South African based economic think tank, NKC African Economics is bemused by the position of Minister of Finance, Calle Schlettwein who said that the recent upgrade by Fitch of Namibia’s national rating is “an indication that our fiscal stance and consolidation is paying off.”
NKC economist, Gerrit van Rooyen, said yesterday that Schlettwein was wrong in his assessment.
“As other analysts have already pointed out, the upgrade was merely a technical adjustment,” Van Rooyen said in an interview.
He said ratings agencies issue a variety of ratings for countries as well as other institutions or corporations that issue debt. Furthermore, the ratings agencies use different nomenclatures and methodologies, he said.
“Fitch upgraded Namibia’s ‘national rating’. This type of rating is unique to Fitch and is not the same as the type of rating investors and the media generally look at.”
He explained that this ‘headline’ credit rating is usually called the ‘long-term foreign currency credit rating’, referring to the risk that a country will default on the repayments of debt owed for a period exceeding 12 months and issued in a foreign currency. It was South Africa’s long-term foreign currency rating that was downgraded to sub-investment grade (BBB) by both S&P and Fitch recently.
Since South Africa’s downgrades, Namibia’s own long-term foreign currency ratings have remained unchanged at one notch above sub-investment grade (BBB- or Baa3) with a ‘negative outlook’ for both Fitch and Moody’s.
“When Fitch recently upgraded Namibia’s national rating it only said in passing that Namibia’s long-term foreign currency credit rating was affirmed on 2 September 2016 and the outlook was changed to negative. Thus, Fitch has yet to reassess Namibia’s headline credit rating since South Africa’s downgrades,” said Van Rooyen.
He said the key difference between the headline rating and the national rating is that the headline rating is internationally comparable, while the national rating is not.
National ratings are only directly comparable with other national ratings in the same country.
“However, in this case, Namibian debt issuers are rated on the South African scale. This means that South African and Namibian debt issuers can be compared since they are rated on the same scale. Therefore, the ‘upgrade’ only suggests that the creditworthiness of Namibian government bonds has improved relative to South African government bonds, while Namibia’s creditworthiness internationally has remained unchanged,” said Van Rooyen.
He said South Africa’s downgrades are bad news for Namibia, which depend on South Africa for its currency, a large part of its trade, the benchmarking of its government bonds and a significant portion of its government revenues via SACU payments.
“Under junk status, South Africa’s currency, debt prices and general economy will underperform relative to the potential that could have been realised under investment-grade status. This underperformance will filter through to Namibia’s growth, inflation and debt costs,” he said.
Namibia’s credit rating came under pressure even before South Africa’s downgrades, due to a sudden slump in economic growth from 6,1% in 2015 to 0,2% in 2016, a wider-than-expected budget deficit in 2016/17 and ballooning public debt over the last couple of years .
Van Rooyen said Namibia will likely retain its investment-grade status, for now, provided that the country’s debt metrics improve following an expected economic growth recovery in 2017 and ongoing fiscal consolidation.
“Nevertheless, in the event of continued economic stagnation in South Africa and Namibia and further South African credit rating downgrades, which would put further pressure on government expenditure and debt costs, Namibia would inevitably lose its investment-grade status,” he said.
Van Rooyen said the lower than expected growth in the South African Customs Union following the downgrades in South Africa will lead to a lower than expected revenue pool, which will lead to lower than expected SACU payments.
