Category Archives: Team Commentary

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.

The Namibian economy is starting to slow, driven by collapsing liquidity.

By: Rowland Brown

Globally, liquidity challenges have become a major talking point, as fund flows reverse out of EM back to advanced economies on the expectation of impending rate rises in the US, particularly. In this, Namibia is no exception, and the country currently faces a liquidity crisis.

While this crisis may appear fairly inconsequential, it should not be underestimated, as already we see its impact on credit extension, with vehicle sales starting to slow as credit extension contracted month on month in June, for the first time since 2011. This liquidity crunch is being driven by two primary factors, namely low interest rates and high government spending.

On the Government spending side, Government has run an expansive budget since 2011, and has ramped up spending to an average of N$5.3 billion per month (close to N$200 million per day on average) in the current financial year. Much of this expenditure is ultimately recurrent and consumptive expenditure, which goes to buy consumables that are not manufactured in Namibia. This results in a net-outflow of funds from Namibia, resulting in, not only a drawdown in international reserves (now at critically low levels), but also a major drying up of liquidity. The reason for this is simply that as cash money leaves the economy, the money multiplier effect on that cash money is also lost. Usually, the money multiplier effect is 12-15x in the Namibian economy, (MB to M2), which means a net outflow of N$1 billion, can have a N$12+ billion effect on local money supply.

On the interest rate side, low interest rates have incentivised borrowing and disincentivised saving (as is their intention). This has meant that commercial banks have lent extensively over the past few years. At the same time, deposit growth at commercial banks has been relatively slow, largely due to extremely low deposit rates. Government spending, and the drawdown of Government deposits with the central bank and commercial banks, has also had a notable impact on deposits received by commercial banks. As bank lending has outstripped their funding growth, liquidity has dried up. Added to this, low liquidity and high interest costs for Government debt (the “risk free” rate) have driven up the cost of raising funding through issuing debt securities, the other key funding source for commercial banks. As lending is heavily focused on housing and imported consumables, much of the credit issued has left the country, also resulting in a drawdown in reserves and domestic liquidity. Moreover, anecdotal evidence suggests that the credit issuance for mortgage loans has outstripped the value of new homes built, meaning that credit issuance is helping to drive an increase in property prices.

The implication of all of this is that liquidity has declined dramatically, and banks, particularly, have little surplus cash available to continue to issue loans at their previous rate. This is already being seen in vehicle sales figures, which are starting to come off, admittedly from a high base. However, the implications of this liquidity crunch is fairly wide spread. Not only will consumables bought on credit likely decline, but consumer spending in general may see a pinch. This implies lower revenues for retailers, but also lower VAT receipts for Government. It also presents a risk to the domestic housing market, as should banks reduce or stop lending for mortgages, house prices may see a correction. Finally, Government, historically reliant at least in part on the banks for its funding, is struggling to raise the funding it needs to operate its current expansive budget. Given that the Government has less than one month of cash reserves (the lowest level since 2005) at the central bank, the need to raise debt each month is critical.

This slowdown in credit issuance, and the possible slowdown in Government spending as a result of struggling to raise debt to fund the budget (as well as lower VAT, SACU and mining royalties/taxes), would drive a major slowdown in the domestic economy, and may even throw the economy into recession. This would partly be driven by the high base set over the past few years, but will be heavily exacerbated by structural issues, such as the impending water and power crises in the country. Global commodity prices and the impact on Namibia’s key exports (and thus our terms of trade) are likely to drench further salt in the developing wound, both reducing growth and employment, but also reducing export earnings and further weakening the balance of payments.

Thus, the pro-cyclical policy, both fiscal and monetary, implemented in a booming economy and without materially changing the productive capacity of the country, may well soon come back to haunt us. Not only has this policy driven these imbalances, but it also means that few tools remain at our disposal to fend off the current and impending crises. Short term, foreign debt will have to be raised to prop up the external position of the country, and to fund the Government deficit, however, the only long term solution is to reign in Government spending, and to reprioritise this spending to ensure that spending results in a change in the country’s productive capacity.

Circling rumours of poor solutions to the current liquidity, Government funding and international reserve crises are enormously concerning, as they may well drive the country towards an international rating downgrade that could massively hamper its ability to address long-term structural (particularly infrastructure) challenges. As almost all of the country’s development plans and needs require funding, this potential funding crisis should be receiving all of the attention of key policy makers, from the Ministry of Finance to the Office of the President. Let’s hope, it is.