2021 – A Modest Recovery
Preliminary National Accounts data from the Namibia Statistics Agency shows that Namibia recorded real GDP growth of 2.4% in 2021. While this is the quickest annual growth rate since 2015 it is lacklustre in the context of the low base set in the prior year. The NSA revised up real output for 2020 in the latest National Accounts release, bringing the contraction for the pandemic year to 7.9%, the deepest on record. The hard lockdown measures implemented in 2020 resulted in almost all sectors of the economy contracting, bar water supply (with the completion and inflows into Neckartal Dam), healthcare services and information and communication services. Output in 2021 benefitted from a less restrictive operating environment but was more severely impacted from a healthcare perspective. Supply chain challenges and reduced tourist numbers added to the drag on activity during the year.
Much of the growth recorded in 2021 was as a result of growth in mining output as a recovery in global demand and supply chain disruptions pushed commodity prices to elevated levels. Within the sector growth came primarily from uranium, gold, lead, salt and marble production. Notably, uranium production almost reached 2018 levels, and the value of uranium exported surpassed 2018 levels as prices in both the spot and long-term market improved significantly. Agriculture, Forestry and Fishing was a slight drag on overall growth, with fishing and crop farming performance weighed down by a slight contraction in the livestock sector.
Secondary industries all recorded contractions with manufacturing output dropping by 6.2%, while electricity and water contracted by 5.7% and construction slumped 10.2%. The contraction in Manufacturing output was due to the beneficiation of basic non-ferrous metals coming to a halt as the Skorpion Zinc mine and smelter was put on care and maintenance. Bar this subsector manufacturing outperformed 2020 modestly. The construction sector has been particularly hard hit since the government embarked on its fiscal consolidation exercise, recording six years of consecutive contractions. In real terms the sector’s output in 2021 was only 30% of that of 2015.
Tertiary industries, although slow to recover, posted moderate growth in 2021. Importantly, wholesale and retail trade posted positive growth for the first time since 2016, indicating a potential floor in consumer sentiment was reached during the pandemic from which further recovery is likely. Output for the sub-sector was however still below 2013 levels, illustrating the depth of the contraction in consumer demand. The Hotels and Restaurants sub- sector recovered with an increase in tourist activity, although such recovery was still impacted by the prevalence of the Delta variant in Southern Africa. Information and Communication continued to benefit from the “work-from-home” trend as well as increased internet usage in general. Financial Intermediation contracted by 20.6% in 2021, with banks suffering from margin compression, while Insurance services posted growth of 11.6%. Real estate and business services growth was inline with that of the economy as a whole, a further symptom of the lacklustre business and consumer demand already noted.
Public Administration and Defence, or government output ex health and education, remained relatively flat in 2021, growing by just 0.5%. This mirrors guidance provided in the budget documents for the year. Fiscal consolidation remained in effect during the year and the freeze on hires and salaries remained in place. Education posted growth in line with the overall economy as well, while healthcare services expanded by 4.5%, with overall government expenditure on healthcare buoyed by the vaccination drive and increase in personnel needed to this regard. Finally, Taxes (less subsidies) posted a strong recovery, growing by 17.1%, off an admittedly very low base in 2020.
As is evident in the below figure, GDP remains below peak levels and may take some time to reach the high-water mark recorded in 2018 (which was only slightly above that of 2015). Present levels of output were last seen in 2014, illustrating the extent to which the extreme measures implemented to reduce the spread of Covid-19 impacted the economy.
This does however not mean that the Namibian economy has not posted a reasonable recovery in recent quarters. On the contrary, a closer analysis of the data shows that Namibia has recorded four consecutive quarters of growth on a year-on-year basis as at 1Q22, with three of these quarters posting growth of over 5.0%. Of concern rather is the fact that the Namibian recovery has lagged the rest of the world.
The IMF estimates global GDP growth of 6.1% in 2021, a significantly quicker pace of recovery than that experienced domestically. This was despite global supply chain challenges and some not insignificant restrictions on movement. Part of the reason for the rapid recovery lies in the fact that many countries did not experience as deep a recession as Namibia did. Many countries, especially in the developed world, embarked on expansive fiscal policy, supporting businesses and individuals to a much greater extent than was possible in Namibia after years of tight fiscal conditions and low revenue growth. Similarly monetary policy was pushed to the extremes in many markets, with central banks emboldened by the relative success of such measures implemented during the decade following the global financial crisis. The lack of fiscal capacity in Namibia to deal with crises has long been warned about and the impact thereof is evident in the slow relative pace of recovery currently being experienced.
