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Red flag raised over Govt borrowing

Mon, 2 November 2015 06:58
by Charmaine Ngatjiheue

Namibia runs a serious risk of failing to honour their debt obligations accrued from the recent floating of the N$10.2b Eurobond, analysts have warned.

The concerns come amid worries that Government has developed a trend where they spend what they do not have.

While Namibia Equity Brokers’ in-house analyst Ngoni Bopoto raised concern over the steep debt repayment costs associated with the accrued debt in future, James Cumming from Simonis Storm Securities says the move could further plunge the country into a financial quagmire as they would need more foreign reserves.

“Our view is that debt can be a blessing or a curse, the principal determinant being the use of funds and the resultant returns. Capital is required to drive Government’s poverty- alleviation and industrialization agendas. However, the returns (financial or social) must be at least sufficient to service the debt, and ideally contribute to capital stock, going forward,” Bopoto stated.

Cumming weighed in, saying “the foreign reserves are running fairly low as we have about N$12 billion to N$14 billion worth of foreign currency. The added N$10 billion bond will help with the net imports of the country. It will also help in terms of Government’s long-term infrastructural projects.”

“This only means that it is a good thing for the local front. It is good that Government is diversifying its market, and the financial mix is better publicity to the international investors.

There should be a vote of confidence in our economy and the political front because it shows that our credit rating is good”, he added.

The Chief Executive Officer of the Namibia Stock Exchange (NSX), Tiaan Bazuin opined that Namibia’s international rating is high, and allows the country to access financing.

“The facts are that there is clearly great international appetite for Namibian bonds, and the sooner we can get the Central Securities’ Depository licensed and running, the sooner they can buy into the existing local bonds in issue,” Bazuin enthused.

The Rule 144A/ Reg S Eurobond, which is Namibia’s second Eurobond issue, has a coupon of 5.25% per annum, and was priced to yield 5.375%, equal to a spread of 336 basis points over the 10-year US Treasury bond.

The bond is expected to be rated Baa3 by Moody’s and BBB- by Fitch.

The transaction was announced as a benchmark transaction, with initial price guidance of 5.75% and due to strong investor appetite, the order book increased to US$3.8 billion before guidance was revised to 5.5% (+/- 1/8%), allowing the issuer to price a US$750m transaction at 5.375%.

The transaction priced 37.5 basis points tighter than the country’s first transaction in 2011, resulting in a negligible new issue premium.

Namibia achieved a broad geographic distribution, with US and UK institutions representing approximately 78% of final investor allocations. Investors from continental Europe, the Middle East, Asia and Africa accounted for the remaining 22%.

Barclays, J.P. Morgan and Standard Bank acted SSS Head of Research James Cumming NEB Analyst Ngoni Bopoto Finance Minister Calle Schlettwein as joint lead managers and book-runners for the Eurobond.

Benefits of the bond Speaking to The Villager this week, Finance Minister Calle Schlettwein said the hard currency is set to boost reserves as they are currently running low, adding that they will also be used to fund infrastructure and development programmes as per the Fourth National Development Plan (NDP4).

The proceeds are meant to fund developmental projects, which take up 12% of the total budget (particularly in the power, water, logistics and transport sectors), as well as to fund initiatives in the education sector with the aim of facilitating skills’ development.

Over this Medium- Term Expenditure Framework (MTEF) period, Government plans to spend N$196 billion, which averages to N$65.3 billion each year. 12% of the total budget is meant for developmental projects.

Schlettwein noted that the bond has very good pricing, and confirms that the country’s credit rating is very good while the country also has good standing with investors.

“First of all, we are borrowing from an open market, and this also goes to show that we have a sound economy. As this was a pretty large listing, we do not have any intentions thus far to list,” Schlettwein noted.