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FELLOWS’ DEVELOPMENT PROGRAM: DEBT MANAGEMENT
TECHNICAL PAPER - NAMIBIA GOVERNMENT DEBT SECURITIES MARKET: CHALLENGES AND THE WAY FORWARD
Fellow: Titus Ndove1
E-mail: [email protected] [email protected]
1 I am indebted to Ms Ceyla Pazarbasioglu, my Mentor and Division Chief of the Capital Market Development Division in the Monetary and Capital Markets Department of the IMF for her continuous advice and support. The usual disclaimer applies.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
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ABSTRACT 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 FitchRating 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
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
3
savings are, nonetheless, not invested in the local market given a relatively well
developed market in the neighboring 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.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
4
TABLE OF CONTENTS
Glossary .......................................................................................................................... 6�
1. � Introduction ........................................................................................................... 8�
1.1 Background ........................................................................................................... 8�
1.2. Macroeconomic Conditions of Namibia ............................................................... 10�
1.3. Objective of the paper ........................................................................................ 12�
2.� Perspectives of Government Debt Securities Market ......................................... 14�
2.1 Institutional and Legal Framework ....................................................................... 14�
2.2 Strategy for Public Debt Management ................................................................. 16�
2.3 Primary Market Issuance ..................................................................................... 16�
2.4 Secondary Markets Activities in Government Bonds ............................................ 17�
2.5 Government Bonds .............................................................................................. 21�
2.6 The Size of the Bond Market ............................................................................... 22�
2.7 Benchmarks ........................................................................................................ 24�
2.8 Investor Base ...................................................................................................... 25�
2.9 Composition of T-bills and Bonds ........................................................................ 27�
2.10 Strategy for Redeeming Maturing Bonds ........................................................... 28�
2.11 Safe and Timely Title Registration, Transfer and Settlement ............................. 29�
2.12 Tax Treatment of Government papers and Other Client Costs .......................... 30�
Box 1� Credit Rating and Impacts on Government Bonds ................................... 31�
3. � Measures taken to develop Namibia Capital Markets ......................................... 34�
a. Introduction of Local Investment requirements/Regulation 28 ................................ 34�
b. CMA Agreement .................................................................................................... 35�
Box 2 Implications of the CMA Arrangement on Capital Markets ............................... 36�
c.� Liquid asset requirements ............................................................................... 38�
(d) Sovereign Debt Management Strategy (SDMS) ................................................... 39�
(e) Introduction of Market Making .............................................................................. 40�
(f) Interactive webpage for secondary bond trading ................................................... 41�
4. Impediments to the Developments of Government Securities Markets ...................... 43�
Current Challenges ................................................................................................... 43�
5. Literature Review ...................................................................................................... 46�
5.1 Case Studies of Selected Countries .................................................................... 46�
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
5
5.1 Slovenia ........................................................................................................... 46�
5.2 Poland ............................................................................................................. 54�
5.3 Special Case Study of a CMA Member South Africa ........................................ 59�
6. Experiences Reviewed and KEY LESSONS for Namibia .......................................... 65�
6.1 Good Attributes to be Emulated by Namibia ........................................................ 65�
Slovenia ................................................................................................................ 65�
Poland ................................................................................................................... 70�
South Africa ........................................................................................................... 74�
6.2 Lessons to be Avoided by Namibia ...................................................................... 76�
Slovenia ................................................................................................................ 76�
Poland ................................................................................................................... 76�
South Africa ........................................................................................................... 78�
7. The Namibian Experience - Lesson for the MEFMI Region ....................................... 80�
8. Recommendations Towards A ROBUST Government Debt Securities Markets in
Namibia ......................................................................................................................... 85�
8.1 Sustaining Stable Macroeconomic Environment .................................................. 85�
8.2 Developing the Government Bonds Markets ........................................................ 86�
8.3 Improving Corporate Governance ........................................................................ 92�
8.4 Institutional and Legal Framework ....................................................................... 92�
8.5 Tax Treatment ..................................................................................................... 94�
8.6 Broadening Investor Base ................................................................................... 95�
8.7 Needs for Reforms – Sequencing ........................................................................ 96�
9. Conclusion ................................................................................................................ 98�
10. References ............................................................................................................ 101�
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
6
GLOSSARY
AG Office of the Attorney General
ALM Asset & Liability Management
AUM Assets Under Management
BES Book Entry System
BIS Bank of International Settlement
BON Bank of Namibia
BOS Bank of Slovenia
CDM Cash and Debt Management
CMA Common Monetary Area
CPS Cheque Processing System
CRAs Credit Rating Agencies
CS-DRMS Common Wealth Debt Recording Management System
EMEs Emerging Market Economies
CPI Consumer Price Index
CS-DRMS Commonwealth Secretariat Debt Management System
GC02 Government of Namibia bond maturing in 2002
GC05 Government of Namibia bond maturing in 2005
GC07 Government of Namibia bond maturing in 2007
GC08 Government of Namibia bond maturing in 2008
GC10 Government of Namibia bond maturing in 2010
GC12 Government of Namibia bond maturing in 2012
GC15 Government of Namibia bond maturing in 2015
GC24 Government of Namibia bond maturing in 2024
GDP Gross Domestic Product
GEAR Growth Employment and Redistribution
ILBs Inflation Linked Bonds
IMF International Monetary Fund
IRS Internal Registered Stock
IRSRA Internal Registered Stock Redemption Account
MEFMI Macroeconomic & Financial Management Institute of Eastern & Southern
Africa
MOF Ministry of Finance
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
7
MTEF Medium Term Expenditure Framework
NAMFISA Namibia Financial Institution Supervisory Authority
NBA Namibian Bond Association
NBP National Bank of Poland
NDP National Development Plan
NPC National Planning Commission
N$ Namibia Dollar
NSX Namibia Stock Exchange
OECD Organisation for Economic Co-operation and Development
OTC Over the Counter
PDD Public Debt Department
PDMD Public Debt Management Department
RTGS Real Time Gross Settlement
SACU Southern Africa Customs Union
SARB Reserve Bank of South Africa
SOEs State Owned Enterprises
SRF State Revenue Fund
USD US Dollar
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
8
1. INTRODUCTION 1.1 Background
This paper reviews recent trends and challenges, as well as the way forward in the
domestic Government debt markets of Namibia, a member of the Common Monetary
Area (CMA)2. The paper primarily focuses on the current practices in domestic
Government debt markets in Namibia, the needs of this market, the impediments to the
developments of the market and how these impediments might be removed. The
domestic debt markets in emerging markets, including Namibia are generally small,
short-term in nature and often are characterized by a narrow investor base. In the case
of Namibia, the domestic debt market is less developed compared to other advanced
emerging markets such as, South Africa, Argentina, Russia and Korea.
The Government debt securities market in Namibia is confronted with a number of
challenges and this is better understood by looking at the country’s financial structure.
When the country became independent in 1990, the money and capital markets barely
existed. The financial system was mainly dominated by urban based commercial banks,
and insurance companies and pension funds. According to the IMF’s Financial Sector
Assessment Program (FSAP) on Namibia (2006), the country has one of the most
sophisticated and highly developed financial systems in Africa. These financial
institutions include four private commercial banks, 30 insurance companies, about 500
pension funds, a stock exchange, 32 asset management companies and a number of
unit trust management companies Namibia has also the development bank, other
specialized lending institutions including micro lending entities. These financial
institutions are predominantly South African owned given the historical past that Namibia
was part of South Africa until 1990.
Given a well developed pension funds the country generates huge savings in excess of
30 percent of GDP. However, Namibia’s contractual savings flow to South Africa instead
2 CMA is a currency union made up by Lesotho, Namibia, South Africa, and Swaziland. The SA currency,
the Rand circulates as a legal tender in other CMA member states along with their respective national
currencies.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
9
due to a relative well developed financial in that country. This resulted in a peculiar
situation where Namibia became a net exporter of capital to South Africa. To aid the
development of the financial markets and the local economy, the Government took
deliberate measures to develop the local market for the Government securities. More
specifically, the Government put the developments of the local money and capital
markets in the national development agenda in the First National Development Plan
(NDP1). As a result, Government instituted several measures to develop the local
market. The ultimate objective of developing the local bond market is to ensure
continuous access to funds in the market at affordable prices to develop the real
economy.
