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Tuesday 22 January 2019
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Namibia teeters, as Geingob begs

screen-shot-2016-09-23-at-12-36-37-pm…Reveals massive borrowing plans

Namibia will seek to raise about US$5 billion in loans and bonds over the next decade to help diversify and industrialise its economy with any debt sales to take place in South Africa, President Hage Geingob revealed this week while on his escapade to the United States of America.
During an interview with Bloomberg this week, Geingob revealed that Namibia plans to issue rand-denominated bonds and get funding from countries, including the US, China, India and Japan. “We’re looking at the South African bond market and some concessional loans,” the 75-year-old said in an interview at Bloomberg’s office in New York on Monday. “Rand bonds would be much better” than dollar-denominated Eurobonds, he said. Local financial experts, however, have cautioned that at this point it is perhaps a bit too late to ask if Namibia should borrow; that question should have been addressed years ago. The currency of Namibia, one of Africa’s wealthiest nations with a gross domestic product per person of about US$5,000, is pegged to the South African rand on a one-to-one basis. While the rand has appreciated 12 percent against the dollar this year, since the start of 2015 it has been one of the worst-performing currencies among major emerging markets, weakening 17 percent. That has caused the Namibian dollar to drop in tandem and made its US dollar-denominated debts more expensive to pay off. Namibia, is one of the most extreme examples among mineral-rich nations that binged on debt while failing to control public spending during the good times and were pitched into hardship when the global economy boom went bust. High unemployment woes are adding to the economic predicament that has engulfed the country because revenue generation through income tax pumps little money into state coffers.

Neighbouring South Africa is the biggest import partner, but that country too has its own internal economic challenges, which threaten supplies to Namibia in the near future. Also, poorly thought-through economic policies aimed at empowering previously-disadvantaged groups have threatened the comfort of investors and the business community. Government is pulling all stops to avoid a financial catastrophe, which has prompted Treasury to issue a directive that no tenders should be awarded until the 2016/17 budget is reviewed. The move could spell doom for the private sector, which employs a huge chunk of Namibians and that depends largely on doing business with Government for its survival.

What analysts say
“It is true that the government has a serious problem in that its debt levels are worryingly high and still growing – something that the IPPR has warned about for years now. At the same time, government has to keep functioning and that needs money. The government has to maintain liquidity to continue its operations while finding ways of cutting costs and reducing the deficit. That will be a tricky balance to strike,” said Maximilian Weylandt, a researcher at Institute for Public Policy Research (IPPR).
Weylandt highlighted that rand bonds have an added advantage over dollar-denominated bonds because there is less of a problem due to currency fluctuations, adding that if we [Namibia] borrow money in US dollars, and the next day our [Namibian] currency weakens a lot compared to the US dollar, then it will be a lot more expensive for us to pay off that bond.

“But if we borrow in rand, then we know that our currency will remain at a level of one-to-one. There are many other risk factors to consider, but at least the fluctuation of our exchange rate versus the dollar is taken out,” he explained. Sharing similar sentiments, IJG Securities researcher Eric van Zyl said tapping debt markets in an effort to grow and diversify the Namibian economy would be a good thing if implemented correctly.  “When funds are used to facilitate growth in the productive capacity of an economy the long-term benefits in terms of revenue generation should outweigh the costs of raising such debt. Thus, it all comes down to how these funds are spent. Building a parliament building, for instance, creates jobs temporarily but does not produce any revenue in the long run and thus using debt to finance such a project would mean that the cost of this debt would need to be covered by some other revenue-generating entity, usually the taxpayer,” he said. Van Zyl agrees with Government’s decision to go after rand bonds, saying it will be better to raise rand debt as we are pegged to the rand and thus rand-denominated debt outstanding would not appreciate in Namibia dollar terms as US dollar debt would. He, however, warned that should South Africa be downgraded to junk status, it will be more expensive to raise debt in South Africa than at present.

With the Namibia dollar pegged to the rand, raising money at a fixed exchange rate eliminates foreign exchange risks, making repayment of this debt much cheaper in the long run. Asked if it will be wise of Government to issue more bonds considering the current economic climate in Namibia, Van Zyl responded: “Government has already surpassed its self-imposed debt-to-GDP threshold of 35 percent, with debt-to-GDP currently at around 41 percent. The cost of funding has also increased and is likely to continue to increase going forward. There is little evidence that the funds raised over the last 12 months (in excess of N$20 billion) have driven a sustainable increase in growth.” “Most of the debt raised this year and last has gone toward consumptive spending which does not increase the productive capacity of Namibia in the long term, and adds to the debt servicing costs of the country, which becomes a long-term burden on the taxpayer,” he said.

He warned that raising more funds to continu e government’s consumptive habits is not sustainable, but it will be difficult for government to slow these habits. “That said, it is not always up to government to issue more debt, as there needs to be a counterparty to the transaction – which is the investor. Should we see Namibia downgraded within the next year, it will become increasingly difficult to find investors willing to lend to Namibia, and the costs of such lending will increase substantially.” Just a few weeks back Namibia, one of the most promising countries in terms of development on the continent, saw its economic outlook downgraded by international ratings agency, Fitch Ratings, from stable to negative. The country’s budget deficit widened sharply to 8.3 percent of GDP and is well above the government’s 5 percent target and the worst on record.

The deficit explosion is due to weaker than expected revenue. Fitch Ratings, however, predicts that things could turn around soon. Namibia does not have any plans to sell another dollar-denominated Eurobond, said Geingob, who came to power last year. It has tapped the market twice, most recently in October 2015, when it sold US$750 million of securities due in October 2025.  Bloomberg indexes show that Namibia fell from a peak of 6.95 percent on January 18, gaining bondholders 24 percent. That compares with an average gain in that period of 15 percent for emerging market dollar bonds issued by governments.

Namibia has issued three rand bonds since 2012. In July, it sold R492 million (US$36 million) of debt maturing in August 2023 and August 2026. Geingob said the government would also seek German investment, including in wind farms, as a form of reparation for the Herero massacre in the early 20th century, when Namibia was a colony known as German South-West Africa. “Germans will come in a big way,” he said. “We are telling them, you are the power here. You killed many of our people. Help us to change that. Now they have agreed. If you could get aid in kind that would help to better your country.” – Additional reporting by Bloomberg




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