Namibia: Local Markets Cough Up N$7b to Fund Budget

30 September 2020

THE Bank of Namibia (BoN) has raised 66% of their local borrowing target of N$10,4 billion for the financial year within six months.

According to an update from the central bank, the private sector has come to the rescue of treasury by providing the government with N$7,04 billion in the space of six months (April to September 2020).

The domestic market is still required to fork out around N$3,4 billion to meet treasury's requirement of N$10,4 billion from the local market.

The amount (N$7,04 billion) provided by the domestic market in six months is almost equivalent to the local borrowing requirement of the 2019/20 financial year.

For the 2020/21 financial year, treasury ran into the biggest budget deficit so far, requiring N$21,4 billion from individual, corporate and multinational lenders.

APPETITE

The update shows treasury has borrowed more than a billion dollar from the market every month between April and August to fund its budget.

July saw the government borrowing almost two billion (N$1,9 billion) from the market as the appetite rose and the financial year approached midterm.

According to the central bank's breakdown, more money was borrowed through bonds, which involve long-term borrowing facilities where individuals lend their money to the government for a period beyond one year with the promise of fixed-rate interest periodically until the bond reaches maturity.

In the six-month period, the central bank raised N$4,7 billion on behalf of treasury through long-term borrowing or bonds, expanding their dominance of the capital market further.

This was compared to their borrowing in the money market through treasury bills, which involve short-term borrowing where individuals and corporate entities lend the government money for three months, six months or nine months.

So far treasury has only borrowed around N$2,2 billion from the money market to fund its budget.

The government opted for long-term funding.

Lending to the government is considered one of the safest investments, but borrowing from the market can, however, be considered as competition for the productive sector, which also requires money to fund operations.

Treasury's balance sheet tends to dominate the private sector in terms of funding as lenders opt for government security, which is preceived as less risky.

With low economic activity in the first six to seven months of 2020, one could say this allowed the government to satisfy its borrowing needs locally, as the private sector temporarily hibernated due to Covid-19 measures.

This gave treasury space to lure investments, given the late presentation of the budget and the time frame within which the BoN raised N$7,04 billion last year for a whole financial year.

Moreover, since January 2020, the private sector credit uptake has been in need of a boost, with its nose diving and low interest rates failing to appease the market.

According to statistics for July, business credit uptake was -1,1% compared to a year ago, with households slightly driving credit extension through housing financing.

Private sector credit extension (PSCE) which track not only the private sector appetite for credit, but also its confidence in the economy stood at 2,3% at the end of July 2020, decreasing by 0,6 percentage points month-on-month.

The low appetite may have provided space for treasury to meet their domestic borrowing needs without crowding out the private sector.

The uphill battle now is to raise the remainder of the N$21,4 billion, which is N$10 billion from external sources, given the country's tainted rating, stagnant economy and slippery fiscal position.

The Ministry of Finance indicated it may go to Washington to tap on Namibia's drawing rights at the International Monetary Fund for a N$4 billion loan.

INDIVIDUAL VS INSTITUTIONAL INVESTORS

Government debt securities are considered safe and having low investment costs.

Treasury bills and bonds can be a starting point for individuals who want to diversify their portfolio.

The BoN says public interest by individual investors for treasury bills and bonds has improved significantly in the past few months.

However, retail (individual) investors still take up a small proportion of government securities, with institutional investors continuing to dominate auctions.

The bank says auctions remain equally accessible to both individuals and institutions, with each of them having an equal chance of getting an allocation, provided their bids are priced competitively.

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