Although the local bond market in Namibia has grown significantly compared to the level
before independence in 1990, a lot is still left to be desired in terms of liquidity,
transparency, efficient market trading and infrastructure, number and size of bonds in
the local market. The limited market development is attributed to lack of active trading,
limited supply of bonds, and lack of skills, capital outflows and diversity in the market.
According to Biekpe (2004), small CMA countries3 have indicated lack of liquidity as a
major obstacle to the development of the local Government debt markets.
Methodology
The database for this technical paper contains information about the characteristics of
Government domestic debt in Namibia for the period 1990 – 2006. The study is limited
only to Namibia since it was very difficult to get comprehensive data on other small CMA
members. Whilst other datasets such as the stock of outstanding debt and its
composition, secondary marketing trading at stock exchange, macroeconomic
indicators, etc, exists for Namibia, it was not possible to obtain information on the trading
over the counter (OTC), holdings of debt by sector, among others. The analysis of the
paper was enriched with the case studies of Poland, Slovenia and South Africa and
sources used in this case were primarily individual IMF country’s reports. The analysis of
this paper is presented in the form tables, charts and text. The main sources of data
collected are the websites, publications and any other administrative records of the
Central Bureau of Statistic, Central Bank, Stock Exchange and Ministry of Finance.
3 Lesotho, Namibia and Swaziland – excluding South Africa
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
10
1.2. Macroeconomic Conditions of Namibia At independence in 1990, the Government inherited an economy characterized by a
narrow industrial base and heavy dependence on the production and export of the
primary commodities, such as, minerals, fish and beef. The Government realized that
such a structure was not conducive for tackling social challenges such as high
unemployment of about 36 percent and income inequality, and as a result, strategies
were put in place to diversify the economy.
The efforts of the Government to diversify the economy bore fruits as witnessed in the
shift from dependence on the primary industry to the secondary and primary industries.
The contribution to GDP from the primary industry which stood at 28.4 percent in 1990
declined significantly to only 20.0 percent in 2005, whilst the share of the secondary
industry increased to the current level of around 18.0 percent from 16.0 percent at
independence (Table 1). Similarly, the contribution from the tertiary industry increased to
53.9 percent in 2005 from 43.5 in 1990.
Table 1 Key Macroeconomic Indicators
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���������� ��� � ���� ���� ���� ���� ���� ����
��������� ���� ���� ���� ���� ���� ���� � ��
The Namibian economy is vibrant and underpinned by sound macroeconomic
fundamentals as reflected in 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 these sound macroeconomic fundamentals,
the country was assigned a favourable sovereign credit rating of BBB- by FitchRating
agency with rating peers of Croatia and India. The GDP per capita income for Namibia is
around USD3200, whilst income inequality is 0.6 (gini coefficient). The economic growth
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
11
remained strong as indicated in Table 2 driven mainly by mining and manufacturing
activities. As a result of an improved fiscal position (surpluses/ low deficits), total
outstanding debt of the central government as a ratio of GDP has been on a declining
trend since 2005, and is geared to continue declining further due to budget surpluses
projected during the 2007/08 financial year. Nonetheless, these low budget surpluses
bring some challenges to the domestic financial markets, as the reduced role of the
government as the major issuer of debt papers means a deterioration of the already low
supply of these papers to the market.
Namibia has one of the highest positive saving – Investment gap in Africa, averaging
around 5 percent of GDP for the past five years (Table 2). The gross saving alone is in
excess of 30 percent to GDP. These saving surpluses provided a good base for Namibia
to develop its domestic Government securities market. Nevertheless, thus far the
country has been relatively unsuccessful to retain a significant portion of these savings
due to a relative shallow domestic market relative to the South African domestic
markets. South Africa has one of the most sophisticated financial markets among
emerging market economies, and this does not augur so well for Namibia as institutional
investors take Namibian savings and invest them in that country. This trend is costing
the country in terms of the loss of foreign exchange reserves (Rand). During 2006 alone,
the net capital outflows to South Africa amounted to US$1 billion, rising by 42 percent
from the previous year.
Table 2 Other Key Macroeconomic Indicators
Indicators 2001 2002 2003 2004 2005 2006
GDP Real Growth Rate 2.4 6.7 3.5 6.0 4.2 4.6
Total Debt as % of GDP 25.7 25.2 29.1 33.6 31.7 31.7
Inflation Rate % 9.2 11.4 7.2 4.2 2.3 5.1
External Debt as % of GDP 5.6 3.9 4.6 5.1 4.7 5.9
Gross Savings as % of GDP 24.2 27.9 33.3 32.8 31.5 0.0 Saving-Investment Gap as % of GDP 2.3 6.7 4.2 7.4 4.8 Budget Deficit/Surplus as % of GDP -4.3 -2.5 -7.2 -3.6 -1.1 2.2
Reserves (USD mio) 238.0 360.0 300.0 323.0 247.0 421.0 Net Capital Outflows (USD mio) 640 703 1,000
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
12
Despite these huge net capital outflows, Namibia managed to fast build its reserves,
especially during 2006. This was mainly as a result of the substantial rise in the current
account surplus, which was also supplemented by issuing of USD50 million one-year
syndicated loan in the international capital market during 2006. Improved export
performance, Southern African Custom Union (SACU) receipts and the sale of a stake in
a mobile telecommunication company. During March 2007, the official reserves were
around USD1.0 billion primarily due to the receipts from the SACU Pool4. The capital
outflows are expected to continue due to the fact that funds under the management of
the highly developed pension funds and insurance corporations are growing. Measures,
therefore, to develop the domestic capital markets are necessary to expand investment
opportunities in order to minimize capital outflows. Namibia’s ratio of pension assets to
GDP in 2001 was estimated at 60 percent and if life insurance, short-term insurance,
unit trusts and other funds are included it amounted to 80 percent of GDP.
It is worthwhile noting that a well developed contractual savings sector in Namibia has
helped the country to develop its domestic Government securities market as it provide a
stable source of long term demand. According BIS (2002), the pension fund
development in emerging markets go hand in hand with the bond market development.
1.3. Objective of the paper
The main objective of this paper is to discuss the Namibian Government domestic debt
securities market in terms of: (i) the level of development in the Government domestic
debt securities market; (ii) the challenges to the development of this market and how
they might be removed; (iii) lessons and experiences of selected countries that are few
steps ahead and have some similarities to Namibia’s path for financial market
development; and (iv) the roadmap towards developing a robust Government debt
securities market.
4 Botswana, Namibia, Lesotho, Swaziland and South Africa belongs to SACU, the oldest custom union in the
world, established in 1910.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
13
The findings of this paper will provide insights to the rest of MEFMI member states,
especially those in the CMA that are also struggling with the same challenges as
Namibia. The paper is structured as follows: Section 2 describes the perspectives of
Government debt securities market; Section 3 explains the measures taken to develop
the Namibian capital markets; Section 4 provides the challenges to the developments of
Government securities’ market; Section 5 presents the literature review, focusing on
case studies of selected countries; Section 6 draws key lessons for Namibia, while
lessons for the region are presented in Section 7. Section 8 presents the
recommendations towards a robust Government debt securities market, while Section 9
concludes.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
14
2. PERSPECTIVES OF GOVERNMENT DEBT SECURITIES MARKET IN NAMIBIA
2.1 Institutional and Legal Framework
The sovereign debt management is the responsibility of the Ministry of Finance (MOF).
This responsibility derives from the Namibian State Finance Act, 1991 (Act 31 1991),
which places the authority on matters regarding the management of public debt with
MOF. In carrying this function, the Ministry is assisted by the Bank of Namibia (BON),
the National Planning Commission Secretariat (NPC) and the Office of the Attorney
General (AG).
