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Fitch downgrades Namibia to below investment grade

Fitch Ratings has downgraded Namibia from BBB- to BB+, which is a non-investment rate on 20 November 2017. The revision was the result of extensive stakeholder consultations in Namibia at the end of October and beginning of November unlike the downgrading of Moody’s Investors Services on 11 August 2017 that was based on desk research. Fitch Ratings accorded a stable outlook to Namibia in contrast to Moody’s negative outlook.
The main reasons for the downgrade include:
• Government has not met its fiscal targets for the budget deficit and for public debts. Fitch expects a budget deficit of 6% for the Financial Year (FY) 2017/18 rather than the 5.3% anticipated by Government. Government revised the budget deficit for the FY2019/20 upward from 1% to 2.9%, while Fitch expects a deficit of 4.6%.
• Previously unreported arrears of NAD2.7 billion will put further upward pressure on the budget deficit and public debts and have highlighted shortcomings in the management of public finances.
• Government expects the public debt to GDP ratio to increase to 44.2% rather than to drop below 40%, while Fitch projects the ratio to rise to 47%.
• The payroll could absorb 50% of the total budget and the upcoming elections in 2019 could prevent more decisive steps to curb the wage bill.
• Fitch projects economic growth of 0.8% for 2017, which is half of Government’s projection of 1.6%. Economic growth is expected to remain over the Medium-term Expenditure Framework well below growth rates in previous years (average of 5.7% between 2010 and 2015).
• Medium growth prospects are restraint by lack of fiscal space, subdued growth in Angola and RSA, as well as low commodity prices.
• Depreciation of the South African rand can affect public finances negatively since 30% of public debt is denominated in hard currencies.
• Foreign-currency reserves are expected to average 4.2 months mainly owing to the African Development Bank loan, repayments by the National Bank of Angola repayment, and asset repatriation. The latter is due to the gradual increase in the domestic asset requirement from 35% to 45%.
• Loss-making State-owned-Enterprises carry significant contingent liabilities due to Government guarantees.
• The current account deficit is expected to narrow from 14.5% in 2016to 6.9% on average between 2017 and 2019, which remains above the median of 2.1% for BB-rated peers.
• Fitch expects some policy uncertainties such as the New Equitable Economic Empowerment Framework (NEEEF) and the Namibia Investment Promotion Act (NIPA) to be removed after the SWAPO Congress.

EAN comments:
The writing was on the wall after Moody’s downgrade in August and the tabling of the Mid -year Budget Review on 2 November 2017 that did not meet expectations. A number of measures could be implemented to reduce the budget deficit and total public debts:
• The budget review focussed to a large extent on the revenue side. However, tax revenue is dependent on the performance of the economy or in the case of SACU transfers on the performance of the South African economy and hence revenue is not under full control of the Namibian Government.
• However, Government has exempted quite a number of food items from Value Added Tax (VAT) some years ago. Most of these exemptions benefit mainly the better off and urban population, since the rural population has hardly any access to e.g. milk and bread or the poor cannot afford items such as milk. A review of the exemptions could increase revenue that could be used to strengthen the social safety net.
• More emphasis needs to be placed on the expenditure side, in particular the huge wage bill. It cannot be expected that natural attrition will result in a leaner and more efficient public sector. This will require a thorough analysis and review of the functions and structures of Government.
• There is room for efficiency gains by merging ministries or directorates with similar and or overlapping functions such as the ministries responsible for managing social grants – Ministry of Poverty Eradication and Social Welfare, Ministry of Gender Equality and Child Welfare, Ministry of Veterans Affairs. Another example are the Ministries of Agriculture, Water and Forestry and of Urban and Rural Development that are responsible for water supply to and sanitation in different areas.

• Some Government functions could be outsourced to the private sector, which would create jobs in the private sector and generate tax revenue.
• Public Sector Employees’ contributions to the Public-Sector Employees’ Medical Aid Scheme (PSEMAS) cover just 14% (NAD355.4 million) of the total costs of PSEMAS that amount to NAD2,533.3 million. Instead of using a flat rate that puts a much higher burden on low-income than on high-income earners, Government could replace the current system with a percentage contribution that would include a re-distributional element and recover a larger share of the total costs.
• Proper stock records could potentially save millions of NAD for goods, such as medicines, that disappear or expire.
• Cuts in the operational budget are inevitable in order to increase investment in vital infrastructure that will attract domestic and foreign investors, create jobs and generate tax revenue.

