, Namibia remains a net creditor to the rest of the world, with a fairly sizable stock of international investments (the property, let us not forget, of pension fund members).
In all, Namibia is likely to experience a tough year in 2016, but if handled carefully, will likely be fairly short lived. The continued twin deficits situation will hopefully unwind come 2017, all things being equal. While unpleasant, weathering the storm is necessary, and part of the normal economic cycles. All, most certainly, is not lost.