2.1.1 Ministry of Finance
The legal provisions for entering into loan agreements are stipulated in the State
Finance Act, 1991 (Act 31 of 1991). The section empowers the Minister of Finance, or
any person authorised by the Minister in writing, to borrow and sign all loan agreements
acquired by the central Government and to furnish guarantees.
Section 29 (1) of the Act stipulates inter alia that the Minister of Finance may borrow at
any time within or outside Namibia. The Minister is also given authority to enter into
agreements with banks or other financial institutions, including the Bank of Namibia, an
international bank or a foreign institution. The Minister has the signing power on behalf
of Government. Furthermore, the State Finance Act empowers the Minister of Finance to
furnish guarantees on behalf of Government. The Act also gives power to the Minister of
Finance to approve the loans granted by the State to any institutions or individuals in
Namibia and to determine the amount and interest rates to be charged on these loans.
2.1.2 Bank of Namibia
The Bank of Namibia (BoN) has a statutory responsibility in sovereign debt
management. In terms of the Bank of Namibia Act, 1997, section 44, the Bank must be
consulted and provide an opinion on all external borrowing by the Namibian Government
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
15
and statutory bodies before a loan is contracted. The Bank is required to pay particular
attention to the timing, terms and conditions and financial expediency of the intended
borrowing.
In terms of the Section 42(1), the Bank of Namibia is entrusted with the issue and
management of the securities issued or guaranteed by the Government. The Bank fulfils
this agency role with respect to the issue, administration and recording of domestic
instruments such as treasury bills and Government bonds. This agency role is duly
reflected in an agreement between the Bank and the Ministry of Finance, entitled
“Agency Agreement for the issue and redemption of treasury bills, internal registered
stock and any other Government instrument”, dated 15 May 1991 and as amended on
24 September 1991. These statutory obligations make the Bank a major partner in
Namibia’s sovereign debt management framework.
2.1.3 Office of Attorney General
The Office of the Attorney General (AG) gives legal opinions on behalf of the Namibian
Government. Legal provisions and policies for entering into loan agreements are clearly
stipulated in the State Finance Act, 1991 (Act 31 1991). As the state’s principal legal
adviser, the Office of the Attorney General is involved in drafting and scrutinising legal
documents related to borrowing and lending transactions as well as the furnishing of
guarantee agreements. The legal officers of the Attorney General are generally also
participating in loan negotiations, and the Attorney General is required to certify to
foreign lenders that all aspects of loan agreements have been carried out in accordance
with the legal provisions of the Namibian rule of law.
2.1.4 National Planning Commission
In accordance with the National Planning Commission Act, 1994 (Act 15 of 1994), the
NPC Secretariat is tasked to make recommendations in connection with proposed
capital and development projects and programs, and to appraise, monitor and evaluate
such projects and programs. The NPC Secretariat carries out this task not only in
relation to Government projects, but also with regard to projects of statutory bodies and
other levels of Government. The practice to date, however, has been that all projects to
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
16
be funded by foreign loans are forwarded to the Ministry of Finance for evaluation and
monitoring.
2.2 Strategy for Public Debt Management
The Namibian Government funds most of its financing needs by borrowing from
domestic sources. This is done for two reasons: Firstly, by borrowing from the domestic
market, the Government intends to contribute to the development of money and capital
markets in Namibia, which were at their infancy at Independence. As a consequence of
this strategy, a healthy primary market in both short-term (treasury bills) and long term
(internal registered stock) Government securities has developed, although trade on the
secondary market remains thin.
Secondly, by raising funds in the domestic market the Government has minimised the
currency risk associated with foreign borrowing due to exchange rate fluctuations.
Foreign loans have largely been limited to concessional loans for infrastructure projects,
and for on-lending to state-owned enterprises and institutions. The advantage
associated with this strategy is that the concessional loans have a long maturity
structure and since infrastructure investments are expected to yield long-term returns,
maturity mismatch is avoided.
2.3 Primary Market Issuance
The primary market practices for non-Government bonds issued in Namibia vary from
one issuer to another. In its role as the agent for issue and management of Government
debt securities, the Bank of Namibia issues Government bonds on behalf of the
Government of the Republic Namibia. Based on annual issued calendar, the Bank of
Namibia invites tenders for Government securities in newspapers, by e-mail and on the
Reuters System. After receiving bids before the deadline at 10:00, the Bank of Namibia
processes tenders in the Dutch auction style and then the Government approves the
tender results. The auction takes place once every month for all the bonds on the run.
The BoN and MoF determine the allotments of the issue immediately after the closure of
the bid whereby the bids are allocated competitively. The whole auction process is
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
17
conducted manually and tender results come out before 16:00 during the same day. This
means that the process at the moment takes a while longer for the results to be
announced, and hence the need to introduce an electronic tendering system to improve
the efficiency in the auction. The settlement takes place 48 hours after the auction.
The main players and holders of the Government bonds are pension funds, commercial
banks, insurance companies, state owned enterprises and asset management
companies. The commercial banks are the major holders of these securities due to the
liquid asset requirements which oblige them to hold 10 percent of their liabilities in liquid
assets. As a result, the commercial banks are holding 90 percent of the liquid assets in
Government securities. Most of these major holders of Government securities are not
engaging in active secondary market trading and thus, they buy and hold to maturity.
The commercial banks and institutional investors mainly buy these securities to match
their respective liabilities. Contributing to the buy and hold attitude is the supply
constraint which is experienced in the market since the beginning of 2006/07 financial
year as institutions are not sure of finding the replacement assets after selling off their
current holdings. Another factor identified as contributing to the buy and hold attitude in
the market is the fragmentation of market into narrow niches, such as pension funds,
banks and retails investors having different investments perspectives. These groups
have different attitudes towards the trading positions and holding of the securities.
2.4 Secondary Markets Activities in Government Bonds
Overall, dynamism of the bond market is determined largely by the extent of trading in
the secondary market. Mohanty (2002) reviewed about 22 countries (emerging market
economies) and concluded that lack of liquidity remains a major obstacle to the
development of securities market in these countries. The market liquidity is defined as its
relative tightness, depth and resilience. Tightness is measured by the bid-ask spread
and it provides the cost for executing transactions. The lower the spread, the higher is
the market liquidity and vice versa. The depth of the market refers to the ability of the
market to handle transactions especially large ones without causing sharp changes in
prices, while resilience is about the speed the price fluctuations recover. The
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
18
measurement used is the market turnover/trade ratio, which is the ratio that measures
the annual transactions to outstanding stock or bond.
There was a noticeable improvement in the secondary market trading activities in
Namibia as reflected in the increased in volume traded, value of transfers recorded in
the Government Bond Register kept at the Bank of Namibia and trade ratio. The volume
of trades nearly tripled to N$1.8 billion in 2005 from N$576.9 million in 2004 and from
only N$12.1 million recorded in 1999. According to the turnover ratio based on exchange
trading data, the secondary market trading in the Government bonds had picked up
significantly since 2002, surging to 7.7 percent from a mere 0.6 percent in 1999. The
increased secondary market trading could be explained by the boom in the equity
market which prompted asset managers to buy bonds in order to balance their portfolio
as per internal investment guidelines. Other factors that explain the increase in
secondary market trading include favourable sovereign credit rating of BBB- assigned to
the country, increased the data coverage, participation by foreigners, and more
involvement by stock brokers.