Closer cooperation between the public and private sector would improve the design of policies that are needed to address the main challenges Namibia is facing such as income inequality, poverty and unemployment on the one hand and to create an environment for the private sector to grow and create the necessary jobs. It is encouraging to note that Government has been listening to concerns regarding NEEEF and NIPA and is taking comments into account. Involving the private sector at an earlier stage would reduce
potential pitfalls in policy design and avoid the risk that investors turn to other destinations. Private sector investment is vital to reduce imports and increase exports, hence reducing the current account deficit, but also to increase economic growth in order to reduce the budget deficit and public debt ratio.

Although the import cover of foreign currency reserves has improved significantly, this is no reason to relax since it is not due to increased economic activities and exports, but because of foreign loans, repayments and repatriation of assets. In order to increase the sustainability of foreign exchange reserves the trade deficit has to be addressed and foreign investment has to be encouraged.

The downgrading is expected to increase the future costs of borrowing, which will increase the allocation to statutory expenditure and will reduce the funds available for other vital expenditure. However, borrowing costs are most likely not affected in the short term, since the financial markets have to some extent factored in the possible downgrading.

The downgrading could result in foreign direct investors to review their investment decisions and expect a higher return that compensates for the increased risks. The downgrading could also affect Namibia’s attractiveness for Public-Private Partnerships since some financial institutions might be prevented from financing PPP’s in countries that do not have an investment grade.
However, not all is doom and gloom. The downgrading is again a reminder that we need to do things differently and break with old, bad habits. Some examples are given above regarding the budget. Other areas include the lack of accountability in some parts of the public sector and State-owned Enterprises that prevents the taxpayer from reaping the benefits from tax payments and prevents the economy to grow faster. With the right policies in place and mechanisms implemented to improve the business climate and
competitiveness, Namibia will be able to turn the tide although it will take a few years probably to regain an investment grade.

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NSA releases the Consumer Price Index for October 2017

The Namibia Statistics Agency (NSA) has released the Consumer Price Index for October 2017 on 15 October 2017. The annual inflation rate for October 2017 dropped again after an increase last month. Herewith a few highlights:
• The annual inflation rate (October 2017 compared to October 2016) decreased to 5.2%, the lowest annual inflation rate since December 2015 when it stood at 3.7%.
• The monthly inflation rate (October 2017 compared to September 2017) dropped back to 0.1% after an increase to 0.4% in September 2017. During five of the ten months this year the monthly inflation rate was 0.1%.
• Annual price increases decelerated for both services (down from 8.4% in September to 8.0% in October) and goods (down from 3.6% to 3.1%). However, price increases for services remain clearly the main driver of inflation accounting for 3.2 percentage points of the inflation of 5.2%.
• The category of ‘housing, water, electricity, etc.’ recorded again the highest inflation rate of the main twelve categories although price increases slowed down from 8.9% in September to 8.6% in October. It is the second lowest inflation rate for housing this year after 8.3% in August.
• The costs of maintenance of dwellings continue to increase at a slower pace, which could be attributed to the contraction in the construction and related industries. Prices for maintenance rose by 4.7% in October – the lowest since January 2014 (4.4%) – compared to 5.9% in September 2017.
• Prices for water supply grew by only 7.2% in October compared to double-digit figures over most of the past two years, while price increases for electricity showed some strong fluctuations over the past few months and slowed to 4.1% in October.
• At the other end of the scale, prices for clothing and footwear dropped by 5.0% compared to October 2016 implying that these items were less expensive in October this year than October 2016.
• Similarly, costs for communication services were also lower in October 2017 compared to the same month last year. They dropped by 0.3%
• The consumer also continues to benefit from low food-price inflation. Prices for food items increased by 3.7% in October compared to 4.2% in September 2017 and 11.9% in October 2016. Bread and cereals are again less expensive than a year ago declining by 2.7%, while fruits (1.6%) and vegetable (2.1%) prices increased below average.
• Meat prices, however, remain under pressure increasing by 9.2% after an increase by 9.4 in September 2017 and 5.3% in October 2016. Strong price rises for meat can be explained with better grazing conditions and strong exports that compete with local demands.
• Costs for transport rose stronger in October (4.4%) than in September 2017 (3.9%), because of increased prices for new vehicles (up by 6.5% compared to 3.9% in September).
• Prices for alcoholic beverages and tobacco also rose stronger than in previous months. Prices were 5.7% higher in October 2017 than in October 2016.

