Uranium Exports Will Support Weaker Capital Inflows to Namibia

Oil & Gas
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Tuesday, October 25, 2016/ 1:08pm /BMI Research

BMI View: Namibia's current account deficit will begin to narrow in the months ahead as uranium production rises in 2017, easing pressure on the country's financing needs. While Namibia's external position will improve over the years ahead, we expect government's proposals for the New Equitable Economic Empowerment Framework will weigh on capital flows to the country as investors remain cautious of the new bill.

Increasing production in Namibia's mining sector, particularly of uranium, will see the current account deficit narrow over the months ahead. We forecast the deficit to narrow from 12.8% of GDP in 2016 to 11.6% in 2017, after deteriorating in 2015.

The deterioration of Namibia's fiscal and current account balances led the government to issue a USD750.0mn eurobond in October 2015 in order to finance the budget and raise the country's international reserves.

Rising export revenues in the years ahead will temper external financing needs and this will improve the country's external debt sustainability.

Uranium Sector to Boost Exports
Namibia's export earnings will rise over the next 18 months as output in the country's uranium sector ramps up. We forecast exports to grow by 4.0% and 7.0% in 2016 and 2017 respectively, compared to a contraction of 12.7% in 2015.

The Husab uranium mine, a joint venture between China General Nuclear Power Holding Corp (CGNPC) and local miner Swakop Uranium, will likely begin operations in Q117 and will substantially raise the country's uranium production.

The commissioning of the mine will see Namibia become the third largest uranium producer in the world, behind only Kazakhstan and Canada, and will provide a boost to export revenues. Indeed, BMI's Mining team forecast uranium mine production to double in 2017 to 5.8 thousand tonnes compared to a contraction of 3.0% in 2016.

External Debt Sustainability Will Improve
Namibia's external debt load will begin to fall in the years ahead as deficit financing needs abate. The country's external debt load rose sharply from 41.5% of GDP in 2014 to 57.2% of GDP in 2015 due to the government's USD750.0mn eurobond issuance in October 2015.

The substantial increase in total government debt as well as twin current account and fiscal deficits led Fitch Ratings to revise its BBB- credit rating outlook from stable to negative.

While this outlook downgrade highlights the ratings agency's concerns over debt servicing capability, we believe that Namibia will retain its investment grade status.

The ramp up in uranium mining will provide a buffer to subdued Southern African Customs Union (SACU) revenues and willease the government's financing needs, albeit gradually, in the years ahead.

Indeed, SACU revenues covered over 40.0% of the trade deficit in 2015 and we expect subdued regional growth to weigh on SACU revenues in the years ahead.

Transformation Policy Will Weigh Modestly On Capital Flows
The government's recently-established New Equitable Economic Empowerment Framework (NEEEF), which seeks to redress income disparities in Namibia, will weigh on investor sentiment.

The aim is to improve the economic status of historically disadvantaged persons, including those racially disadvantaged, women and disabled persons. Most concerning for investors is the stipulation that businesses in Namibia will have to accommodate 25.0% shareholding to racially disadvantaged persons.

While the government will gather input from the private sector to help address concerns, foreign investors are likely to remain wary. As a result investors will employ a wait-and-see approach which will weigh modestly on capital flows into the country.

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