By Rowland Brown
Figures just released by the Bank of Namibia show that domestic debt increased to over N$20bn for the first time in May, up 1.2 percent month on month, and 14.3 percent year on year. This increase and level may sound alarming, but is it?
Despite Government’s spending spree of the past four years, Namibia remains one of the countries with the lowest debt-to-GDP ratios in the world, and despite this aggressive spending by Government, the ratio has barely increased over the past two years. Following major debt issuance in 2011, which rocketed the debt-to-GDP ratio up from 16 percent to 27 percent, debt issuance has largely stabilised, and is now, for the most part, growing at an equal or lesser rate than nominal GDP, thus stabilising, and even reducing, the ratio.
Namibia Debt to GDP
Namibia Debt Growth
Moreover, the majority of the increase in debt that has been seen since the start of 2011, is foreign debt, which has increased by some 264 percent, compared to domestic debt increases of just 97 percent. This increase in foreign debt is almost exclusively the result of the Eurobond issuance in late 2011 (as well as the relatively small JSE listed bond), which represented N$4bn worth of debt when issued, but following major Rand-USD depreciation subsequently, now represents over N$5.2bn. As such, much of the increase in debt over recent months is not determined by actual issuance at all, but by currency movements.
Namibia Foreign Debt
This currency effect remains concerning, as the Ministry of Finance and Bank of Namibia decided against a currency hedge when issuing the bond, due to the apparent cost of such. As a result, the value of this bond is completely at the mercy of the exchange rate, and general social and economic conditions in South Africa. Since it’s issuance just 2 and a half years ago, the currency has weakened by over 30 percent. Should this trend continue of the remaining 7 and a half years of the bond’s life, it could prove hugely costly for the country, both from the perspective of bond repayment/rolling over, and also with regards to coupon payments.
Generally, however, Government continues to run a fairly tight ship when it comes to fiscal expenditure, and despite expectations of more aggressive debt issuance in the 2014 financial year, the debt-to-GDP ratio is largely expected to remain manageable, sustainable and prudent. However, this is very dependent on on-going strong growth. While such growth is expected to continue for the foreseeable future, should it falter, Government will have to reign in borrowing dramatically, and rapidly. This said, while debt levels remain manageable, they represent but one of the issues or indicators that the Government needs to observe when planning its expenditure. International reserve levels (the balance of payments) and demand side inflation, not to mention efficiency of spending and strategic utilisation of borrowed funds are equally important, and thus should not be disregarded when further debt issuance is considered.