Secondary trading of Government bonds as can be observed in Chart 1 is still
concentrated more in over-the-counter (OTC) market when compared to trading
activities through the NSX. The concentration of trades on OTC could be explained by
the high dealing charges, which include transaction levy to the stock exchange (NSX),
levy to the regulator and transfer secretary fees for all the dealings conducted via the
NSX. For an example, per each deal, a transaction levy of 10 percent of brokerage is
paid to the stock exchange and a levy of 0.04 percent of the total consideration to the
regulator.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
19
Chart 1 Secondary Market trading of Government Bonds - Namibia
-
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2003 2004 2005
Bill
ion
s
NSX OTC TOTAL TRANSFERS
Based only on the exchange trading data, the bond turnover ratio in the Government
bonds reached the highest of 31.9 percent during 2005 although it declined to 19.1
percent in 2006 (see Table 3). The direction of trading does not reflect any specially
preference towards either on-the-run or off the run issue. The secondary trading per
instrument seems to have been driven mainly by the preference of shorter maturity. The
most traded bonds are the ones with shorter tenor, while the least traded are the ones
with longer tenor such as the GC24, maturing in 2024. The long dated instruments such
as the GC24 are mainly demanded by institutional investors who mainly need these
assets to match their long term liabilities, and normally obtain these assets primarily from
the primary market. The attitude of buy and hold is highly prevalent in this sector as
institutional investors do not buy these assets to trade.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
20
Table 3 Bond Turnover Ratio
Bonds Debt outstanding (N$ million)
Annual Secondary Trades (N$ million)
Turnover Ratio (Trades reported /debt outstanding)
1999 1932.9 12.1 0.6% 2000 2168.7 17.3 0.8% 2001 2695.1 24.0 0.9% 2002 3017.5 231.4 7.7% 2003 3527.3 475.1 13.5% 2004 4831.5 576.9 11.9% 2005 5727.0 1826.4 31.9% 2006 6737.8 1288.6 19.1%
Source: NSX and BoN �
The transfer of Government bonds has also been on the rise since 2001. It increased
from N$343.5 million (USD50 mio) in 2001 to N$2.4 billion (USD332 mio) in 2006 (Chart
2). As expected this is reflecting the rise in trading of Government bonds traded on the
NSX.
Chart 2 Direct secondary transfers at Bank of Namibia
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T. Ndove: Technical Paper – Namibia Government Debt Securities Market
21
Despite the increase in secondary market trading for Government debt securities, the
attitude of buy and hold is still prevalent in the market and is attributed to the low supply
of debt papers especially from the Government due to reduced financing needs for
2006/07 – 2007/08 financial years.
Although there is a notable increase in secondary trades, it is still not able to generate
sufficient liquidity. With a low turnover ratio averaging around 10.0 percent from 1999 to
2006, it is not significant and not even close to covering half of the amount outstanding
of Government bonds. The illiquidity of Namibian Government debt securities may be
put into by perspective by comparing it with the turnover of South Africa. The market
turnover for Government debt securities in South Africa country amounted to 8.1 trillion
Rand during 2005, covering the amount outstanding of bonds by 18.9 times. The total
trades at the Bond Exchange of South Africa (BESA), amounted to 298 000 during the
2005 as opposed to a mere 150 trades in the case of Namibia, leaving 100 zero trading
days in a possible 247 trading days. It is, thus, clear that despite the rise in secondary
trades and transfers of Government bonds, a lot still need to be done by the
Government/BoN to enhance the desired level of liquidity in the market.
2.5 Government Bond Types
By 1998, 13 Government Internal Registered Stocks with various maturities and coupon
rates were issued, but secondary trading was sporadic. In order to lengthen their
maturity structure, enhance their liquidity and create local benchmark instruments, most
of these bonds were consolidated in 1998 into three major bonds namely GC02, GC05
and GC10 maturing in 2002, 2005 and 2010, respectively. In April 2002, the Government
issued GC07 and GC15 due in 2007 and 2015, respectively. During 2004 and 2005, the
Government added another three bonds on its portfolio in the form of GC08, GC12 and
GC24, respectively. Additional bonds are issued primarily to cover existing gap between
the instrument already in issue .i.e. GC12 to cover the gap between GC10 and GC15.
Furthermore, the government also wants to ensure that they make available benchmark
bonds in all major maturity sectors in order to provide investment avenues for investors
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
22
in those sectors and provide price reference for private sector bonds with similar
maturities. Currently the Government has six bonds in issue (Table 4).
Table 4 Internal Registered Stocks (IRS) /Bonds
IRS
GC07
GC08
GC10
GC12
GC15
GC24
First issued
date
April 2002
Dec 2004
May 1998
21 July
2005
April 2002
Aug 2004
Maturity date
July 2007
15 July 2008
Jan 2010
15 October
2012
April 2015
15 Oct 2024
Coupon rate
12.50%
8.5%
12.0%
10.5%
13.0%
10.5%
Coupon dates
15 Jan,
15 Jul
15 Jan,
15 July
15 Jan,
15 Jul
15 Apr,
15 Oct
15 Apr,
15 Oct
15 April,
15 Oct
RSA
benchmark
R194
R194
R153
R153
R157
R186
Source: BoN
2.6 The Size of the Bond Market Domestic debt forms the largest part of Government’s debt portfolio. The amount
outstanding in Government internal registered stock (IRS) has been increasing steadily
since the first stock was issued in 1992. IRS increased from N$50 million (USD 7 mio)
or 0.3 percent of GDP in 1992 to N$6.7 billion (USD 930 mio) or 16 percent to GDP by
end of December 2006 (Chart 3 and Table 5). The Government total domestic debt,
including treasury bills and bonds increased steadily after Independence from nothing at
the end of 1991 to 26.3 percent of GDP by end of 2006. The sharp increase in the
domestic debt to GDP ratio has raised many concerns about sustainability.5 Another
issue of concern has been the very short maturity of most of government domestic debt.
This situation has, however changed in the mean time as Government successfully
5 The study undertaken to determine debt sustainability concluded that both domestic and external debt are
sustainable, refers to “Central Government Debt Sustainability” by Zaaruka, Ndove and Tjipe (2004).
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
23
switch most of it debt from shorter term to longer term instruments. Government’s
foreign debt stock has remained more or less stable since Independence. As a
percentage of GDP, foreign debt increased slightly from 5.4 percent of GDP in 1992/93
to 6.0 percent in 2006. Virtually all foreign loans acquired by the central Government are
used only to finance capital projects.
Chart 3 IRS Outstanding (N$ million)
The total bond market in Namibia stood at N$7.6 billion by end of December 2006, with
Government accounting for 81.4 percent of the total fixed income in the country. The
Namibian commercial banks contributed around 10 percent of the outstanding stock,
while 8.8 percent is taken up by the state owned enterprises (SOEs).
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
24
Table 5: Government Domestic Debt (N$ Million)
T-Bill As % of Total Bond As % of
Total Total 1991 20.0 100.0 - - 20.0 1992 145.0 74.4 50.0 25.6 195.0 1993 265.0 38.7 419.4 61.3 684.4 1994 262.7 30.6 597.0 69.4 859.7 1995 420.0 33.3 842.0 66.7 1,262.0 1996 992.1 48.7 1,044.6 51.3 2,036.7 1997 1,678.1 58.1 1,212.0 41.9 2,890.1 1998 1,888.3 50.1 1,878.3 49.9 3,766.6 1999 2,430.7 55.7 1,932.9 44.3 4,363.6 2000 2,640.0 54.9 2,168.7 45.1 4,808.7 2001 2,799.7 51.0 2,695.1 49.0 5,494.8 2002 3,516.2 53.8 3,017.5 46.2 6,533.7 2003 4,841.2 57.9 3,527.3 42.1 8,368.5 2004 5,841.5 54.7 4,831.5 45.3 10,673.0
2005 5,117.0 47.2 5,727.0 52.8 10,844.0 2006 4,375.0 40.0 6,577.8 60.0 10,952.9
2.7 Benchmarks
The South African Government securities act as benchmarks to the Government of
Namibia securities as illustrated in Table 4. The Government bonds issued in the
domestic market also serve as benchmarks for various investors in the local market, and
facilitate pricing of corporate bonds and other fixed income securities. However, the
Government securities have not yet established an official yield curve. The average
spread between the Namibian Government bonds and South African Government
benchmark bonds narrowed during December 2006 to 140 basis points from 190 basis
points during the same period of 2005 (Chart 4). This observation is more evident in the
GC15 as the spread narrowed from the high of 200 basis points recorded in December
2005 to 130 basis points in December 2006. The narrowing spreads benefited from a
favourable sovereign long term foreign currency credit ratings of BBB-, allowing
investors to reduce the credit risk for Namibian bonds.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
25
Chart 4 Spreads between IRS and Benchmark bonds (2005-06)
Source: BoN
The IMF recently suggested that the country should consider seriously establishing its
own benchmark bonds. Having own benchmarks should be a dream for any country
planning to develop its capital markets and not an exception for Namibia either.