Outlook 2022
Global Macro
A few short months ago a more rapid Namibian recovery seemed imminent. Global demand was driving commodity prices ever higher and Namibia, already a beneficiary of much renewed interest in mineral exploration, was ideally positioned to take advantage of elevated zinc, tin, copper, gold and uranium prices. A new Debmarine diamond mining vessel further added to the mining sector outlook for the year. Agriculture was set to benefit from one of the better rainy seasons of the last decade. A rebound in manufacturing activity was taking place with various sub-sectors well placed to benefit from growth in primary sector activities. The outlook was decidedly rosier than had been the case for some time.
On the 24th of February that outlook turned uncertain when Russia invaded Ukraine. The consequences of this action were not immediately evident and commodity prices and financial markets did not initially overreact to the increased geopolitical tensions. Russia’s invasion was met with a host of economic sanctions by most western countries, but military intervention was largely limited to Ukraine’s own efforts supported by arms from the US and a host of European countries. Ukraine’s leadership successfully rallied much support from Western leaders and sentiment has thus far favoured increased Western action against Russia. Russia however held two trump cards up its sleeve, namely Europe’s dependence on Russian gas and the sympathies of a number of key non-Western countries that continue to support Russian trade, such as India and China. Thus, the conflict has become an economic headwind which may take some time to blow over. Thus far the impact has largely been negative for Europe where energy prices have skyrocketed. This in turn has negatively impacted consumer demand and business input costs and production. The immediate implication for Namibia is that commodity prices, especially copper, zinc and tin, have declined substantially from their recent highs.
Another key theme with regard to commodity prices has been the continuation of lockdowns and production halts in China on the back of Covid-19 outbreaks. These measures are expected to lead to a sharper decline in growth in China this year which means slower demand growth internally and lower production for export, both of which are expected to put further downward pressure on commodity prices. Exacerbating this outlook is a drop in global demand due to tighter monetary conditions brought about by unyielding inflation. Further concerns stem from risks that the continuation of lockdown measures and slowed growth in China pose on the Chinese property market. A full-blown property crisis in China would be felt across the globe.
A third key theme in terms of the global macroeconomic outlook is inflation. The US, UK and Europe are all experiencing multi-decade high inflation at present and central banks are tightening monetary policy in response. The historically low interest rates applied to economies ravaged by governments’ reactions to the pandemic are now a thing of the past. At least in the short term. The US Federal Reserve has embarked on a rate hiking cycle, as has the Bank of England and the European Central Bank. Inflation, last year dismissed as transitory by these central banks, has remained and gained further steam. The implications of this are tighter monetary policy and higher interest rates globally, at least in the short term. The South African Reserve Bank (SARB) and Bank of Namibia (BoN) have already embarked on monetary tightening in order to prevent excessivecurrency depreciation and the cost push inflation it drives.
Thus, the global macroeconomic environment has deteriorated since the start of 2022, and the global headwinds that plagued early 2021 have re- emerged to give context to Namibia’s economic outlook. Interest rates are rising, commodity prices have retraced, recessionary concerns have emerged in the US and Europe, geopolitical tensions have escalated into conflict and the world’s second largest economy, China, is showing signs of instability. The global macroeconomic environment and growth outlook thus exhibits significant downside risks which inform the outlook for the domestic economy.
Domestic Inflation
While global inflation has pushed up to multi-decade highs, Namibian Consumer Price Inflation (CPI) has remained within the SARB’s target band of 3.0% to 6.0% for the first six months of 2022. June CPI printed 6.0%, the highest rate of inflation since 2017 but by no means extraordinary for Namibia. For the most part “Food and non-alcoholic beverages” and “Transportation” have been the drivers of inflation during the year. Housing costs have tethered overall inflation somewhat as the largest CPI basket item only experienced price increases of 1.4% y/y. There is certainly more inflation to come though as higher transport costs filter through via second round effects on the prices of other goods and services, but runaway domestic inflation is unlikely. Elevated levels of inflation are detrimental to demand, especially when higher costs are driven by external factors, but current forecasts are tempered by a deterioration in the global outlook and as such should not act as a major drag on economic activity. We do expect inflation to reach 7.0%, or even higher, before the end of the year after which it is likely to taper if global economic headwinds remain.