Overall, the current trend of the inflation rate supports our view that this year’s annual inflation rate will remain below last year’s inflation rate of 6.7%. Consumers continue to benefit from lower prices for basic food items such as bread and cereals and relatively modest increases for food items in general. However, inflation is expected to pick up for November due to the increase in fuel prices by NAD0.40 per litre for petrol and NAD0.60 per litre for diesel. Since transport accounts for the third largest category in the consumption basket (14.3%), any price increases within this category influences the overall inflation rate.

EAN Commentary – CPI October 2017

World Bank releases the Doing Business 2018 report

The World Bank has released its annual ‘Doing Business 2018’ report on 31 October 2017. Like last year, 190 countries are included in the analysis. The assessment is based on ten areas such as starting a business, getting electricity, dealing with construction permits etc. Below is a summary of some of the highlights:
• Namibia improved her ranking slightly from rank 108 in last year’s report to 106 this year. The improvement, however, recovered only some ground the country has lost since 2012 when Namibia ranked 78.
• Namibia maintained her ranking within the now 16 SADC member states – rank 7. In 2014 and 2016 Namibia ranked sixth, while in 2015 the country ranked fifth. The ranking indicates that considerable efforts are required to become the most competitive economy in SADC, let alone on the continent.
• Namibia improved in two out of the ten areas, namely ‘Getting electricity’ and ‘Enforcing contracts’. The country’s quality of judicial processes is rated 9.5 this time compared to 6.5 out of 18 last year. This resulted in an improvement by 39 places from rank 98 to rank 59 this year. The reliability of electricity supply is better rated this year at 6 out of 8 than last year, which led to a much-improved ranking – rank 68 up from 124 last year.
• However, Namibia’s ranking dropped in all other areas; slightly in some, but significantly in others. Of concern is certainly the drop in ranking regarding ‘Dealing with construction permits’ by 40 places to rank 107 this year. The reasons are an increase in the number of procedures (12 now up from 10) and consequently an increase in the number of days it takes to get the permit – 160 days compared to 137. The lengthier process resulted in an increase in the costs for getting the permit from 0.5% of the value to 2.5%. Given the high prices for residential property and the contraction in the construction industry, these areas warrant urgent attention.
• Namibia also slipped substantially regarding ‘Resolving insolvency’ by 26 places to rank 123 mainly because the strength of the insolvency framework is being regarded weaker this year (6.0) than last year – 7.5 out of 16.
• Another area of concern is the ranking in terms of ‘Trading across borders’. Namibia dropped five ranks to rank 132 simply because other countries improved and moved forward, while time and costs of imports and exports have not changed for Namibia. In order to become the logistics hub for southern Africa the border procedures have to be streamlined and costs have to be cut.
• There has been no improvement in any indicators for ‘Getting credit’. Therefore, the score remained at 60.0 like last year, but the country slipped six places to rank 68, because other countries improved their scores.
• The same applies to ‘Starting a business’. Namibia scored the same as last year (68.9), but moved down two ranks to rank 172 out of 190 countries. The launch of NamBizOne, a single-window platform, has apparently not have had any positive impact so far on the procedures (10) and time (66 days) it takes to start a business. In order to stimulate economic growth and job creation, concerted efforts by all institutions involved are needed to make a single-window for registrations a reality.
• Paying taxes (decline in ranking from 74 to 79), Protecting minority investors (drop from 81 to 89) and Registering property (down from 174 to 175) remain areas for substantial improvements.
The improvement is in contrast to the decline in competitiveness according to the World Economic Forum’s Global Competitiveness Report 2017-18 that was released in September 2017. However, the GCR uses a different methodology and is in part based on the Executive Opinion Survey. The results point often in the same direction: Lack of reform in Namibia results in declining competitiveness, while other countries are moving ahead. Namibia’s main challenges of poverty, income inequality and unemployment will only be overcome if a more conducive environment for the private sector to invest and operate is created. New technologies offer opportunities to reduce bureaucratic processes, time and costs.