2.8 Investor Base for Government Securities
Generally, the investor base for developed domestic debt markets include commercial
banks, mutual funds, and contractual savings institutions such as pension funds and
insurance companies investing in government securities. This is not the case for many
emerging markets economies (EMEs). Namibia, however, has well established
institutional investors, such as pension funds and insurance companies. Although
Namibia has a well established pension funds and insurance companies, banks
somehow are the largest investors of government papers, holding normally these
securities for liquid asset requirements.
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
26
Institutional Investors
According to t the IMF (2004), the establishment of local pension funds has made a
particularly important contribution to the development of local securities’ markets in Latin
America and Central Europe, and their role is beginning to be felt in some of the Asian
markets. It emphasized that the establishment of the pension funds are necessary for
the development of the local securities markets and, therefore, it is necessary to have
them in any country that wants to establish a successful securities’ market. Namibia’s
ratio of pension assets to GDP in 2001 was estimated at 60 percent and if include life
insurance, short-term insurance, unit trusts and other funds it amounted to 80 percent of
GDP. As can be observed in Chart 5, the pension assets for as a percentage of GDP are
one of the highest in the world making it a potential market for the development of
Government securities.
Chart 5 Pension Assets as % of GDP
87.3
69.0
60.0
58.2
43.0
41.8
32.6
31.6
20.0
0.2
0.0 20.0 40.0 60.0 80.0 100.0
Netherlands
South Africa
Namibia
United States
Canada
Japan
Sweden
Australia
Botswana
Maxico
Source: Namibia Economic Policy Research Unit
Background of Pension Funds and Insurance Companies
According to the IMF (2006) the systematic pension reforms in Namibia are different
from developing countries. The contractual savings in Namibia are not only well
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
27
developed in terms of assets under management (AUM), however, its development also
reached critical mass necessary to have a large impact on local market development.
This level of maturity has been reached before independence in 1990. The IMF further
indicated that the only difference between Namibia and most developed and developing
countries is the lack of investing much of AUM in the local markets. About 65 percent of
AUM is invested in foreign assets, similar only to the case of Hong Kong that traditionally
invested 65 percent of its assets in foreign currency to mitigate currency risk under the
pegged exchange rate. In the case of Namibia, the rationale for most of assets invested
outside the country could be explained primarily by the country’s membership to CMA
that eliminates currency risk and close economic links between Namibia and South
Africa. The lack of investment opportunities in the local market has been cited as
another reason for this situation.
The growth of AUM for the pension funds and the insurance sector could be explained
by developments which happened before independence. As one of the few positive
developments from the previous dispensation, the mining companies had put strong
emphasis on protecting and securing retirement income for their employees. This
benefited tremendously the pension funds and insurance companies. In addition, the
civil servants were also covered by a funded pension scheme. After independence, the
vibrant growth of the economy resulted in the emergence of new and larger private
companies which together with an expanded civil service boosted the AUM of pension
funds and insurance companies.
2.9 Composition of T-bills and Bonds
Over the past years, the composition and structure of domestic debt has changed. The
government borrowing strategy which offered more longer dated government securities
and less short-term debt securities over the past two years continued in recent years.
The composition skewed towards the short end of the yield curve has a potential to
cause cash flow problems and a rollover risk for the Government. Therefore, the
borrowing plans of 2005/06 and 2006/07 fiscal years aimed at reducing the proportion of
treasury bills in favour of the bonds. By end of the fiscal year 2006/07, the Central
Government plan to increase the share of bonds as a percentage of total domestic debt
to 63.0 percent from 56.0 percent during the end of 2005/06. During December 2006,
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
28
with still three months to go before the end of the financial year, the target is anticipated
to be attained smoothly.
Government’s commitment to reduce short-term debt is reflected in the contraction of
treasury bills issued during 2006, declining by 14.5 percent in comparison to the stock
outstanding by end of December 2005 (Chart 6).
Chart 6 Total debt in securities: 2005 and 2006 (N$ million)
0
2,000
4,000
6,000
8,000
10,000
12,000
TB'S IRS TOTAL DEBT2005 2006
As expected, the bonds moved in the opposite direction, rising by 14.9 percent over the
same period.
Government’s fiscal position had improved during the 2006/07 financial year. This
improved fiscal position had an effect on the borrowing requirements for the government.
Consequently, the budget surplus anticipated for 2006/07 financial year led to a low
supply of Government domestic debt securities during the period.
2.10 Strategy for Redeeming Maturing Bonds
In order to ensure a smooth redemption of maturing bonds, a two pronged strategy is
pursued, consisting of Switch Auctions and the establishment an Internal Registered
Stock Redemption Account or Sinking Fund. Under the first strategy, a portion of bonds
was switched into other bonds prior to the maturity of the bond, thus reducing the
outstanding balance. The second strategy entailed the establishment of a Sinking Fund
as a provision to redeem the bond at maturity as it was assumed that some holders
T. Ndove: Technical Paper – Namibia Government Debt Securities Market
29
would opt not to rollover their holdings into other bonds, but rather receive cash. The
funds for the Sinking Fund were raised through primary auctions and were invested with
local banking institutions. This two-pronged strategy proved to be successful as the
GC05 was redeemed without any difficulties. Funds are also put aside for the upcoming
maturities of the GC07 and GC08, maturing in 2007 and 2008.
The funds on the Sinking Fund are raised by means of Internal Registered Stocks’
primary auctions, whereby 50 percent of the proceeds from each auction will be
transferred to this account. In addition, Government can also transfer excess funds from
State Revenue Fund at any point as circumstances allow. The commitment was also
made that by the end of each fiscal year that the excess balance of over N$250.0 million
should be transferred to this account. So far, the accumulation of funds on IRSRA
exceeded the expectations, with over N$1.8 billion collected by the end of January 2007.
These funds are invested with local banking institutions, earning competitive rates.
2.11 Safe and Timely Title Registration, Transfer and Settlement
Significant milestones in the payment system reform process have already been
achieved, such as the establishment of the real-time gross settlement (RTGS) system
and the setting up of an electronic clearing house. A further payment system reform took
place, namely the cheque clearing and settlement system. The cheque processing
reform was necessitated by the need to improve payment services offered to Namibian
customers through the establishment of a common cheque processing platform and
standards for the banking industry. In this regard, the Namibian banking institutions had
implemented a multi-bank electronic Cheque Processing System (CPS) during 2005.
The CPS entailed the setting up of a shared, centralised and interlinked infrastructure for
the electronic code-line clearing of cheques.
Despite the reform in the Namibia payment and clearing system, there are some
shortcomings observed with regards to debt securities. There is no integral and
simultaneous process for transferring securities from sellers to buyers and for the
settlement of transactions. Transfer of securities ownership takes place at the Bank of
Namibia, while payments are arranged between parties to the transactions. Thus, the
T. Ndove: Technical Paper – Government Debt Securities Market
30
parties to a deal are still subject to default risk or settlement risk of their respective
counterpart. A Book Entry System exists for treasury bills. The objective of the book
entry system is to provide participants in the market for Government securities with a
format for holding securities electronically without physically holding certificates that is
dematerializing the securities. However, the current legislation (State Finance Act) does
not recognize the scriptless issue of IRS securities. Thus, IRS are still issued in
certificates. The process of secondary market transfer remains cumbersome, with
parties involved in a transaction having to apply for a transfer and bring in old certificates
and exchange them for new certificates. As mentioned above, the risk of issuing
certificates to a person not making payments exists. This could threaten market
credibility
2.12 Tax Treatment of Government papers and Other Client Costs
Section (16)(1)(l) of the Namibian Income Tax Act no. 24 of 1981 exempts interest
income, received by or accrued to any person (other than a company) or any external
company not carrying on business in Namibia, from TBs and IRS issued by the
Government or any representative authority or local authority in Namibia. Capital gains
are usually not taxable. However, should a taxpayer’s activity of making capital gains be
of such a nature that it can be construed as trading, it may be taxable. Determination of
the taxability of capital gains should, therefore, be referred to Inland Revenue.
