• Michael Dynes

12 things you probably didn't know about the 2nd most stable country in Africa

Updated: Sep 7, 2018

Namibia risk profile highlights short-term growth concerns but reaffirms stable outlook

Namibia is a large and sparsely populated country located on Africa’s southwest coast, which has enjoyed nearly three decades of uninterrupted political stability since gaining independence from apartheid South Africa in 1990, following a protracted forty-year struggle for self-rule.

Namibia’s World Bank ranking

1. Namibia ranks highly in the World Bank’s annual ‘Doing Business’ index, which measures the ease of doing business in 190 countries around the world according to ten criteria – such as the ease of starting a business, getting construction permits, registering a property, paying taxes, access to credit and enforcing contracts. Namibia ranks sixth (108 globally) among the 48 countries of sub-Saharan Africa after Mauritius (49), Rwanda (56), Botswana (71), South Africa (74) and Kenya (92).

2. The country is also the fifth least corrupt country in Africa, according to Transparency International’s annual Corruption Perception Index 2017, which ranks Namibia at 53 out of 180 countries globally, after Botswana, Seychelles, Cape Verde and Rwanda.

3. Bribery is illegal in Namibia, and an Anti-Corruption Commission was established in 2003 to enforce the country’s anti-corruption legislation. But long-standing institutional and human capacity weaknesses have meant that anti-corruption legislation is poorly enforced, particularly in the sector of government procurement – where most opportunities for graft present themselves. While corruption in Namibia pales in comparison with most other African countries, the latest E&Y fraud survey shows that 79% of businesses see fraud and corruption as a major risk.

4. Mining companies are taxed at 37.5% for hard rock mining, and 55% for diamond mining. Petroleum exploration and production companies are taxed at the basic corporation tax rate of 35% – although additional taxes may apply. Namibia imports up to 50% of its electricity needs from neighbouring South Africa, much of which is consumed by the extractive sector.

As of 2017, only 34% of Namibians have access to the national grid, meaning that two-thirds of the population have no access to clean energy.

China invests $4.8 billion in Husab uranium mine

5. The extractive sector – mostly mining – brings in more than 50% of Namibia’s foreign exchange earnings, and the country is expected to become the world’s second largest uranium producer after Kazakhstan when China’s new Husab uranium mine near Swakopmund becomes fully operational around 2020. China has invested $4.8 billion in Husab – one of China’s largest investments in the entire African continent – which is also Namibia’s largest employer, according to the local Chamber of Mines.

6. When fully operational, Husab will produce 15,000 tonnes of uranium a year, compared to the 23,000 tonnes produced by Kazakhstan. Husab will boost Namibia’s gross domestic product by 5%, and increase export volumes by some 20% a year. Husab is owned by the state-owned China General Nuclear Power Corp, which is proving the backbone of China’s domestic nuclear power generation expansion capacity in the decades ahead – supplied in part by Namibian-sourced uranium.

Windhoek, capital city of Namibia
Mining output overall increased by 15% in 2017

Oil and gas outlook

7. Namibia’s natural resource endowment received a major boost in 1974 when US major Chevron discovered the offshore Kudu gas field in the Orange basin, northwest of the city of Oranjemund, at a depth of around 600 feet. Originally estimated to hold 1.2 trillion cubic feet of natural gas, Kudu’s reserves were subsequently revised up to 3 trillion cubic feet, and then later to 9 trillion cubic feet, following the sinking of some eight appraisal wells to gauge the extent of field’s potential.

The Kudu license has since been held by numerous explorers, including Shell, Texaco and Tullow Oil – none of whom have so far succeeded in developing the prospect.

Two major challenges have hindered development of the Kudu field. Located some 110 miles (170 kilometres) offshore, Kudu would require the construction of a subsea tieback – an underwater pipeline from the gas field to the coast – that would be among one of the longest and most expensive in the world.

Namibia had also hoped to build a 800 mega watt gas-fired power plant to process the gas for local and regional electricity consumption, which would require offtake agreements from both South African and Zambian state-owned power utilities in order to be financially viable – neither of which has been forthcoming.

Tullow acquired the field in 2004 for $570 million, but abandoned its drilling programme in 2010 in the wake of the 2008 financial crisis, which saw funding for high risk-hydrocarbons projects largely evaporate. State-owned oil and gas explorer NamCor announced a joint venture with Russia’s Gazprom, but this too failed to progress the project.

