By Hilary Mare
THE continuous increase in the level of public debt accompanied by weaker economic activity is frightening and concerning, Simonis and Storm Securities (SSS) has said.
Commenting on the mid-term budget review for 2018/19 presented by Finance Minister Calle Schlettwein last week, SSS lamented that the public debt-to-GDP ratio is projected to escalate to 44 percent in 2018/19 compared to an initial 40 percent projection recorded in the annual budget
“The minister has highlighted that taking on more debt is unsustainable, yet we have observed an increase in the projected debt level. We are estimating public debt to GDP at 47.7 percent in the current financial period. One would assume that the debt to GDP has increased due to declining economic activity, however, what is more concerning is the increase in the projected debt levels in value terms by 11.9 percent to N$82.6 billion in 2018/2019,” remarked SSS.
Escalating debt levels for a small open economy with little revenue generation capacity is a recipe for disaster, SSS further argued, highlighting that coupled to this, the rating agencies are also closely monitoring the debt levels.
“Note that the key measures for a positive rating are steady fiscal consolidation, public debt stabilisation objectives and the prospect of a return to a moderate growth outlook.”
Although Namibia’s debt as a percent of GDP is lower than Brazil, India, SA and China, a 45 percent debt to GDP is excessive for a small economy with a population of 2.3 million and nominal GDP of N$178 billion. Foreign debt as a percentage of total debt is at 35 percent, not a major concern, however, it does expose us to external shocks, added SSS.
The Ministry of Finance (MoF) has disclosed its debt redemption strategy to ensure the smooth redemption of the bonds that will mature between 2020 and 2025. This strategy entails maintaining a sinking fund, which currently stands at N$5.7 billion. The total outstanding debt for bonds maturing between 2020 and 2015 amounts to N$35.9 billion.
“Although a good strategy, it will be insufficient to cover the outstanding amount. We, therefore, expect most debt to be rolled forward.
“Our main concern remains the elevated debt level and the servicing thereof, which will continue to put pressure on the Fiscus. We expect debt to increase to N$107.0 billion and debt to GDP to 51.9 percent by the end of 2020/21. This is above the estimated peak of 48.7 percent in 2020/21 indicated in the MTEF,” SSS noted.
The Finance Ministry estimates interest payments to remain at N$6.5 billion as per the original budget of 2018/19. Of interest to note is that the development budget fell below the amount to be paid out as interest on debt.
“This explains why the excessive increase in debt is not felt in the economy (economic growth) and improving the critical areas within the country.
“We commend the Minister for allowing adequate time for consultations and stakeholder input on several tax policy proposals. There are also specific proposals to be refined, such as taxing foreign income of Namibian residents, providing for specific taxation of trusts, etc.
“Noteworthy is the progress being made on the tax administration reforms to operationalise the Revenue Agency for Namibia by March 2019. We hope that this will improve the tax collections (reduce the leakage) and provide respite to our already strained budget,” SSS concluded.
Confidente. Lifting the Lid. Copyright © 2015