Table 6 Dealing Charges on Bonds
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���������������������
��� ���!�����"�#� �$ �
%�!&����������� �$ �
'�����&(�����)� ��$ �
��������&(������� ��� �$ �
����������������� ��� $ �
*+������������������������
,���� ��$ �
The bond charges include the brokerage rates that consist of a transaction levy of 10
percent for brokerage, which is paid to the stock exchange. The regulator levy includes
T. Ndove: Technical Paper – Government Debt Securities Market
31
0.04 percent of the total consideration amount. As displayed in Table 6, the charges for
bonds ranges from 0.030 percent for the transaction above N$ million to 0.065 percent
for up to N$100,000. There is also a value added tax of 15 percent on transfer secretary
fees.
Box 1 Credit Rating and Impacts on Government Bonds In recent years, the demand for sovereign credit rating has gained momentum as more
Governments, public institutions and the private sector have intended to access
international markets to borrow in foreign currencies. The task of a credit rating agency
is to assess the ability of the Government to service its foreign loans and show a
willingness to generate the foreign exchange necessary to meet its obligations. A credit
rating enables many Governments, some with a prior history of debt defaults, to gain
access to international markets. This means that a sovereign rating is most crucial for
the whole country even if the Government itself may not want to access the international
financial markets.
To gain access to international capital markets and attract foreign capital, the
Government of the Republic of Namibia obtained a credit rating in 2005 which was re-
affirmed in 2006 by the FitchRatings Agency. The aim of the rating exercise was to
determine the credit worthiness of the Government, which could then serve as a
benchmark for others in the private sector. Any rating has impact on the entire bond
market in the country. A good rating has positive spin offs as it provides impetus to the
establishment of bond market that encourages more participation from investors,
including foreign investors. A bad rating might impact negatively on the bond market.
However, it is a good thing to provide investors with unbiased and objective opinion of
the relative risk of the issue.
Rating Outcome
FitchRatings Agency assigned Namibia an investment grade of BBB- to long-term
foreign currency rating and a BBB for the long-term local currency rating to Namibia.
Namibia currently has the fourth best rating in Africa after Botswana, South Africa and
Tunisia, among the countries which have been rated. Namibia’s rating peers include
India and Croatia. The rating was underpinned by a stable policy environment and
T. Ndove: Technical Paper – Government Debt Securities Market
32
sound macro-economic fundamentals, – a low public and external debt, high domestic
savings and current account surpluses, macro-economic stability and a relatively robust
growth. The country has the advantage of an abundance of mineral resources which
have been well managed and is politically stable, which further supported the ratings.
Prudent management of public finances has resulted in a low public debt burden, which
at 31.7 percent of the GDP at the end of 2006 is slightly better comparing with countries
in the same grade. The country has high domestic savings, and sustained current
account surpluses, which have resulted in low overall external debt. Growth has been
relatively robust, underpinned by value-added enhancing investment and the expansion
of a natural resource output. The country also rapidly accumulated reserves, reaching
the highest level of around USD1.0 billion during March 2007.
The key weakness identified by the rating agency relates to persistent capital outflows to
South Africa, owing to insufficient of domestic investment opportunities in Namibia for its
sizeable domestic savings. Other issues relate to the heavy reliance of the economy on
the primary sector, which accounts for 20 percent of the GDP and 60 percent of income
from exports, leaving it vulnerable to external shocks, the cautious approach to structural
reforms and a “weak administrative capacity”. Social challenges including a high income
inequality, land reform, HIV/Aids and high unemployment, are tougher problems than
those faced by its rating peers.
. Improvements in creditworthiness will hinge on structural reforms to strengthen
domestic investment opportunities and on a deepening of the domestic capital market.
These will strengthen the ability of the Government to deploy savings domestically and
thus help to reduce capital outflows and build reserves. The ratings which Namibia has
obtained in the different categories, as well as the overall ratings of peer countries, are
summarized below.
Impacts of Rating on Capital Markets
The Credit Rating Agencies (CRAs) have been seen by many markets participants as
having a strong impact on both the costs of funding and the willingness of major
institutional investors to hold certain types of instruments. In many countries, sovereign
credit rating is frequently seen as a ‘must have’ for issuing bonds, especially in the Euro
T. Ndove: Technical Paper – Government Debt Securities Market
33
Zone (Moody’s). This rating is expected to have positive spin-offs on the economy of the
country, particularly on the bond and equity markets and on the flows from foreign direct
investment. The effects of the rating on the cost of borrowing are reflected in the
narrowing spreads between Namibian yields and counterpart benchmarks in South
Africa as portrayed in the chart 4.
T. Ndove: Technical Paper – Government Debt Securities Market
34
3. MEASURES TAKEN TO DEVELOP NAMIBIA CAPITAL MARKETS
After independence, the Bank of Namibia and the Ministry of Finance, in conjunction with
market participants, had continued looking into various market development efforts to
improve the domestic financial markets in the country. Measures to develop the financial
markets include the introduction of local investment requirement, membership to CMA,
Sovereign Debt Management Strategy, proposal for market making and the
establishment of the Namibian Bond Association, among others.
a. Introduction of Local Investment requirements/Regulation 28
The local investment requirements was introduced to retain some of excess savings
generated by the economy and to slow down capital outflows to the more sophisticated
markets in South Africa. This regulation is applicable only to the pension funds and
insurance companies since they account for larger outflows to South Africa. It requires
them to invest at least 35 percent of their total assets in the domestic assets. The
outflows which amounted to US$1 billion during 2006 has a negative implications on the
official Rand reserves for the country since when the commercial banks are taking the
funds out they come to the central bank, net purchasing the Rand which form part of the
country’s foreign exchange reserves. Reserves are also used to provide the cover for
the Namibia Dollar in circulation according to the Common Monetary Area (CMA)
agreement.
As a result of the introduction of captive funding, Namibia saw the development of the
domestic debt markets taking shape. This is reflected in the emergence of the stock
exchange, unit trusts, stock broking firms and the asset management industry. However,
as indicated previously, these practices have been done away with in most countries
since it is found to be a stumbling block to financial market developments. The onus is
thus upon the Namibian authorities to develop a vibrant financial markets and gradual
remove the captive funding.
T. Ndove: Technical Paper – Government Debt Securities Market
35
b. CMA Agreement To maintain confidence and monetary stability in the economy, the Namibian
Government deliberately assumed membership in the CMA to which South Africa,
Lesotho and Swaziland are also parties. Participation in the CMA was envisaged to
enhance fiscal, exchange rate and monetary stability, which create favorable conditions
for capital market development. This agreement entails pegging the local currency to
the Rand on a one-to-one basis where the Rand circulates in CMA area as a legal
tender, forming the exchange control regime where exchange control policies are
harmonized, and allowing free flow of capital among member countries. By joining the
CMA arrangement, the Namibian authorities chose to align themselves with the
monetary policy of the South African monetary authority.
Namibia’s membership to CMA is, however, associated with a number of challenges that
threatens the development of the local money and capital markets. The subscription to
the CMA has limited the Bank of Namibia’s ability to fully conduct independent monetary
operations, because local institutions hardly seek and obtain accommodation from the
Bank of Namibia. In fact, they often surpass it to obtain accommodation from the parent
banks in South Africa and also place their excess funds elsewhere. This is evident in
the daily outflow of commercial banks’ excess funds to RSA and inflows from that
country to cover their daily long and short positions.
However, it is important to note that the benefits generated from this arrangement
despite the challenges far outweigh the cost. For an example, the CMA arrangement
brings monetary and foreign exchange stability. It is convenient for Namibia to have the
Rand as a legal tender in a sense that most of its cross-border transactions take place in
Rand. Moreover, South Africa compensates Namibia for lost seigniorage for the Rand
circulating in Namibia.