Interest Rates
Central banks globally are responding to high inflation by tightening monetary policy. The US Federal Reserve hiked rates for the first time in three years in March this year, while the Bank of England embarked on its rate hiking cycle in December last year. The European Central Bank has been slow to the party, hiking rates in June, the first hike in eleven years in the Eurozone. Developed market central banks are prioritising efforts to slow inflation over supporting growth. The implication of this is the spill-over of higher interest rates into emerging market economies in an effort to support currencies and negate supply side inflation.
The SARB hiked rates for the first time in this cycle in November 2021, and has subsequently hiked four more times bringing the repo rate to 5.5% in July from 3.5% in October last year. The SARB’s proactive rate hike in November caught many by surprise but has been supportive of the currency, with subsequent hikes of larger magnitude bringing benchmark rates closer to pre-pandemic levels. By historic standards benchmark rates in both South Africa and Namibia are still accommodative with Namibia’s repo rate set to rise in August to a level in-line with the bottom of the global financial crisis induced rate cutting cycle, previously the most accommodative interest rate levels seen since independence.
Thus, while monetary policy is tightening domestically, interest rates remain accommodative and debt servicing costs cheap. Interest rates are expected to continue their upward trajectory over the short term, but are unlikely to put much pressure on Namibian economic activity unless the magnitude of hikes necessary to maintain the rand at reasonablelevels pushes interest rates past pre-pandemic levels. This is unlikely in the context of slower global growth. And while some developed market central banks have been unexpectedly hawkish in favouring more rapid monetary tightening, this sentiment may shift quite quickly in the event that global GDP growth underperforms expectations.
Interest rates returning to pre-pandemic levels will also have a positive impact on bank margins in Namibia. Banks have been particularly cautious in the very low interest rate environment brought on by the pandemic, and some margin expansion may allow increased credit extension and a willingness to apply capital accumulated over recent years. Non-performing loans remain high and impairment charges may continue to be elevated when compared to historic measures, but moderately higher interest rates should still be positive for credit extension which would aid domestic investment as well as consumption.
On balance the interest rate environment is tilted ever so slightly to the negative as domestic monetary conditions tighten along with global monetary policy, but interest rates are unlikely to be a major drag on economic activity unless developed market central banks pursue more aggressive than expected policy in the face of growing uncertainty.
Fiscus and the Budget
Government’s fiscal position for 2022/23 looks somewhat rosier than was the case in 2021/22. For the 2022/23 budget year the Ministry of Finance and Public Enterprises expects to receive N$59.68bn and spend N$70.77bn. Revenue expectations for the year starting April 2022 are up by 10.8% from the 2021/22 mid-year budget review, and 11.7% higher than in 2021/22. Expenditure is budgeted to grow by 3.8% versus prior expectations, or some 1.6% more than what was spent in 2021/22, this excludes the recently announced increase in the public sector wage bill, which is expected to amount to N$924m. The deficit for 2022/23 is thus expected to decline to N$11.09bn (N$12.4bn should the wage bill increase be funded through debt) or 5.6% of GDP, a significant improvement from the 7.3% deficit expected in last year’s mid-year review.
The funding requirement for the current year is N$19.38bn, significantly lower than the N$30.40bn requirement in 2021/22, but still substantial. After debt rollovers are accounted for N$11.03bn in net debt is expected to be raised in the domestic market which will push up domestic debt stock to N$104.60bn. This is assuming that the recentwage increase will be accommodated within the current expenditure ceiling. Government debt is expected to reach N$140.19bn or 71.0% of GDP in 2022/23 after accounting for foreign debt. This is largely in line with prior expectations. The quantum of debt, however, continues to raise some difficult questions. Over N$100bn worth of debt has beenraised in just eight years, and there are few productive assets to show for it.
Government’s budget ceiling has not expanded much over the years that fiscal consolidation was implemented. While described as pro-growth fiscal consolidation by the Ministry of Finance and Public Enterprises, the lack of growth in the expenditure ceiling has not contained growth in the operational portion of the budget but rather resulted in a decreased allocation to the development budget. Thus, while government was cautious to not act as a drag on economic activity, large deficits in combination with a shrinking allocation to productive expenditure has resulted in a large debt burden, growing debt costs and little increase in productive public assets as an enabler of economic activity. Yes,government has not put the brakes on the economy, but the fiscal consolidation exercise has resulted in a structurally less productive budget. As a result, government is not equipped to mitigate economic shocks. It is also unlikely to be a major driver of economic activity in the medium term despite reasonably strong revenue expectations for the current budget year.
