The State has raised N$1.6 billion through the JSE (Johannesburg Stock Exchange) bond facility between 2014 and 2015, tapping into international markets which allows for sizeable funding to be raised, Bank of Namibia (BoN) has revealed.
Speaking to The Villager, the Bank of Namibia said tapping into international markets offers government an opportunity to raise significant funding, which is not practically possible domestically, especially at relatively attractive pricing. Tapping into lucrative international markets also broaden the State’s funding base to complement the domestic capital market.
Government raised ZAR850 million in November 2014, ZAR800 million in June last year and ZAR750 million in September last year.
“Government has the liberty to source funding from both local and international capital markets. During 2011, a decision was taken to issue a maiden Eurobond (USD denominated funding). In 2012, government also listed a N$3 billion bond program on the JSE. The main reason for raising funds internationally include establishing a benchmark that could be used by Namibian private and state-owned enterprises who may seek to raise funding internationally,” Ndangi Katoma, Chief Corporate Communications at the national bank said.
Meanwhile, Katoma said, government has strategy to rollover short-term debt in order to reduce repayment risks. Katoma said in the last three years, the government has extended maturity of (rolled-over) close to N$8 billion worth of treasury bills from proceeding years.
So far, government has redeemed N$2.8 billion, which has been repaid back to investors and some switched into other instruments through two bonds namely the GC14 and GC15. The bonds had a combined outstanding amount of N$2.8 billion. Treasury bills are the most popular instruments in the domestic market, specifically among commercial banks. Treasury bills have four different maturities, 91-days, 182-days, 275-day and 364-days, while bonds have various maturities, with the highest maturity being 2040 for the GC40 and the lowest being the GC17, maturing in 2017.
“The Namibian government borrows from different investors through the issuance of two types of instruments namely treasury bills and government bonds. Treasury bills are used by government as a short-term funding instrument (maturity of less than a year) while bonds are for long-term funding (longer than a year),” Katoma noted.
Through these instruments, the Namibian government borrows domestically from a large pool of investors which includes commercial banks, asset managers, brokers, life insurance companies and private individuals. Although banks are the major participants of government treasury bills and bond auctions, Katoma said it should be noted that they often act as agents for their clients. “Therefore not all bids submitted by the banks are on their respective names.”
Katoma noted that firstly, government securities are relatively liquid (easy to dispose at relatively low cost), while secondly, government securities are regarded as the risk-free benchmark in the domestic market, meanwhile, purchasing government securities also enables commercial banks to meet their liquid asset requirements given a general shortage of liquid assets domestically.
“Namibia is still below international benchmarks such as the total debt to GDP ratio of 60 percent. However, public debts have increased strongly over the past year because of the depreciation of the NAD against the USD, the impact on the local financial market depends on the liquidity of financial institutions,” Executive Director of the Economic Association of Namibia (EAN), Klaus Schade, said.
Schade further stated that if government borrows while the liquidity of local financial institutions is limited, it will crowd out private sector borrowing, adding that if there is sufficient liquidity, it provides opportunities to invest in financial instruments. Schade noted that the benefit of borrowing from domestic banks is that interest payments will benefit domestic investors, be it private or institutional investors, while borrowing abroad implies that interest payments leave the country.
The difference between borrowing locally and from international markets largely depend from international rates.
“Currently interest rates in most developed countries are very low, or even negative, meaning borrowing in these markets carry low costs in terms of interest payments. However, borrowing abroad, except for borrowing in the Common Monetary Area in South African Rand, always carries the risk of exchange rate fluctuations. If the currency depreciates against the currency in which money is borrowed, is makes the repayment and interest payment more expensive,” Schade said.
Close to N$6.0 billion (45%) of the outstanding amount on treasury bills are being held by commercial banks, while a majority of longer dated bonds are held by pension funds and life insurance companies.