OREANDA-NEWS. Fitch Ratings has affirmed Namibia's Long-term foreign and local currency Issuer Default Ratings (IDR) at 'BBB-' and 'BBB', respectively, with Stable Outlooks. The issue ratings on Namibia's senior unsecured foreign and local currency bonds have also been affirmed at 'BBB-' and 'BBB', respectively. The Country Ceiling has been affirmed at 'BBB' and the Short-term foreign currency IDR at 'F3'. Fitch has also affirmed the National rating on the South African scale at 'AA+(zaf)' with a Stable Outlook. The issue ratings on Namibia's bonds with a National rating have been affirmed at 'AA+(zaf)'.

KEY RATING DRIVERS
Namibia's 'BBB-' rating balances strong and sustained levels of economic growth, a relatively low public debt load and a high level of political stability, against large fiscal and external deficits.

Namibia has a sizeable general government deficit, which Fitch estimates at 6% of GDP in fiscal year 2015/16 (FY15, from April 2015), similar to the 6.1% shortfall in FY14. In February 2016, the government announced plans to tighten fiscal policy to reduce the budget deficit to 3% of GDP over the medium term, in line with IMF recommendations. The consolidation will involve a reduction in expenditure by around eight percentage points of GDP by 2018, focussed on reducing expenditure on materials and supplies, subsidised travel, overtime, equipment and some capital spending.

However, the fiscal consolidation will be challenging in the context of an expected fall in revenues from the Southern African Customs Union, which the government projects to fall from around 10% of GDP in FY15 to under 7% by FY18. Fitch expects the deficit to narrow to 4.9% of GDP in FY16 and 4.0% in FY17, somewhat higher than the government's targets.

General government debt is moderate at an estimated 35.1% of GDP at end-2015, but had risen sharply from 22.2% at end-2014. However, this partly reflects the issuance of a Eurobond in October 2015, part of which is pre-financing for FY16, and the consequent build up in government deposits to an estimated 10.9% of GDP at end-2015, as well as the effect of exchange rate depreciation on foreign currency debt. The level of public debt/GDP remains well below the 'BBB' median of 43%.

Namibia's economic growth performance and prospects are robust. Real GDP growth held up well at an estimated 4.8% in 2015, despite the impact of a regional drought and weakness in South Africa, its main trading partner (20% of exports and 65% of imports). Fitch forecasts growth will ease to 4.6% this year as continued external weakness and drought offset increased production at several mines. In 2017 Fitch expects real GDP growth to rise to 5.6%, as a number of ongoing mining projects will add to production capacity. In particular, the Husab Uranium Project, which is expected to be fully online by 2017, when it will be the second-largest uranium mine in the world, has a nameplate capacity of 6,800 tonnes of output per year.

The large current account deficit is a significant rating weakness. It widened to an estimated 14.9% of GDP in 2015, from 11.2% in 2014, due to lower prices for many of Namibia's main commodity exports, as well as robust import growth, partly reflecting strong capital goods imports to develop the country's mining sector. From 2016, these trends will start to reverse, as new capacity in the mining sector increases exports, and lower capital goods demand (thanks to mining construction being completed) and higher domestic interest rates curtail import growth. Fitch forecasts the current account deficit narrowing to 11.8% of GDP in 2016 and 6.4% in 2017.

Part of the 2015 Eurobond issuance has been retained to bolster foreign exchange reserves, leading to an increase to USD2bn at end-2015 from just USD1.2bn in 2014. Nevertheless, they remain low at equivalent to 2.6 months of current external payments, compared with the 'BBB' median of 5.6 months. Fitch expects a narrowing of the current account deficit to support a gradual increase in reserves over the medium term.

Fitch estimates that gross external debt rose to the equivalent of 51.1% of GDP in 2015, from 38.7% in 2014, thanks to increased private and government borrowing. However, a large part of the public borrowing was pre-financing for 2016 and for boosting foreign exchange reserves, while most private borrowing (a mixture of banks and non-financials) comes in the form of long-term loans from parent companies, reducing risks. Net external debt is -12.9% of GDP, compared with a 'BBB' median level of 3.6%. The international investment position has been positive since 2005.

Credit growth has been strong in recent years, supporting economic growth but also creating potential risks, particularly in the housing market. House prices have risen by 93% in the past five years, due to easier credit availability and constrained supply, and a large correction would entail risks for the banking sector. Nevertheless, risks for banks are mitigated by strong asset quality. Non-performing loans represented 1.5% of the total at end-December 2015. Fitch expects that Namibian banks would receive support from foreign parents if needed.

RATING SENSITIVITIES
The Stable Outlook reflects Fitch's assessment that upside and downside risks to the ratings are currently balanced. The main risk factors that, individually or collectively, could trigger rating action are:

Negative:
- Underperformance in exports that leads to a widening of the current account deficit and/or significant drawdown in international reserves.
- A failure to reduce the fiscal deficit leading to continued deterioration in the government debt/GDP ratio.

Positive:
- A marked improvement in the current account balance and increase in foreign exchange reserves.
- Income convergence towards 'BBB' peers in the context of macroeconomic stability, diversification of the economy and increase in employment over the medium term.

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 the subdued outlook for commodity prices.