Namibia: Capital Market in Diversification Dilemma

NAMIBIA'S financial market is not developed enough to take up excess funds in the economy, with most pension funds recently settling for government debt.

Worryingly, this has resulted in returns on government debt diminishing, with some investors currently praying that inflation stays low in order for them to earn meaningful returns on their investments.

The Bank of Namibia recently said changes in the domestic asset requirement is gradually reducing treasury bills and bond yields as the market becomes flooded with too much money chasing few investments.

The Namibian asked industry experts their opinion on diversification issues, and they said while the market is small and not deep enough to take up funds, it should be given some time.

Capricorn Asset Management's senior portfolio manager, Relf Lumley, said there are enough local assets for the pension fund industry, but unfortunately the assets are mainly in the fixed income asset class.

"This creates the problem of diversification for some funds. However, some improvement is on the horizon, with the planned listing of Standard Bank Namibia", he added.

He explained that the excess money on the market is partly due to changes in legislation, and as a result of the reduction in spending.

Lumley pinned his hopes on inflation staying low, stating "we still have significant real interest rates on the treasury bills and local bonds. This provides a real return for a longer period, especially if inflation rates stay low, as some economists have forecast".

He furthermore indicated that the economy is faced with unproductive capital, as borrowers are fewer.

The only major borrower in the capital markets is still the state, and even they have to reduce borrowing to ensure the deficit does not escalate to unsustainable levels.

Lumley said the country requires some sound economic policies and deployment from the state and the private sector to move out of the current slump, to stimulate the demand for credit, and improve the returns on the pension funds.

Local economist Daniel Kavishe believes the increased asset requirement allocations have mainly impacted government bond pricing, the full effects of which will be felt in 10 years, after more financial instruments are listed and as liquidity increases.

He added that the slowdown in the economy may have led to conservative and "safer" investment options domestically, but when the economy turns and as capital markets expand, local available assets will grow, invariably having a positive impact on economic performance.

Commenting on the higher demand for fixed income assets, IJG managing director Mark Späth said the capital and money market was not deep enough, and more quality assets are needed to take up the excess funds.

He said currently, the whole financial sector is exposed to government assets as they are the main issuers of fixed income assets, creating diversification issues, and thus called on more local companies to list to create investment platforms.

Späth also hopes inflation remains low so that returns on the fixed income remain positive and rewarding.

Standard Bank chief executive officer Vetumbuavi Mungunda echoed similar sentiments, stating that "there is too much liquidity at this point in time, and there are few assets".

He said as the economy slows down, business reduces investments and watches how things turn out, with those with excess funds investing in the money market, and those who want to borrow to expand sitting back until the uncertainty clears.

Mungunda added that with excess liquidity in the market, the opportunity "is only in fixed income assets. If only we can have a strongly developed financial market with listed equities, then there won't be diversification problems".

The yields on the 91-day and 182-day treasury bills declined by 6 basis points and 11 basis points on an annual basis to reach a level of 7,32% and 7,38%, respectively, at the end of the second quarter of 2019, compared to the corresponding quarter of 2018.

The Bank of Namibia's quarterly bulletin shows that almost two-thirds of other/non-banking financial corporation funds were invested in equities, followed by interest-bearing securities with a share of 20,9%.

Equities normally provide higher long-term growth, and are therefore a preferred investment instrument for OFCs, despite being relatively volatile, followed by cash and deposits and 14 other assets with shares of 6,3% and 10,6%, respectively, the central bank said.

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