T. Ndove: Technical Paper – Government Debt Securities Market
36
Box 2 Implications of the CMA Arrangement on Capital Markets
The CMA arrangement allows for the free movement of capital among the CMA member
states. The outflow of funds to South Africa is more pronounced in Namibia, primarily
because the country has one of the highest saving ratio6 in Africa and having more
South African financial institutions (Namibia was part of South Africa until 1990) than
other members of the monetary union.
The CMA arrangement makes provision for member countries to impose measures in
order to promote local industries with a view to ensure equitable development within the
region. In Namibia, the capital outflows to South Africa on daily basis are in the form of
pension funds, life insurance and unit trusts. These outflows deprive the country much
needed funds for investments.
Recently, a number of concerns have been raised with regard to funds managed by Unit
Trust flowing out of Namibia to South Africa. Unit Trust funds are not subjected to the
domestic asset requirement of 35 percent. The Government introduced local investment
requirements applicable to insurance companies and pension funds to invest 35 percent
of their total assets in domestic assets7. The objective is to retain funds that go out of the
country in the form of contractual savings and make such funds available for domestic
investments. The Unit Trust industry has grown at a tremendous pace over the past five
years and recently money market unit trust funds became popular.
As a result, the Cabinet of Namibia reviewed the previous measures and approved new
measures to slowdown capital outflows. Although the domestic investment requirement
of 35 percent, have contributed to the growth of NSX, the impact of the requirement in
terms retaining national saving in Namibia has not been effective. This is the reason why
the Cabinet reviewed the measures again and adopted new ones.
6 As of 2003, the saving ratio represented about 35% to GDP 7 Regulation 143 under the Short-term Insurance Act no. 4/1998 and Regulation 145 under the Long-term
Insurance Act no. 5/1998, replacing Regulation 34 under the Insurance Act no. 27/1943 (as amended in no.
59/1995); Regulation 28 under the Pension Fund Act no. 24/1956 (as amended in no. 103/1994).
T. Ndove: Technical Paper – Government Debt Securities Market
37
The new redefined measures, among others, include the legislation to subject unit trust
management companies to domestic assets requirements of 35 percent as well as
withdraw the tax-free status of returns on unit trust. The institutional investors are also
required to invest up to 5 percent in unlisted securities. The percentage of investment in
dual listed companies that qualifies as domestic investment is reduced to 10 percent
over five years. The introduction of these measures is based on the fact that these
investors hold the largest funds in Namibia.
Empirical evidence shows that only 10 percent of pension funds’ assets can be classified
as true Namibian asset if dual-listed shares and cash placed on deposit at local
commercial banks are excluded from these portfolios (see Nepru 2002). The same study
also found that less then 5 percent of the 35 per cent Namibian portfolio consists of local
equity. The implication here is that only 20 per cent of the total assets of the pension
funds and life insurers are truly Namibian, the rest is invested in dual-listed companies.
A related concern is the tax-free status of the income derived from money market unit
trusts. Generally, income from unit trust funds are not subject to tax as this income come
in a form of dividends that are tax exempted. It is argued that much of the income of the
money market unit trusts is derived from interest income, which is subject to income tax.
Therefore, income earned from money market unit trust activities should be taxable.
International Experience
The international experience on capital controls tells us that with the advent of
globalisation and financial liberalisation, major capital markets in the developed and
developing countries have become free from restrictions on the flow of capital. This was
mainly because it was felt that capital controls are anyway ineffective8 in retaining capital
when economic and or political indicators of one country signal financial or political
problems in the near future.
However, in practice, by the end of 1999, 147 countries out of total of 185 had controls
on directed investment, 125 countries controlled transactions with capital market
8 In fact, it has become clear that capital controls used so far are easy to evade, costly, complex and obscure and supported by large and rigid administrations which lend themselves to corruption (R Schmidt, 2000).
T. Ndove: Technical Paper – Government Debt Securities Market
38
securities, 110 countries controlled trade in money market instruments; still 108
countries regulated commercial credits (see IMF Report on Exchange Rate
Arrangements and Exchange Rate Restrictions for 2000). This implies that there is a
paradox between the use of capital controls in practice and in theory. This is so
because although it is not recommended as a good policy prescription in theory, in
practice quite a number of countries have used it and are still using it.
During the Asian financial crisis in 1997 and subsequent crises in Latin America and
Russia, the debate on capital controls resurfaced again. It has evidently become clear
that short term capital was very unstable and the sudden reversal of it was perceived as
having exacerbated the crisis. Against this background, the G7 countries acknowledged
recently the use of capital control in retaining capital outflows (Economist, 1999). It is
argued that capital controls might be beneficial for developing countries where
international capital is very mobile and financial markets are under-developed or in some
cases non-existent.
The latest study by the (IMF 2006) on capital controls argued against their introduction
as they are found to have large costs to the economy in terms of efficiency losses, less
market discipline and reduce capital flows. Despite the fact that the countries are able
create demand for the Government debt papers in the short term the long term effects
hampers the modernization of the financial markets.
c. Liquid asset requirements
Liquid asset requirement compels banking institutions to keep 10 percent of their
liabilities in cash, Government securities and parastatals’ papers guaranteed by the
Government. The primary aim is to satisfy sound banking practices, while the secondary
aim is to assist in developing local capital markets by encouraging the demand for local
financial assets.
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(d) Sovereign Debt Management Strategy (SDMS)
In the CMA region, only Namibia and South Africa have adopted comprehensive
Sovereign Debt Management Strategies (SDMS), designed to ensure that the national
debt remains both affordable and low risk. The SDMS for Namibia is based on
international best practices, adapted for Namibia’s specific needs and circumstances.
The objective of sovereign debt management in Namibia is to minimise the cost of
government borrowing, consistent with an acceptable degree of risk. This strategy
document intends to serve as an action plan for managing the costs and risks
associated with Namibia’s sovereign debt.
This strategic plan adopts a set of strategic debt management benchmarks based on the
asset and liability management (ALM) approach. Achieving these benchmarks involve
some challenges, in particular, need to reduce the short-term debt and improve liquidity
at the longer end of the domestic debt market. The strategy document identifies areas
for improvement in existing debt management processes in Namibia, based on a review
of international best practice. It proposes strategies to help improve debt management
effectiveness in the following areas:
• institutional and legal framework
• debt management office
• use of strategic benchmarks
• domestic debt markets
With regard to the institutional and legal framework, the document makes two main
proposals. Firstly, there should be clear and transparent guidelines on Government
guarantees, on-lending agreements, and for borrowing by central government and
parastatals. Secondly, existing debt management committees should be re-organised to
improve efficiency and strengthen accountability.
The document recommends restructuring the debt management office according to
international best practice. It proposes establishing a front office, a middle office and a
back office. The front office is responsible for issuing government securities, conducting
loan negotiations, and working with the Bank of Namibia to develop the domestic debt
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market. The middle office is in charge of risk management and analysis. The back office
is tasked with the maintenance of detailed records of all government debt transactions.
Implementing the new structure requires that qualified and experienced financial experts
are recruited at senior levels in the cash and debt management (CDM) division.
The document also recommends adopting a set of strategic debt management
benchmarks. As quantitative measures, benchmarks encourage a more disciplined
approach to debt management, improving transparency and accountability. The
document proposes twelve provisional benchmarks covering a range of debt
sustainability, cost and risk indicators. The benchmarks are Namibia specific and
consistent with the internationally accepted asset and liability management (ALM)
approach to debt management.
(e) Introduction of Market Making
The possibility of introducing market making for Government securities was one of the
recommendations made at the Namibian Bond Market Symposium hosted by BoN
during 2004. During 2005, the Bank of Namibia conducted a survey among market
participants to obtain their views on the feasibility of market making in the Internal
Registered Stock or bonds of the Government of the Republic of Namibia. The response
was that there was a definite need for market making, to stimulate liquidity and improve
the pricing of Government as the case in South Africa, which also has a similar system.