Economic Tailwinds – Oil Discovery
Any evaluation of future economic activity would be amiss if not accounting for the recent offshore oil discoveries. In January, Shell announced encouraging early results from the Graff-1 exploration well, establishing the presence of a working petroleum system with light oil. Although no official estimates were provided on the size of the discovery, some researchers believe that the find could hold upward of 700 million barrels of oil equivalent.
A few weeks later, TotalEnergies announced that it too made a significant discovery of light oil with associated gas at the nearby Venus-1X prospect. Unofficial initial estimates suggested that the 2,700 sq. kilometre area could hold volumes of around 3 billion barrels, while others later claimed that recoverable reserves could exceed 10 billion barrels of oil equivalent. Appraisal drilling results are expected towards the end of the year and should provide a more accurate estimate of the actual reserves. Regardless of the exact size of the finds, the discoveries could have a profound effect on the size of the Namibian economy towards the latter part of the decade when extraction is expected to start.
In the near term however the discoveries are likely to impact government budget ceilings and allocations as certainty regarding the viability of exploiting the resource improves. Potential future windfall revenues remove some of the pressure on government to minimise debt issuance. Thus, as certainty improves around the viability of oil extraction it is likely that government could start playing an expansionary role in the economy once again. This should be prudently managed of course as the viability of oil production remains susceptible to production delays due to a complicated and expensive extraction process, macroeconomic shocks and future decarbonisation efforts.
It is unlikely that we will see the recent oil discoveries result in government playing such an expansionary role in 2022, but it is possibly a tailwind that might boost activity in subsequent years. The results of the planned appraisal processes at both discoveries could provide some implied guidance on government spending going forward and will be closely followed by both investors as well as creditors.
Conclusion
Economic growth for the year is forecast to come in at 3.3% in 2022, accelerating from the lacklustre growth of 2021. Much of the growth is expected to come from the primary sectors, with diamond mining providing for a substantial portion of the expansion. The new Debmarine vessel, the MV Benguela Gem, is projected to increase diamond production by roughly 500,000 carats per year. And while the outlook for commodities is less positive halfway through 2022, the increase in diamond production alone is enough to push the sector’s growth rate to over 10%.
Livestock production is also contributing meaningfully to growth in the current year, with the first half of the year already posting 20% growth in cattle marketed versus the prior year. The herd restocking exercise is yielding fruit and good rainfall has supported production, at least with regards to cattle. Smallstock is expected to be a drag on the sector with early reports indicating a marked contraction in the sub-sector. The improvements in number of cattle marketed should buoy the sector overall though.
Secondary industries, while expected to grow somewhat, are not expected to reach levels of output seen before the pandemic. Water and electricity production should grow modestly, and manufacturing continues to recover slowly while construction activity remains relatively stagnant.
Tertiary industries are exhibiting mixed performance with sectors such as tourism recovering from an extremely low base in prior years while wholesale and retail trade struggles to gain momentum as unemployment increases brought on by recession and the pandemic are slow to reverse. High inflation, primarily due to fuel prices and transport costs, is likely to temper demand in the second half of 2022, but despite this we expect a modest expansion in wholesale and retail trade and other consumer driven sectors. Real incomes in Namibia have been under pressure for more than half a decade now and consumption growth has languished as a result.
Headwinds to a more rapid expansion in the second half of 2022 and thereafter are, as mentioned before, global inflation and monetary tightening which threaten to close the taps on the accommodative post pandemic environment that was in place until early this year. The Russian invasion of Ukraine is likely to be a medium-term theme, adding to energy costs and creating uncertainty with regard to global food production. Namibia’s economy is often referred to as small and open and the potential for economic shocks has grown. The Namibian economic recovery remains under threat and the fiscus has few tools with which to protect against economic shocks. The outlook is uncertain and warrants prudent management by fiscal and monetary authorities in the near term. The longer-term outlook is likely to be significantly better if the recent oil discoveries translate to oil production.
Eric van Zyl | Managing Director Designate
Danie van Wyk | Sales and Research