The latest Namibian fixed income and economics report by Simonis Storm Securities notes that government’s total domestic debt has increased by 300% over the last seven years to N$50.7 billion in July 2018.
The same report also says total government debt, including foreign debt increased by 354% to N$75.4bn over the same period and Simonis Storm expresses its concern over the escalation in an already low GDP growth environment especially with government receiving about N$4.5bn on a monthly basis from the Bank of Namibia to finance expenditure.
Says the firm, “We estimate Government debt to double over the next 7 years with an assumption that current annual budget deficit persists in foreseeable future.”
Meanwhile, as far as Namibia’s fixed income position is concerned, the yield curve flattened on average by 20bps in July 2018 compared to the widening of 29bps seen in June 2018.
The firm notes that the longer end of the curve maintained its steepness in July pricing in the risk accepted by a long term bond investor.
“The general flattening on shorter maturities can be attributed to a decreased in the Namibia/SA spreads combined with strengthening SA benchmark yields during the period under review. The yield on the GC27 stood at 10.3% at the end of July, down from a high yield of 10.7% seen in June. In contrast, spreads on longer dated bonds (from GC30 to GC45) widen by 14bps on average in July 2018 as a lack of appetite persists.”
“As a result of high demand on short maturities and lack thereof on the longer end of the curve, we have observed a general over allocation on the short end (GC20 to GC27) of N$538mn during the first 4 months of the 2018/19 financial period. Moreover, an under allocation was registered on the long end (GC30 to GC45) of N$281mn.”
“At current maturity profiles, including the JSE and Eurobonds, about N$41.2bn will mature in the next seven years which implies domestic debt should double over the next seven years to meet payment obligations. Our view is that government will be forced to take on additional external debt as the debt burden will be hefty for the economy to bear amidst estimated prolonged lower GDP growth,” says the firm.
Simonis storm further observes that yields on the treasury bills have been on a downward trajectory during the 2Q2018 as demand for short term maturities accelerated.
“This was evident in the bid-to-cover ratio that increased above a 2x cover across all TB’s and short term bonds (specifically the GC20 to GC25). We ascribe the increase in demand to a high commercial banking liquidity position and lack of appetite for private sector credit extension from commercial banks given the local economic position.”
“Nevertheless, we observed a decline in the demand for TBs on the 2nd of August 2018. The commercial bank liquidity position in Namibia has also scaled down in the beginning of August, recording liquidity position in Namibia at N$2.1bn from a high of N$4.6bn registered on the 6th of July 2018,” says the firm.
Meanwhile, low demand continues to cast a dark cloud over longer dated bonds.
Simonis Storm believes that the lack of clarity on the repayment of the two Eurobonds and SA risks such as a probable rising interest rates environment for 2019, currency vulnerability, prolonged low economic growth, upcoming elections and land redistribution issues have investors worried about the long term outlook in the bond market.
“We estimate the Eurobonds to amount to N$17.5bn at the end of 2018 based on our currency outlook. The sinking fund, which is estimated at N$5.6bn in 2018/19FY will provide some relief on the debt burden,” says the firm.