Category Archives: Team Commentary

Following major debt issuance and the depreciation of the rand on unhedged Government debt, Namibia’s debt to GDP ratio looks set to reach and possibly surpass 35% by the end of 2015.

2015 will be a year for the books as far as Namibia’s debt is concerned. In the space of just 12 months, it is estimated that public debt (that taken out by the Government) has increased by over 65%, and over N$20 billion, to a total of N$55 billion. A number of reasons for this exist, however the three major reasons are:

1. Government has ambitious spending plans for the year, which it expected to fund through normal revenue channels and through some fairly sizable debt issuance (approximately N$9 billion in 2015/16). However, revenue has been disappointing, both due to very ambitious forecasts, as well as due to a general economic slowdown in the country, weak commodity prices, and less regional trade. As such, many revenue lines of the Government are under pressure, and likely to remain so for the next few years. As revenue is lower than expected, and expenditure remains relatively high, a lot of debt has had to be issued to fund the activities of Government, and the deficit is likely to be notably larger than expected, probably between N$9 and N$12 billion.
2. The Government was forced to issue hard currency debt in order to protect the crumbling external position of the country, after an extended period of fiscal and monetary stimulus that drove strong growth in consumption activity, and strong demand for imports. As the external position weakened, the risk of a rating downgrade increased to the point that the Ministry of Finance stepped in and borrowed a large chunk of funds on the international market, massively increasing the country’s hard currency debt, but thankfully staving off a rating downgrade.
3. Hard currency debt, of which Namibia now has a lot, has re-priced against Government as the currency has weakened. Over the past year, the Rand (and thus Namibia Dollar) has depreciated in value by over 30%, making the stock of Namibian hard currency debt, which was left unhedged despite the repeated warnings of local experts, significantly larger than it was a year ago.

What this means, however, is that Namibia’s public debt to GDP ratio is likely to approach 35% by the end of the year, with the stock of debt up just under 70% in the space of just 12 months – very frightening numbers. Moreover, hard currency debt is set to make up more than 50% of total debt, and once again, this remains unhedged, a situation that most find unimaginable, but the Ministry of Finance persists with. The vast cost of this decision is, after all, carried by the tax payer.

At the same time, the bank balance of the central government has improved significantly after the recent issuance of the country’s second Eurobond. These funds, however, have been at least partially earmarked to protect the external position, and the remainder will hopefully not be spent on recurrent activities, but saved for infrastructure development.

The bottom line is that the fiscal position of Government remains weak at the current point in time, with revenue expected to remain under pressure for the next few years (not to mention SACU repayments), and debt reaching concerningly high levels, partially due to a decision not to hedge hard currency debt, which is being proved again and again to have been a very bad decision. In addition, efforts to slow spending, while admirable, are falling well short of the required mark. While the Minister of Finance desperately tries to rein in spending, less financially savvy members of the administration appear adamant to continue to spend money we simply no longer have.

Desperately needed is a reprioritisation of Government spending, away from non-core and non-priority issues, towards real priorities such as housing, water, energy and poverty reduction. However, to date efforts to reprioritise have been wholly inadequate, and haven’t seen any meaningful movement of funds to these priorities. Instead, ambitious project after ambitious project is announced by the country’s policy makers, leaving us with the ever more pressing question – “with what funds?!”

We are increasingly concerned that the debt situation of the country is becoming precarious to say the least, and that sustainability may become a serious issue should hard currency bonds remain unhedged, debt issuance continue at current rates, should the economy slow or should commodity prices remain low for an extended period of time.

We desperately need to reduce spending (and hedge our hard currency debt, all of it!) at this time, there are no two ways about it.

By Rowland Brown

The Bank of Namibia recently released figures showing that it currently has approximately N$2.8 billion worth of Kwanza’s in their bank account, following the agreement between the Banco Nacional De Angola and the Bank of Namibia, which allowed for the direct exchange between the Kwanza and Namibia Dollar at banks and bureau de changes’ in Namibia. This agreement came into force in late June, and resulted in way more activity than anyone anticipated, particularly in Oshikango. The idea behind the agreement was that it would enable Angolans to come over the border and buy goods in Namibia, using their Kwanza, which they could convert at the local banks and bureau de changes. The idea here was simple – Namibia converts Kwanza in to Namibia Dollars, those Namibia Dollars are spent in Oshikango (and elsewhere) in exchange for goods and services, meaning the Namibia Dollars remain in the country, as do the Kwanza. Thus, Namibia keeps the Namibia Dollars and gets the Kwanza, in exchange for the aforementioned goods and services. Later, the Kwanza is exchanged back into US Dollars by the the Banco Nacional De Angola.

