Namibia – Decline in Investment Offset by Narrowing Current Account Deficit


Wednesday, August 30, 2017 10:38AM / BMI Research

BMI View: Rising uranium and copper production coupled with relatively subdued import demand will see Namibia's current account deficit narrow significantly in the coming years. While financial account surpluses will also decline in the face of increased regulatory uncertainty, we see little threat to the country's external stability.

Namibia's current account deficit will narrow substantially through to 2020. The trade deficit will shrink significantly as the completion of the Husab uranium mine and several construction projects will simultaneously boost mineral exports and decrease demand for imports linked to construction. At the same time, Southern African Customs Union (SACU) receipts will broadly hold up, ensuring that secondary income surpluses remain steady.

We forecast that the current account deficit will narrow from 12.1% of GDP in 2016 to 1.3% of GDP by 2020. As such, while Namibia's financial account surpluses will begin to narrow, as major infrastructure projects finish and uncertainty over the impact of proposed black economic empowerment legislation tempers foreign firm's willingness to invest in the mining sector, we see little risk to external account stability.

Indeed, we expect financial account inflows to continue to comfortably fund the current account deficit, allowing the country to slowly build its foreign reserve stockpile.

Financial Account Surplus to Fall Further

Namibia's financial account surplus will continue its narrowing trend, largely on the back of shrinking foreign direct investment (FDI) inflows. After hitting USD4.4bn in 2016, FDI is likely to face increasing headwinds as the Husab mine is now operational and several major construction projects such as the Walvis Bay Port expansion will be completed in the next 12 months.

Although other projects are planned, we do not expect all to come to fruition and the proposed projects are now as large in scale as the current and soon to be completed developments. Meanwhile, ongoing discussion over the New Equitable Economic Empowerment Framework (NEEEF) legislation may act as a further headwind to FDI over a multiyear timeframe.

The bill will potentially include laws enforcing that 25.0% of all new businesses be owned by 'previously disadvantaged persons' and could change government procurement contracts, as companies that score poorly on the NEEEF framework will be given lower priority. As the specific details of the draft bill are not yet confirmed, the combination of uncertainty over both the exact contents and timing of the bill will likely see investment delayed.

Current Account Deficit To Narrow Sharply To 2020

Even as investment into Namibia slows, we do not see this as a major threat to the country's external account stability. This is largely due to our expectation for a simultaneous narrowing of the current account deficit. In the next few years, a major increase in Namibia's mining exports combined with more tepid import growth will narrow the trade deficit – a major driver of the country's external account shortfalls.

The Husab uranium mine, the third largest uranium only mine in the world, began production in December 2016 and will reach peak output in 2017. We expect that this will more than double the country's uranium production, with annual uranium output forecast to increase from 2.9 thousand tonnes (KT) in 2016 to 6.8KT in 2017.

Meanwhile, we expect that global copper prices will recover from a low of USD4,331 per tonne in January 2016 to average USD5,500 per tonne in 2017, incentivising a boost in copper exports (copper was 11.7% of total goods exports in 2016).

At the same time, the completion of several construction projects between 2016 and 2018 will lessen the demand for materials and equipment required for construction, cooling import growth. Machinery, steel and vehicles associated with construction collectively made up a considerable (though declining) proportion of Namibia's imports since the start of several projects in 2014.

In addition, still sluggish economic activity outside of the minerals sector – with loan growth well below average for the year to March 2017 (most recent data) – will see consumer demand for imported goods remain subdued in the coming years.

SACU Receipts to Remain Steady

On top of the narrowing trade deficit, Namibia's current account will also benefit from modest increases in the secondary income surplus increase in 2017, remaining stable thereafter, as receipts from SACU will support the narrowing of the deficit.

South Africa's economy will expand slightly in the next two years which will mean an uptick in imports into the SACU region and consequently in secondary income flowing into Namibia, helping to narrow the current account deficit.

With the current account deficit narrowing even more sharply than the financial account, this will ensure limited funding risks and see Namibia's foreign reserves continue their tentative recovery begun in 2016.

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