More recently, BW Offshore entered into an agreement with NamCor in 2017 to acquire a 56% stake in the Kudu license, which is awaiting further developments. Discovery of the Kudu field is seen by the oil and gas industry as evidence that Namibia has the potential to become a new hydrocarbons province. To date, however, exploration offshore has been sporadic, and exploration onshore has been limited, although Namibia is widely suspected of hosting significant hydrocarbons potential.

In a development that has sparked renewed interest in Namibia’s hydrocarbons potential, the Ministry of Mines and Energy announced in September that Tullow Oil’s drillship Ocean Rig Poseidon has commenced a one-well drilling programme in the offshore Cormoranat-1 prospect, north of the Kudu field, roughly adjacent to Walvis Bay, in a new search for oil and gas.

The country’s long-standing political stability is seen by Fitch as a major credit strength

Upper-middle income country

8. Namibia natural resource riches, along with its tiny population – the second smallest in the world per square kilometre after Outer Mongolia – classify it as an upper-middle income country. Again, however, this status is misleading. While political stability, and sound economic management have helped to reduce poverty, the track record on job creation has been very disappointing. Extreme social-economic inequalities – exacerbated by former apartheid rule – persist despite generous public spending on social programmes.

Up to the final quarter of 2016, the Namibian economy had been experiencing average annual economic growth of 4.7% of GDP. But in the first quarter of 2017, the economy recorded a severe economic contraction of -1.6% – the worst quarterly performance since 1990. Since then, the economy has slowly began to recover, but it has struggled to return to previous levels of growth.

The explanation for the downturn lies in a combination of factors including the government’s continued attempts to keep to its fiscal consolidation targets – which helped domestic consumption to stall; a 30% contraction in construction activity, which reflected the completion of the Husab mine without any additional large-scale construction projects to offset its impact; and the closure of two domestic power plants for annual maintenance.

Reduced government spending had a marked impact on the services sector – which triggered a contraction in the wholesale and retail trade, tourism and the public sector. The slowdown in demand for goods and services from neighbouring Angola, following the collapse of oil price in mid-2014 also took its toll, although the recovery of oil prices during to 2018 to $70 a barrel and above should help domestic demand to recover from earlier lows.

Indications of economic recovery

9. Early indications are that the mining and agricultural sectors have now begun to recover. Mining output overall increased by 15% in 2017, due to higher diamond and bulk ore production. Diamond production was up 10%, while uranium output was up 25% due to the start-up of the Husab mine. Husab is now expected to ramp up output to full production by 2020. At the same time, agricultural production rebounded by 5%, – largely due to the end of the protracted drought which had depressed output across vast swathes of southern and eastern Africa.

10. The country’s sovereign credit rating was downgraded in November 2017 by credit rating agency Fitch from BBB- to BB+ with a stable outlook – which is below investment grade. Fitch maintained the BB+ rating during a review earlier this year after evaluating the government’s commitment to stabilising debt, implementing the fiscal reforms needed to return the country to macroeconomic stability, while the domestic economy was experiencing a slowdown amidst signs of a modest recovery.

11. Economic performance so far this year – a growth rate of 0.6% in 2018 compared to a contraction in 2017 – helped avoid a further downgrade. But the high public sector wage bill, and large-scale transfers (bailouts) to public sector companies such as Air Namibia, remain a challenge. A more efficient and effective public sector would enable scarce funding to be freed up and redeployed more effectively elsewhere.

Namibia avoids further downgrade

Nonetheless, Fitch forecast that the budget deficit will exceed official projections, narrowing from 5.1% of GDP in 2017, to 4.9% of GDP in 2018, and to 4.1% in 2019 – against a target of 2.3% of GDP. Compared to the performance of other African B-rated peers, Namibia’s performance remains commendable.

The country’s long-standing political stability is seen by Fitch as a major credit strength. The upcoming land conference – if successful – holds out the prospect of diffusing the land issue, which would help boost investor confidence in the outlook for the southwest African country. Reducing Namibia’s high wage bill will be painful, but the funds released could then be invested in infrastructure, which would boost growth and job creation over the medium to long-term.

12. Namibia’s sovereign credit rating is currently sitting one notch below investment grade. It usually takes a couple of years for a country to restore its investment-grade status. Fitch said that its rating could be re-evaluated in the event of a reduction in the country’s debt-to-GDP ratio (which is currently running at 47% of GDP, above the prudent 40% threshold, but way below that of some developed countries at over 100% of GDP), a reduction in the country’s current account deficit, or stronger than expected GDP growth.

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