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Depreciating NAD a strain on foreign debt

Mon, 25 January 2016 02:25
by Charmaine Ngatjiheue
News Flash

Photo: Flickr

The depreciating Namibian Dollar against the US Dollar may have a significant negative impact on total returns from foreign debts which includes bonds, local analysts told The Villager. 

Simonis Storm Securities (SSS) economist Frans Uusiku opined that generally, foreign bonds may offer lower yields than domestic bonds because of the diversified portfolio, and these benefits should be weighed against the risk of loss in currency value.

He said the advantage with the Namibian Eurobond is the fact that it is issued and denominated in USD terms, which is much more in Namibia’s favour, given that the USD has appreciated in value against the NAD.

“From a government borrowing point of view, issuing bonds in foreign or advanced economies can be one of the cheapest ways of raising funds because of the relatively low interest rates that are prevailing in advanced economies,” Uusiku said.

It is, however, too soon to tell whether the country will have to pay more or less for that bond, seeing that the local currency has dropped.

“It is difficult to say how much will be paid back at this point. There is currently a high interest rate expectation both in SA and ultimately in Namibia, which is likely to see market forces adjusting in the near future, and thereby bringing the currency strength back to its singledigit level. It’s a just a matter of time,” Uusiku added.

Meanwhile, the Deputy Dean of Economics and Management Sciences at the University of Namibia, Dr Omu Kakujaha- Matundu noted that when a currency depreciates, the repayment of the debt against the other currency becomes more expensive.

Kakujaha-Matundu thus advised that funds from the foreign bonds which the country had issued should be invested in infrastructure as these are the types of things that help in growing the economy.

The government borrows funds for infrastructural development, and since development/ infrastructure expenditure is of a long-term nature and only yields returns over a longer period, it is imperative for government to balance the composition of debt by choosing bonds which are a long-term source of financing to finance infrastructural projects.

“Infrastructure includes good roads, proper power plants and although the currency has weakened, the investments would be worth the money when the country pays back the debt. From the good infrastructure, the country can generate revenue that would be beneficial for the economy,” Kakujaha- Matundu said.

He reiterated that the funds should be put to good use to yield good returns for the country, emphasising that the golden rule states that whatever a country borrows, it has to be invested in infrastructure. Kakujaha-Matundu optimistically stated that the Rand will not remain too weak against the USD, which in turn means the NAD will also not remain weak for too long against the USD.

“The Rand will strengthen in future, although now it has reached an all-time low. Things will change, and they will be fine. Even though the country will end up paying more money for the debt as the local currency weakens, these funds would have helped the economy grow,” he continued.

Weakening currency not only causes high inflation rates and inflated import costs, but to a certain extending it may cause the issuing of foreign bonds to yield fewer returns as the debt costs the country more.

Since South African President Jacob Zuma sacked former Finance minister Nhlanhla Nene, the Rand has depreciated against the US Dollar, reaching an all-time low of Zar16.7 (N$16.7). This in turn led to the Namibian dollar - which is pegged to the Rand - to also weaken against the Dollar.

If a loan, or in this case a bond, is largely made up of foreign currency, then a foreign exchange risk is always there, especially if the currency depreciates, which in turn results in more payments. For instance, late last year, Namibia successfully priced a US$750 million 10-year sovereign bond for placement in the international capital markets

. This is Namibia’s second Eurobond issue, the first one having been issued in 2011. The Eurobond is the country’s second international listing as the country listed on the Johannesburg Stock Exchange (JSE) with a N$3 billion bond programme which raised N$850m.

The country’s listing on the JSE limits currency risks as there are no exchange risks. However, the country taking Eurobonds may turn out to be more expensive. The JSE listing for the country was a strategic move as it reduces any other foreign debt.

In 2011, the country sold $500 million of Eurobonds, and thus there was concern about the effect of currency depreciation on repayments.

Meanwhile, the current depreciation of the Namibian dollar implies that the amount for interest payments and repayments is currently much higher in NAD than at the time the Eurobond was issued. business@thevillager.