EAN Commentary – Doing Business 2018

NSA releases the Consumer Price Index for September 2017

The Namibia Statistics Agency (NSA) has released the Consumer Price Index for September 2017 on 12 October 2017. The annual inflation rate for September 2017 increased for the first time this year. Herewith a few highlights:
• The annual inflation rate (September 2017 compared to September 2016) increased slightly from 5.4% in August 2017 to 5.6% in September 2017 after declining continuously since January 2017. However, it remained below the inflation rate in September 2016 of 6.9%.
• The monthly inflation rate (September 2017 compared to August 2017) rose from 0.1% in August to 0.4% in September 2017.
• Price increases for services are this year the main inflation driver. Prices for services increased by 8.4% compared to September 2016. Service prices rose faster than prices for goods since January 2017.
• Services account for 42.3% of the consumption basket. Consequently, price increases of services contributed 3.6 percentage points to the total inflation rate of 5.6%
• Prices for housing, water, electricity, etc. recorded the highest inflation rate of 8.9% year-on-year. Since this category accounts for the largest weight in the consumption basket (28.4%) it has a strong influence on the overall inflation rate. Compared to August when it stood at 8.3%, inflation accelerated for this category in September.
• Rental payments recorded price increases of 9.6% as in previous months. Costs for repairs and maintenance increased by 5.9%, down from 6.3% in August 2017. The contraction in the construction sector could have a dampening effect on prices for repairs and maintenance. Costs for water supply rose also at a slower pace: 8.1% in September compared to 8.4% in August. Electricity prices on the other hand showed a much stronger increase in September (6.0%) than in August (1.8%).
• After an uptick in food prices in August (4.6%) compared to July 2017 (4.3%), price increases slowed down to 4.2% in September. Food and non-alcoholic beverages account for the second highest weight in the consumption basket (16.5%).
• Prices for bread and cereals as well as for fruits actually decreased compared to September 2016 by 2.4% and 1.7% respectively. Prices for milk, cheese and eggs rose by 2.9%, which is below price increases in August (5.3%). Meat prices on the other hand continue their upward trend and rose by 9.4% compared to 8.9% in August 2017. The strong increase in the value of exports of live animals in the second quarter 2017 could be a driving force for higher meat prices. The price for vegetables is on the rise again (2.1%) after five consecutive months of decline.
• Transport prices showed a stronger increase in September 2017 (3.9%) compared to August (2.0%) fuelled by higher fuel prices. Costs for the operation of transport equipment rose by 5.0% compared to 1.9% in August 2017. Transport carries the third largest weight in the consumption basket with 14.3%.
• Costs for alcoholic beverages and tobacco rose at the fastest pace since February 2017, namely at  5.3% in September compared to 4.8% in August. These items account for 12.6% of total expenditure  of an average Namibian household.
Despite a slight acceleration of price increases, we expect the annual inflation rate to remain below last year’s inflation rate of 6.7%. Relatively modest price increases for food products remain good news for in particular low-income earners and the poor who spend a much larger share of their income on food than the average Namibian household (16.5%). The decision to leave fuel prices unchanged in October will  reduce price pressure on transportation costs with subsequent positive impacts on the inflation rate in October.
EAN Commentary – CPI September 2017

EAN Commentary – Second quarter GDP statistics

The Namibia Statistics Agency (NSA) released the second quarter Gross Domestic Product (GDP) data on 21 September 2017. The GDP data for the second quarter 2017 are compared to the GDP figures for the second quarter 2016 (year-on-year). The Namibian economy continued to contract at the same pace as in the first quarter 2017, namely by 1.7% compared to the second quarter 2016.
Following are some of the highlights:
First quarter 2017 GDP revisions:
• First quarter 2017 GDP data were revised upward by one percentage point from -2.7% to -1.7%.
• Most economic sectors showed a stronger performance in the first quarter than previously estimated. The estimates for the agricultural sector were adjusted from 10.5% to 11.2%, for mining from 16.8% to 18.7%, for manufacturing from -10.7% to -2.5% and for hotels and restaurants from -9.3% to -7.3%.
• The fishing sector faced more headwinds in the first quarter and growth in the sector was downward adjusted from 4.6% to 1.1%.
Second quarter 2017 GDP estimates:
• A number of economic sectors rebounded strongly compared to the second quarter 2016: Agriculture grew by 17.0% owing to strong growth in output of the Crop production sub sector (32.0%), while livestock production grew by 12.5%.
• The output of the Mining sector expanded by 25.8%, mainly driven by the diamond mining sector that grew by 33.2% and metal ores (20.8%) in particular zinc production that was up by 38.1%. Output of uranium increased as well and was the highest since the fourth quarter of 2014.
• The Manufacturing sector reversed its performance and recorded a positive growth of 2.9% owing to higher production of beverages – up by 10.8% – and basic non-ferrous metals (1.4%). As expected, meat processing declined by 0.2% compared to the same quarter 2016.
• The output of the Transport and Communication sector rose by 3.5% despite a decline in cargo handled at Namibian ports (-7.6%). However, the decline was not as severe as in the second quarter 2016 (18.0%). The railway subsector grew by 3.5%.
• In contrast, the output of the Construction sector dropped by 51.9% after a decline by 45.0% in the first quarter this year. The sector has contracted since the first quarter 2015.
• The output of the Wholesale and retail trade sector declined by 8.2%, owning to lower vehicle sales (-24.6%), lower furniture sales (11.6%) and declining sales by supermarkets (-0.7%).
• The Hotels and restaurants sector showed a weaker performance than in the second quarter 2016 (-3.0%). This is due to a decline in room nights sold (2.0%). Bed nights sold increased at a slower pace in the second quarter 2017 (4.2%) than in the second quarter 2016 (10.6%) resulting in the overall contraction of this sector.
• The output of the Fishing sector also contracted (-9.8%) mainly because of lower landings by the mid-water subsector (-13.2%).
The quarterly GDP data show a number of encouraging developments. After three years of drought over the past four years, the agricultural sector is recovering and is showing strong growth albeit starting from a low basis. We expect the agricultural sector to maintain this performance throughout 2017. The stronger performance of the mining sector is also encouraging, in particular the increase in diamond, zinc and uranium production, which will have a positive impact on exports. Furthermore, increased mining output will benefit the transport sector (including cargo handled at the ports) that performed better in the second than in the first quarter. Despite the continuing decline of the construction sector, which has an impact on construction-related manufacturing activities such as metal fabrication etc., the manufacturing sector recorded a positive growth rate. We expect this trend to continue, since beverage production is expected to continue to expand since water supply has improved.
The construction sector will feel the full impact of Government’s budgetary alignments this year. The job losses in this sector will have a negative impact on the wholesale and retail trade sector that contracted over the past three quarters. The recent drop in interest rates will however relieve some pressure on consumer spending.
Contrary to expectations based on reports of a booming tourism sector, the hotels and restaurants sector declined for a second quarter. However, this can be explained by incomplete data on room nights and bed nights sold. We expect the sector to record a positive annual growth rate.
Overall, initial quarterly GDP data should be treated with some caution as they are up for revision once NSA receives more complete information from the industries. The revisions for the first quarter serve as an example.