However, while some of this activity was seen, eyewitness accounts talk of Angolans crossing the border with, quite literally, bakkie loads of cash, which they then exchanged into Namibia Dollars. Rather than spending this money in Namibia, much of it was taken back into Angola. The reason for this – simple – Angolan’s trust the value of the Namibia Dollar, more than the Kwanza. The flurry of currency exchanging activity at the border during the first few weeks of trading was so extreme that many of the local banks had to close their branches, as they simply couldn’t deal with the demand for Namibia Dollars from Angolans with Kwanza.

At the same time, the price of oil, Angola’s primary (almost only) source of hard currency earnings, fell through the floor, declining by approximately 50% between June 2014 and June 2015. This has meant that the Banco Nacional De Angola is unlikely to have sufficient hard currency (US Dollars) to exchange for the N$2.8 billion worth of Kwanza currently sitting in Namibia.

Assuming little trade in Kwanza for goods or services in Namibia, the numbers recently released by BON suggest that there is close to N$2.8 billion worth of Namibia Dollar notes are currently in Angola. While the number is unlikely to be quite this high (as some of the Namibia Dollars received , it appears that a huge amount of Namibia’s actual cash money is sitting in Angola. As of August end, Namibia has hard currency in circulation of N$4.26 billion, meaning that the N$2.8 billion would represent 66% of all of Namibia’s cash! Given that the multiplier effect on this cash money, to base money, is usually 12-24x, this net outflow is absolutely vast in terms of the effective base money withdrawal (consider how many times a N$10 dollar note changes hands in a year and how much that note buys, to get an idea of the multiplier. Now remove that note from circulation and put it in Angola, and you get a simple illustration of the problem).

Not only will this have a devastating impact on the hard currency (external) position of the country until the Kwanza is exchanged into US Dollars (which could be anytime, and unfortunately, Kwanza is no hard currency!), but it is also very likely to be the proximate cause of the current banking sector liquidity crisis in Namibia. We must note, of course, that there is a distinction between banking sector liquidity and prudent asset allocation decisions by pension fund asset managers (as is their legal, fiduciary, duty). The former and latter have little to do with one another, other than the fact that they both have an impact on demand for Government debt securities, used to fund the budget deficit.

Interestingly, this Kwanza development (release of information) comes at the same time as Namibia is scrambling to raise a hard-currency Eurobond to protect the country’s external position. While there is no doubt a great need for this, it must be said that it was avoidable. Namibia, as part of the common monetary area must meet a clause that stipulates that Namibia must hold sufficient hard currency reserves to cover currency in circulation. The logic – to ensure that if all (or a lot) of the Namibia Dollar cash money ends up in the vault of the South African Reserve Bank (SARB), Namibia will be able to “buy” the Namibia Dollars back, by giving the SARB a currency they can use (the Namibia Dollar has no value in South Africa, as the Kwanza has no value in Namibia). It should be noted, in addition, that the focus exclusively on currency in circulation relative to international reserves, is fatally flawed. Covering currency in circulation is just one of many uses or needs for hard currency. There are a vast number of others, which is the primary reason that the IMF advocates three months of import coverage of reserves, more than twice as much as Namibia currently has.

Further, despite claims to the contrary, the repatriation of the Kwanza will do little to bolster the external position unless the money is kept in hard currency. This may happen, however it keeps the funds out of the banking sector (unless BON prints more money, which will be inflationary), which will simply exacerbate the liquidity crisis.

Peculiar, perhaps, is that while the primary mandate of the Bank of Namibia is to protect he country’s external position, it has pursued a policy of historically low interest rates through a period of abnormally high growth. This certainly helped to drive growth in consumer credit demand, which resulted in major increases in imports funded by domestic money (thus a net outflow of Namibian money, and a decline in reserves). Now, the bank is hiking into economic weakness, while the Ministry of Finance fights to protect the external position with external bond issuances.

With regards to the funding position of Government, much of the current liquidity crisis, has been driven by loose monetary and fiscal policy. However, the major withdrawal in hard currency from the Namibian economy is likely to be the primary and underlying cause of the current liquidity crisis, and lack of demand by banks for Government securities at recent debt auctions. It is also likely to be the underlying reason for the slowdown in credit extension to household by many of the commercial banks.