Fitch Ratings (Fitch) downgraded Namibia’s long-term foreign currency credit rating to BB- and changed the outlook from negative to stable on Friday, June 24. This reflect high and rising government debt and exacerbated by the economic shock.
A downgrade means that when Namibia needs to borrow more money, as it inevitably will, investors will demand a higher interest rate because of the lower creditworthiness of the country. This will translate into higher interest costs which leave less money to be spent on running and developing the country. Successful economic policy requires that priority be given to interventions which offer the greatest impact at the least cost. The current situation is dire. However, there are simple things that can be done that can have a meaningful impact in a relatively short period of time. Rapid action to promote these opportunities is the best way to get the economy going again. Given Namibia’s shortage of domestic savings, stimulating economic growth requires foreign investment. It is therefore vital for monetary and fiscal authorities to address the concerns raised by rating agencies in downgrade reports before they become more apparent and magnified to trigger more negative rating actions. It is important the gover
nment to create an environment that enable business confidence by engaging key economic players in addressing structural rigidities, declining competitiveness, policy uncertainty and bargaining power of labour. This will succeed only if policy is rationally formulated so that investors have confidence in the long-term sustainability of Namibia as an investment destination. We have to demonstrate sure, sound economic management and fiscal discipline, and a commitment to Namibia economic recovery.
The most important cause of Namibia’s present economic woes is a shortage of technical and managerial skills. This is most clearly seen in government, but is a problem throughout the economy. With a new rating from Fitch Ratings, the Namibians expects to make the last step toward. An investment rating is expected to allow the country to attract more job-generating foreign direct investments. The economy of a country is always linked to the world economy through external economic activities such as foreign investment and foreign trade.
Namibia has established the Namibia Investment Promotion and Development Board and have introduced policies that include fiscal and financial incentives. As with most economic events, it’s difficult to predict precisely what the impact will be. In essence, a downgrade is just an assessment of our creditworthiness. However, the tag to BB- from BB that has now been hung around our country’s neck is still detrimental and it will impact on how we are seen by foreign investors. The economy is expected to weaken as uncertainty holds back investment, not just by local businesses but especially by foreign investors who place emphasis on ratings and the outlook for a country when making investment decisions.
In the same breath, and perversely, we could also see a near term boost to some economic segments, especially export-oriented sectors, such as mining and tourism. In time, though, the Bank of Namibia will be obliged to raise interest rates to deal with higher consumer price inflation. From these sequence of events, it follows that, in time, the ratings downgrade is followed by slower economic growth, higher consumer price inflation and higher interest rates. The combination of these factors is called stagflation. This environment is a poor outcome that will hold back economic progress and social transformation. Of course, it would be naive to argue that this is entirely due to the ratings agencies’ call. Rather, this poor economic outcome was already on the cards. To explain, it’s important to recognize that the ratings agencies don’t have access to more or better information than the market at large and that their calls don’t drive market movements. Rather, their decisions tend to lag rather than lead the ma
rkets, and in this way, generally confirm what we already know.
By some measures, Namibia has been off the pace but not in bad shape. According to Bank of Namibia, “the Namibian economy recorded a modest rebound in 2021 and recovered some of the ground lost in 2020. Following a record contraction of 7.9 percent in 2020, the Namibian economy is estimated to have expanded by 2.4 percent in 2021, aided by supportive macroeconomic policies. This recovery was driven by mining and quarrying, coupled with positive real value addition in the wholesale and retail trade, hotels and restaurants, and information and communication sectors”.
Moreover, if we choose to ignore the message that is being provided by the ratings agencies that our financial position needs attention and our growth prospects look poor, then we risk slipping further into sub-investment grade. If we choose to treat this downgrade as a wake-up call that and we work together as a nation to restore our economy to a sound footing, introduce pro-growth policies, restore political certainty and fiscal discipline, stop corruption, reduce inequality and generate solid, inclusive economic growth, then our sojourn into sub-investment grade will be short-lived and we can bounce back a stronger, united Namibia.
To that end, Namibia is our home, we drive her growth. Critically, a point that should not be lost is that as much as the ratings call is by an external agency, the repair required is domestic, and includes public and private sector facets. The first is high private sector savings rates fuelling high domestic investment levels. The second is sound monetary policy that has been effective in managing the risk of consumer price inflation running away during the recovery.
A downgrade isn’t good for any country but it’s also not all doom and gloom. Our response and our actions as a country and as its citizens will determine whether we drift downwards into recession and even default on our debt or we bounce back as a stronger Namibia. As individuals it’s important to be active citizens.