EAN Commentary – Second quarter 2017 GDP statistics

EAN Commentary – Quarterly Trade Statistics for the Second Quarter 2017

The Namibia Statistics Agency (NSA) has officially released the Quarterly Trade Statistics for the Second Quarter on 21 September 2017. Herewith a few highlights:
• The revision of the first quarter trade statistics resulted in a widening trade gap. Although total exports were revised upwards to NAD15,607 million, the trade deficit increased from NAD4,695 million to NAD4,885 million since imports increased to 20,492 million.
• The trade balance moved further into negative territory in the second quarter 2017, widening to NAD6,193 million. It is mainly due to a strong decrease in the value of exports from NAD15,607 million to NAD13,920 million, while the value of imports declined by only NAD379 million to NAD20,113 million.
• Namibia’s exports are dominated by diamonds. The value of diamond exports increased from NAD4,155 million in the first quarter 2017 (Q1 2017) to NAD4,726 million in the second quarter (Q2 2017). Diamond exports are also up compared to Q2 2016 (NAD4,602 million). However, total diamond exports for the first half 2017 are almost NAD1 billion below the value exported in the first half of 2016.
• The value of copper ore exports picked from NAD1,678 million (Q1 2017) to NAD2,178 million (Q2 2017), but remained below the export value of Q2 2016 (NAD2,279 million).
• The value of fish exports dropped from NAD2,486 million (Q1 2017) to NAD2,161 million in Q2 2017, which was down by NAD400 million compared to the export value in Q2 2016 (NAD2,566 million).
• The export value of copper cathodes declined as well from NAD1,178 million to NAD867 million between the first two quarters 2017. It is also substantially lower than in the Q2 2016 (NAD1,512 million).
• Although oil prices on the spot market dropped from an average of USD53.59 per barrel during the first quarter 2017 to USD49.55 per barrel in the second and a slight appreciation of the Namibia dollar versus the US dollar from on average NAD13.23 in the first quarter to NAD13,20 in the second, the total import value of mineral fuels & oil increased from NAD2,074 million to NAD2,325 million. However, the value of oil imports remained substantially below Q2 2016 (NAD4,282 million).
• The second largest import item vehicles with a value of NAD2,017 in the second quarter, which is a decrease by about 10% from the Q1 2017 (NAD2,223 million). The value of vehicle imports also declined compared to Q2 2016, when it stood at NAD2,476 million.
• The import value of boilers & machinery as well as electrical machinery & equipment on the other increased in the Q2 2017 compared to Q1 2017. Namibia imported boilers to the value of NAD1,953 million in Q2 2017 compared to NAD1,830 million in Q1 2017 and electrical machinery to the value of NAD1,231 million compared to NAD1,156 million.

