NAMIBIA GOVERNMENT DEBT SECURITIES MARKET: CHALLENGES AND THE WAY FORWARD
By Titus Ndove
The development of domestic debt markets is seen as one of the key measures undertaken to strengthen the financial sector and reduce external debt related risks. Namibia has one of the most sophisticated and developed financial systems in the African continent. The diverse range of financial institutions in Namibia comprises of private commercial banks, insurance companies, pension funds, a stock exchange, assets management companies, unit trust companies and other specialized lending institutions. The Namibia economy is also vibrant as reflected in a healthy growth rate, stable prices, disciplined fiscal policy as reflected in strong fiscal position and low debt, high national savings and healthy current account surpluses.
As a result of sound macroeconomic fundamentals, the country was assigned a favourable sovereign credit rating of BBB- by Fitch Rating agency during 2005, which was re-affirmed during 2006. This rating put Namibia in the same league as countries such as India and Croatia. Namibia took advantage of the good credit rating and accessed the international capital market during 2006 when it contracted a 364 day syndicated debut loan facility of US$50 million, which was oversubscribed.
The Bank of Namibia is currently looking at accessing the international bond market in order to create contingency borrowing sources when such need arises. At the same, time this will create benchmarks for future issues by the Namibia institutions.
Having one of the highly developed financial systems in the African continent, however, does not insulate the country from being confronted by a number of challenges in the Government domestic debt securities market. The key challenges facing the Government domestic debt securities market are among others, the development of a deep and liquid secondary market, stemming capital outflows and supply of enough debt papers to the market. Various initiatives are recommended in this technical paper to improve liquidity in the secondary market and finding other means to increase the debt papers in the market given the significant reduction in the Government financing requirements, especially during 2006/07 to 2007/08 fiscal years.
Namibia has a well-developed pension fund and insurance companies sector which are important for the development of a fixed income securities market. These contractual savings are, nonetheless, not invested in the local market given a relatively well developed market in the neighbouring South Africa. Namibia is a member of the Common Monetary Area (CMA) with Lesotho, Swaziland, and South Africa. CMA provides for free capital outflows among member countries and free access to each member’s financial markets. Consequently, the investment of the country’s national savings in South Africa put pressure on the country’s foreign exchange reserve.
As a response to these outflows, the Government introduced domestic investment requirements/captive funding on pension funds and insurance companies, which is set at 35 percent of their assets. Although many countries are using, this or similar regulation in practice, it is not a good policy, according to the IMF (2002). Another study conducted by the IMF (2006) argued that capital controls have large costs on the economies of the countries that introduced these measures. These costs are in terms of efficiency losses, less market discipline and reduced capital flows. Many countries in Western Europe and some English speaking countries, including South Africa introduced captive funding in the early stages of financial market developments. Although, this created captive demand for domestic Government bonds it was found to be the stumbling block to the market developments as the debt issues were not based on market conditions. As a result, most of the countries that introduced captive funding have done away with it in order to develop a sound and vibrant Government debt securities market.
In the case of Namibia, removing domestic investment requirements should be a gradual process where the Government should first develop the financial markets. A haste lifting of these requirements without creating competitive products in the financial markets, could exacerbate the capital outflows to South Africa and this may lead to severe implications on the country’s financial stability as the official reserves possibly will be depleted.