Tuesday, November 14, 2017 8:46 AM / BMI Research
BMI View: Economic activity will accelerate over the coming quarters in Namibia, having struggled with significant fiscal constraints and limited investment in 2017. Major increases in mining output and growth in the agriculture sector will help drive a recovery in 2018.
We expect a recovery in Namibia's growth in 2018 due to our forecast of sustained growth in mining, alongside the consequent increase in fiscal revenues. Namibia's economy will likely remain weak in Q417, as we believe fiscal constraints – exacerbated by the August downgrade of the government's credit rating – will weigh on key sectors of the economy and counteract some of the effects of growth in mining.
Namibia's Q217 GDP data has shown another quarter of contraction, significantly underperforming our expectations, leading us to revise downwards our forecast for real growth in 2017 to 0.2% and to 3.5% in 2018. We had believed that increases in mining output would help headline growth to buck the weak trend in 2017, but we now expect that the impact will be muted by the unexpectedly large contraction in other sectors.
In 2018 we still maintain a positive outlook as mining and other sectors will see greater output, bolstering fiscal revenues and supporting demand in the wider economy.
Weak Data Drives 2017 Revisions
We expect that fiscal constraints will continue to weigh on growth in Q417, although in 2018 the increasing revenues from mining will enable the government to adopt a slightly more expansive fiscal policy. Public spending is vital to supporting GDP growth in Namibia, as public administration is the second largest sector of the economy, accounting for 9.6% of total GDP in Q217, with the construction sector also heavily dependent on government investment.
These two sectors posted some of the biggest declines in real GDP terms in Q217, chiefly because of fiscal constraints. Indeed, construction has fallen from over 7.0% of GDP in Q415 to 2.3% of GDP in Q217 because of a six-year low in government investment in the sector. These sectors will likely remain weak due to the downgrade of the Namibian government's credit rating to junk status in August 2017, as the increased cost of borrowing will restrain the government's considerable financial support for State Owned Enterprises and impede any new investments in construction projects.
In 2018, we expect that government spending will recover somewhat due to increasing revenues from the mining, agricultural and retail sectors, offering some relief to the public administration and construction sectors.
Mining To Lead Recovery in 2018
Namibia's mining sector – particularly uranium mining – will be the main engine of growth over the coming quarters. The mining sector is seeing robust growth, posting 25.8% y-o-y growth in Q217, which is being led mainly by increases in uranium and diamond production.
As mining output increases, it will mitigate some of the impact from other sectors that are in decline. We are expecting that the Husab uranium mine will reach full production in the coming quarters, which will see a doubling of uranium production year-on-year and make Namibia the world's third largest uranium producer.
We believe diamond mining will continue to see robust output, as offshore diamond mining is boosting production by complementing more long-standing onshore mines. This has already had an effect, manifested in a three-year high in diamond production in Q117. We expect that the ongoing increase in mining output in the next year will be the chief motor behind a recovery in headline growth in 2018.
Mining, Manufacturing And Agriculture To Support Other Sectors
The sectors that will see stronger output in the coming quarters such as manufacturing, agriculture and mining, will gradually drive increases in income for a significant proportion of the labour force. This will consequently bolster demand in other sectors of the economy such as retail and real estate and in turn bolster their output.
The agricultural, manufacturing and mining sectors employ 28.9% of the workforce (according to the statistics agency's 2016 labour report) and we expect that all will see greater strength in the coming quarters. We expect that the eventual boost in income for this significant part of the labour force will bolster wider consumption, though any increase in income for those employed in these sectors will come gradually.
Retail in particular showed a
marked decline in Q217, but we expect that the eventual increase in consumption
demand in 2018 will see some recovery in retail, greater growth in real estate
and a boost to the hospitality sector. This will help support the gains made in
mining and see headline growth head higher in 2018.