Despite the opening of new mines and improved commodity prices, exports are not really picking up. A t the same time, imports remain at high levels although major infrastructure projects were completed that required the importation of among others construction materials and equipment. Although Namibia’s foreign exchange reserves have improved significantly over the past few months due to the repatriation of foreign investment and the loan from the African Development Bank, a continuation of the large trade deficit will put pressure on foreign exchange reserves unless levelled out by the inflow of foreign exchange from the Southern African Customs Union Common Revenue Pool and from Foreign Direct Investment (FDI). It should, however, be noted that the trade statistics refer to the trade of goods only and exclude the trade of services. Namibia usually achieves a positive trade balance in the trade of services.

EAN Commentary – Second quarter 2017 trade statistics

EAN Commentary – Consumer Price Index August 2017

NSA releases the Consumer Price Index for August 2017
The Namibia Statistics Agency (NSA) has released the Consumer Price Index for August 2017 on 14 September 2017. The annual inflation rate remained unchanged compared to July 2017. Herewith a few highlights:
• The annual inflation rate remained at 5.4% compared to August 2016. It remains the lowest annual inflation rate since January 2016 (5.3%).
• The monthly inflation rate increased to 0.09% compared to July 2017, up from a monthly inflation rate of 0.04% in the previous month.
• Housing, water and electricity was the category driving inflation. It carries the highest weight in the consumption basket (28.4%) and recorded an inflation rate of 8.3%. Price pressure in this category dropped from 9.1% in July 2017 and is the lowest so far this year.
• The costs of electricity and other fuels as well as the costs for water supply etc. rose by 1.8% and 8.4% respectively compared to stronger increases during July (6.9% and 9.4% respectively).
• Rental payments continue to increase at an annual rate of 9.6%, while the cost of maintenance of dwellings increased stronger in August (6.3%) than in July (6.0%).
• Food prices increased stronger in August 2017 at 4.6% compared to July 2017 (4.3%). Food prices carry the second highest weight in the consumption basket with 16.5%.
• Food price inflation was driven by higher inflation rates for fruits (up from 2.6% in July to 6.8%), dairy products (up from 4.1% to 5.3%) and meat (up from 7.9% to 8.9% in August 2017).
• Prices for bread and cereals as well as for vegetables continued to contract in August although at a slower pace. Prices for vegetables were 0.2% lower in August than in July, while the declined by 1.8% in July. Bread and cereals cost 0.5% less than in July.
• Transport inflation dropped slightly from 2.4% in July to 2.0% in August. Transport is the third largest consumption category with a weight of 14.3%.
• While purchasing prices for vehicles increased at a slower pace than in July (6.4%), namely at 4.2% in August, the costs for the operation of transport equipment (mainly referring to the cost of fuel) rose faster, namely by 1.9%, in August than in July (1.6%).
• The costs for health services rose also at a slower pace, namely at 5.8% in August, while they increased by 6.3% in July. This is due to lower price increases for the category of medical products and equipment. Prices for this category increased by 6.1% (July: 7.4%), while price increases for outpatient services remained unchanged at 6.3% compared to July.
• Looking at inflation from a different angle, prices for services remain the main driver of inflation. Costs for services increased by 8.1% as in July. In contrast, prices for goods increased by only 3.4%, the lowest increase since June 2015 (3.1%).
Annual inflation for 2017 is set to end up lower than in 2016, when it averaged at 6.7%. This is good news for the consumer in times of high unemployment who benefits already from lower interest rate – at least if s/he is a net borrower. It is also good news for Government meeting its fiscal targets such as the budget deficit since slower cost increases for purchasing goods and services makes it easier to stay within the budget ceilings.

