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Bonds Oversubscription Reveals Govt Asset Dominance

By: Nghiinomenwa Erastus

The Bank of Namibia has indicated that the high appetite for government debt securities is due to media coverage/awareness, small funds to be raised locally this year, and the urge to fulfil long-term investment plans.

At the same time, the central bank, which borrows on behalf of the government, has accepted that there is a lack of alternate long-term assets in the capital market to compete with government securities.

However, the central bank revealed no crowding out (government borrowing reduces private sector investment as they compete for capital).

In about two weeks, investors in government bonds have offered to lend the state N$1,6 billion, despite the treasury only needing N$450 million.

This has led to an oversubscription of almost 400%, indicating that there is much available cash chasing very few long-term investable financial instruments such as bonds.

This includes one auction of 14 bonds where the private sector (individuals and institutional investors) offered the government almost a billion-dollar N$909 million daily as they competed to buy portions of the auctioned bonds, recording an over-subscription of N$694 million.

In response to the high appetite, the central bank said several factors have contributed to the current robust demand for government instruments.

The director for communication for the central bank, Kazembire Zemburuka, indicated that one of the reasons is that the target funding to be raised domestically this year is smaller than the previous fiscal year.

At the same time, there has been positive news regarding Namibia, and this has enhanced confidence and sentiment amongst investors, both locally and internationally, he wrote.

Zemburuka added that the influx of capital to government debt instruments is also because the government continues to be the safest issuer of instruments in Namibia.

“Naturally, institutional and retail investors will continue to demand government instruments to fulfil their long-term investment plans,” wrote Zemburuka.

He also attributed the interest in a treasury debt security, saying that the increased media coverage of the primary auctions has enhanced awareness of government instruments and has, therefore, drawn investors to some degree.

“In this regard, there is an increase in the general awareness of government bonds as an alternative investment product for retail clients,” said Zemburuka.

There is, however, worry that various sectors of the economy and SMEs struggling to access capital are being crowded by the budget deficit funding as more capital opts for fixed income assets.

Zemburuka noted that at this stage, the domestic capital market is dominated by government instruments- “there is a lack of alternate issuers domestically, leading to lower availability of local assets”.

He explained that the lack of domestic instruments is part of why the government prioritizes borrowing domestically.

Zemburuka said there is sufficient room for other private sector players to issue instruments in the domestic market.

“The Bank of Namibia and the Ministry of Finance are, however, aware that over-reliance on the domestic market could eventually crowd out the private sector,” Zemburuka stated.

He explained that is partly why the government has established external financing sources in regional and international markets.

“This balance is working well as demonstrated by excessive demand for instruments raised above,” Zemburuka assured.

Furthermore, he revealed that Private Sector Credit Extension (PSCE) is slow, meaning there is no pressure or shortage of funding.

He said borrowers seem reluctant to take on more debt lately, while lenders seem to have adopted stringent measures on credit facilities as a cushion over the perceived risks given the current environment of subdued economic activity.

According to Zemburuka, this leaves government securities as a preferred investment avenue by lenders due to their low level of risk.

The central bank was also asked if there is an improvement in retailer investors/bidders on the fixed income auction, given that in the past, only a few individuals were investing in bonds.

Zemburuka updated that the number of retail clients has increased over the past few months.

“We believe the increase is aligned with the rising general awareness for primary auctions of the government bonds through various media platforms,” he wrote.

The appetite to invest in bonds and treasury bills is not only because there are few alternative assets but also because the investment is rewarding in terms of coupon/interest payments and is considered safe.

In the past six months, a total of N$2.6 billion was paid in the last two coupon interest periods, January 2022 (N$1.3billion) and April 2022 (N$1.3 billion).


Julia Heita

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