EAN Commentary – CPI August 2017

EAN Commentary – National Accounts 2016

NSA releases the National Accounts for 2016
The Namibia Statistics Agency (NSA) released the Final National Accounts 2016 on 17 August 2017. Overall economic growth in 2016 was stronger (1.1 percent) than initially estimated in the Preliminary National Accounts (0.2 percent).
Following are some of the highlights:
• Gross Domestic Product in current prices increased from NAD147,635 million to NAD161,030 mln in 2016 and from NAD108,573 mln to NAD109,748 mln in 2010 constant prices.
• The Namibian economy grew by 1.1 percent in 2016 compared to 6.0 percent (2015) and 6.4 percent in 2014.
• Per-capita income in constant prices declined from NAD47,605 in 2015 to NAD47,216 in 2016. This is the second drop in per-capita income in constant prices over the past ten years. Per-capita income dropped by 1.2 percent in 2009 and 0.8 percent in 2016.
• Value addition in the Primary Industries declined by 2.0 percent in 2016, the fourth consecutive annual decline. Diamond mining as well as other mining and quarrying recorded negative growth rates of 9.6 and 19.8 percent respectively, while uranium mining grew by 13.6 percent. Value addition of the mining sector as a whole dropped by 5.7 percent.
• Both the agriculture and fishing sectors showed growth of 0.8 and 7.7 percent respectively. Despite the drought, the output of livestock farming increased by 0.8 percent compared to 2015 because of the low basis. Crop farming experienced another year of decline – 1.2 percent.
• Value addition of the manufacturing sector declined by 7.8 percent mainly caused by the construction sector’s decline by 26.5 percent. The construction sector grew strongly during the three preceding years by 32.4 percent on average. Output of the Metal fabrication sector declined by 1.1 percent, which can be explained by the contraction in the construction sector.
• Among others, Meat processing (-2.1 percent), Beverages (1.6 percent) and Other manufacturing (13.9 percent) contracted in 2016 like in the two previous years.
• Diamond processing displayed a strong recovery growing by 65.9 percent after declines during three of the four previous years.
• The tertiary sector prevented the economy from a recession due to a growth of 3.9 percent that was sufficient to mitigate the contractions in the primary and secondary sectors. Health (10.5), Transport and communication (6.1 percent) and Hotels and restaurants (5.1 percent) showed the strongest performances in the tertiary sector.
• Gross Fixed Capital Formation dropped to NAD39,080 mln compared to NAD50,315 mln (2015) and NAD46,370 mln (2014).
• The value of imports amounted to NAD106,192 million, while the value of exports stood at NAD68,005 mln leaving a negative trade balance of NAD38,187 mln.
EAN comments
• Economic growth surpassed expectations for 2016 since quarterly GDP data recorded negative growth rates for three of the four quarters. However, it remained below the 1.3 percent anticipated in the budget statement.
• Stronger than expected growth could result in lower budget deficit to GDP and total public debt to GDP ratios depending on which growth projections have been used so far to calculate the ratios.
• The decline in per capita income in constant prices by 0.8 percent is caused by population growth of 1.9 percent compared to GDP growth of 1.1 percent. The Population and Housing Census 2011 however, stated a population growth rate of 1.4 percent over the period of 2001 to 2011.
• Gross Fixed Capital Formation (investment) declined in particular because of lower investment in the sector mining and quarrying. This is not surprising, since the development of the new mines (B2Gold, Husab uranium and Tschudi copper) had to a large extent been completed in 2016.
• Despite budget cuts announced in October 2016, public investment increased further to NAD10,168 mln compared to NAD9,756 mln in 2015 and NAD2,313 mln in 2007.
• Investment in mineral exploration (NAD650 mln) dropped to its lowest level since 2007 (NAD540 mln), which could negatively impact on future growth prospects in the mining sector.
• The trade balance recorded the second highest deficit only exceeded in 2015 (NAD45,497 mln). The deficit accounted for 56.2 percent of exports. The foreign exchange reserves (EAN Commentary – Monetary Policy Statement 17 Aug2017) improved strongly over the past few months, but only due to the repatriation of funds by financial institutions and due to the African Development Bank loan. Without addressing the negative trade balance, the foreign exchange reserves will return to precarious levels.
• The annual change of the overall GDP deflator for 2015 moved from minus 0.2 percent into positive territory (1.4 percent) because of sector-specific deflator adjustments.

EAN commentary-National Accounts 2016

EAN Commentary – Monetary Policy Statement August 2017

BoN releases Monetary Policy Statement
The Bank of Namibia has released the Monetary Policy Statement on 16 August 2017. The Monetary Policy Committee has decided to cut the repo rate by 25 basis points from 7.00 percent to 6.75 percent. The BoN has followed the step taken by the South African Reserve Bank that cut the repo rate by 25 basis points to 6.75 percent with effect of 21 July 2017.
The Bank of Namibia cited the following main reasons for its decision:
• Slightly better global economic growth prospects for 2017 (3.5 percent) compared to 3.2 percent in 2016. However, global risks remain such as policy shifts in the USA and the UK (Brexit) and geopolitical tensions in particular between the USA and North Korea.
• Weakening domestic economy during the first six months of 2017 compared to the same period 2016. This affected mainly the construction, manufacturing, wholesale and retail trade, as well as the transport sectors.
• Although the domestic inflation rate for the first six months averaged at 7.00 percent compared to 6.3 percent during the same period in 2016, it is on a downward trend.
• Private sector credit extension (PSCE) slowed down significantly from 12.5 percent during the first six months in 2016 to 8.5 percent in 2017.
• Increased stock of international reserves that cover 5.5 months of imports and are sufficient to sustain the currency peg of the Namibia dollar with the South African rand.
EAN comments
The repo rate determines the interest rates of commercial banks. An interest rate cut has therefore positive impacts on the cost of borrowing, since commercial banks usually adjust their interest rates by the same margin.
• The foreign exchange reserves have seen a substantial recovery due to the African Development Bank loan issued in South African rand and the repatriation of funds by financial institutions. The import cover increased from about three months to 5.5 months, which is a very good news. The low import cover in the past had been of concern. However, the Eurobond and AfDB loan have to be repaid at some point in time.
• The strong recovery of foreign exchange reserves reduces the need for an attractive interest rate environment to attract foreign financial investment.
• Although the inflation rate exceeded last year’s average inflation rate for the first six months, we expect the annual inflation rate for 2017 to be lower than in 2016. Even though the annual inflation rate is expected to stay outside the band of 3 to 6 percent, the downward trend supports the interest rate cut.
• The lower interest rate is good news for borrowers, since it reduces the costs of borrowing.
• The lower interest environment could support consumption, which would directly benefit the wholesale and retail trade sector and consequently the manufacturing sector.
• It could also encourage private sector investment, since lower interest rates reduce the cost of doing business and could make investment more viable. However, in order to support private sector investment, Namibia has to improve the policy environment.
• The decision is good news for the public sector, since it could cushion against potentially increasing costs of borrowing owing to the investment downgrading by Moody’s on 11 August 2017.
• However, lower interest rates disincentivise savings since returns from savings decline. Combined with lower costs of borrowing could increase household indebtedness further, which is already at a high level.

EAN commentary-Monetary Policy Statement August 2017

EAN Commentary – Consumer Price Index July 2017

NSA releases Consumer Price Index for July 2017
The Namibia Statistics Agency (NSA) has released the Consumer Price Index for July 2017 on 10 August 2017. Inflation continued its downward trend that started in February 2017, when inflation declined from 8.2 percent in January to 7.8 percent. Herewith a few highlights:
• Inflation slowed down to 5.4 percent compared to July 2016;
• No inflationary pressure was recorded compared to June 2017. The month-on-month inflation rate stood at 0.0 percent
• Namibia experiences the slowest price increases since January 2016;
• Food and beverage prices increased at one of the slowest rates since June 2015. Prices increased by 4.3 percent. Inflation for this category was only lower in May 2017 at 3.7 percent.
• Prices for some food items actually declined, such as Bread and cereals (-0.6 percent) and Vegetables (-1.8 percent).
• Price increases for Meat slowed down from 8.9 percent in June to 7.9 percent in July. Meat prices displayed one of the highest price increases among food items compared to last year when farmers sold livestock because of the drought.
• The category ‘Housing, water, electricity etc.’ was the main driver of inflation with an annual inflation rate of 9.1 percent. This category accounts for the largest share of the consumption basket (28.4 percent) and hence, has a strong influence of the overall inflation rate. Rental payments increased by the largest margin in July – 9.6 percent – followed by Water supply and sewerage – 9.4 percent. Electricity prices increased by 6.9 percent compared to July 2016.
• Transport inflation has come down again to 2.4 percent – the lowest level since May 2016 (1.5 percent). Transport carries the third highest weight in the consumption basket – 14.3 percent. This was caused by a substantial slowdown of price increases for the ‘operation of transport equipment’, which basically refers to fuel. Prices in this category increased by just 1.6 percent compared to 5.8 percent in June.
• Prices for health services rose at the slowest pace since January 2016 – 5.4 percent compared to 5.3 percent.
• Price increases for the category ‘Housing, water, electricity, etc.’ remained on the same level as in May, namely at 9.8 percent. Housing etc. accounts for the largest share of the consumption basket, namely for 28.4 percent and has, therefore, a substantial influence on the inflation rate.
The continuing slowdown in food price inflation is good news for the poorer households that spend the largest share of their income on food. However, future prices for maize at the South African Futures Exchange (Safex) suggest that we can expect slight price increases towards the end of the year, while wheat prices are expected to drop. The current trend of the inflation rate supports our view that the annual inflation rate for 2017 will drop below last year’s inflation rate of 6.7 percent, which is good news for the consumer as well as for Government’s fiscal targets.

EAN commentary-Consumer Price Index July 2017