A number of market participants had, indicated a willingness to play a role in market
making. The Bank finalized a study on the feasibility of market making in Government
debt securities. Other countries’ experiences have been studied and the bank will follow
the best practices to introduce the primary-dealership system in a manner that will best
fulfill the objective of money and capital market development. The proposal for the
introduction of market making in Government debt securities has been approved by the
Ministry of Finance and will be implemented during 2008/09 when Government is
expected to run a budget deficit. In the current fiscal year, it is not possible to implement
market making due to the low financing needs for the Government.
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(f) Interactive webpage for secondary bond trading
Another effort that the bank made to enhance efficiency and liquidity in the bond market
in Namibia during 2006 was the launching of the Secondary Bond Market Website. The
Secondary Bond Market Website was created to enhance pricing transparency in
Government, semi-Government institutions and corporate bonds. The website is not a
trading platform, but rather an electronic forum for market participants to indicate their
intentions to transact and obtain information about current market activities in all bonds.
Participants submit their bid and offer prices with an intention that interested parties
would call them up to initiate a trade with them. Once a trade is concluded the seller
updates the site with the yield to maturity at which the trade was concluded. In so doing
a reliable database is created capturing all reported deals.
Furthermore, registered users also submit their bids and offer prices thus creating a
platform were buyers and sellers can meet. Overall, the website provides information
about current market activities and is expected to create a reliable database especially
for OTC deals.
All commercial banks and Stock Brokers, as well as the NSX are registered users of the
website. The support for the website from the market is overwhelming as indicated in
number of deals and hits recorded since its launch in mid May 2006.
(g) The formation of the Namibia Bond Association
The Namibian Bond Association (NBA) was established during 2006, an association not
for gain with the authority to advice and determine the development of the market. NBA
is critical in the further development of a formal bond market in Namibia. This body is
working towards a clear framework to ensure equitable, smooth functioning and
transparent markets, investor protection and secure settlement environment. The NBA
covers representatives of the financial market industry that are involved in the bond
market. Among the members are the Bank of Namibia, commercial banks, issuers,
brokers, Namibian Stock Exchange, custody services, investors, and the Namibian
Financial Institutions Supervisory Authority (NAMFISA), just to mention a few. The NBA
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draws a lot from the Bond Exchange of South Africa (BESA) and BESA pledged its
cooperation to assist further development of the bond market in Namibia.
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4. IMPEDIMENTS TO THE DEVELOPMENT OF GOVERNMENT SECURITIES’
MARKET IN NAMIBIA
Although the local Namibian bond market has expanded considerably from its infant
stage in 1992, a lot of challenges still remain. Although the local bond market has grown
significant compared to level at independence, a lot is still has to be improved upon in
terms of liquidity, transparency, efficient market trading and infrastructure, number and
size of bonds in the local market. The limited market development is attributed to lack of
active trading, limited supply of bonds, lack of skills, capital outflows and diversity in the
market. These challenges are being elaborated on in more detail in subsequent
paragraphs.
Current Challenges
1. Liquidity9
The Namibian capital market is quite developed in terms of existing infrastructure, but a
number of challenges have remained. For example, there is a need to activate
secondary market trading and improve market liquidity. Although trading activities on
the stock exchange have been rising in recent years, the ratio of bonds traded to
amounts of bond outstanding is still very low.
Lack of liquidity can amongst others be attributed to:
� Domination by large institutional investors who have taken a buy and hold attitude
following large demand for Namibian financial assets.
� Limited number of issuers and narrow range of instruments available in the local
capital market.
� High dealing charges and other client costs are disincentive to secondary market
trading and thus, contribute to lack of liquidity.
9 Liquidity is a measure of ease with which bonds can be traded in the secondary market. It is measured by
the ratio of value traded in bonds to market capitalization or the market value of bonds in issue.
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2. Transparent and Efficient Trading System
While most of the bonds issued in Namibia are listed on the Namibian Stock Exchange
(NSX), trading remains sporadic and the market is generally illiquid. In addition, there is
said to be high volumes of bonds traded over-the-counter. This segregate the market
such that there are neither transparent price indications in the market nor full information
on volumes and values traded in the market. For this reason, the market has no access
to continuous access to historic and live market information.
3. Shortage of Skills
Most of the bonds in Namibia are said to be part of passive portfolios and are held to
maturity. It is widely believed that one of the reasons for holding bonds in that way is
due to lack of market skills and as a result these bonds are managed from remote
centres where Namibian bonds are not a priority when it comes to trading. This situation
also contributes to lack of liquidity in the market.
4. Limited Supply of Bonds
The number and size of bonds available in the Namibian bond market are limited for
investment opportunities and liquid asset requirements of the commercial banks. This
situation has been exacerbated by the improved fiscal position of the Government, the
largest issuers in recent years, whilst at the same time potential corporate issuers are
more comfortable funding their financial needs with bank loans. This makes it difficult to
generate sufficient liquidity needed for secondary market trading, contributing to low
levels of liquidity in the market. This implies that a number of viable institutions and
companies should be encouraged to issue bonds in the market to increase the number
of available bonds. This would not only increase the diverse number of bonds issued but
may also improve liquidity in the market.
5. Foreign Participants
Currently there is said to be limited foreign participation in the Namibian bond market
which could introduce diversity in the market. Increasing the marketability of Namibian
financial assets could be a solution to attracting active foreign participation in the local
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bond market. Foreign participation is expected to pick up after the country obtained a
fovourable sovereign credit rating. This should encourage foreign investors to invest in
Namibian bond market and bring diverse views in the local market.
5. Capital Flows
Although the country has a high national saving rate that provides the base for
Government domestic securities market developments, the same savings find its way to
South Africa in form of capital outflows. South Africa financial markets are more
developed relative to the one of Namibia. The challenge facing Namibia is thus, to create
competitive markets to attract local savings to stay home. This is not an easy task given
the free movement of capital within the CMA. The market participants, however, are also
interested in a well developed domestic markets and their interest is demonstrated
through the creation of the Namibian Bond Association, which among others is aimed at
ensuring the equitable, smooth functioning and transparent markets.
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5. LITERATURE REVIEW
5.1 Case Studies of Selected Countries
The development of debt market is undeniable getting a lot of attention lately, especially
in developing countries. The cases of Slovenia, Poland, and South Africa are presented
here for Namibia and the rest of MEFMI region to draw from their invaluable insights and
experiences. The case studies are heavily drawn from the study undertaken by the IMF
(2002), focusing on steps taken by the countries to improve public debt management
practices in relation to the Guidelines for Public Debt Management. The case studies of
these countries were chosen based mainly on the path they have taken to develop their
markets and the commitment to source funds from the domestic markets. This is
relevant to the Namibia Government debt securities markets. The Governments for all
three countries chosen in the case studies commit to borrow domestically in order to
develop the local markets. This is the same commitment the Government of Namibia
undertook in order to develop the domestic debt markets. In addition, these countries
also introduced a primary dealer system to develop the Government debt securities
market and have also the debt office located in the MoF. These countries also tried to
access the international capital bonds to create diversify their borrowing sources, the
path Namibia already undertaken.
5.1 Slovenia
Background and Macroeconomic Conditions
Slovenia achieved independence in 1991, a year after the independence of Namibia.
The country experienced budget surpluses before 1997, however, had also been
characterized by hyperinflation. It was only in 1998 that treasury bills with maturities of 6
and 12 months were issued, denominated in local currency. Issuance of these
instruments before 1997 was infrequent due to the surplus recorded on the fiscal
position of the Government and they were indexed to inflation given the hyperinflation in
the economy.
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Borrowing operations started in the domestic market through short-term borrowing to
manage liquidity, with first Eurobond issue in the Euro market in 1996 and the issuance
of inflation-indexed bonds in 1997. Slovenia experienced budget surpluses before 1997
when small budget deficits emerged. The main objective was to develop a domestic
market primarily using bonds to finance the deficit. Developing the domestic market for
debt became very important for Slovenia in order to ensure timely financing in domestic
currency and minimize risk associated with financing the budget deficit with external
debt. The domestic debt market has been growing and recently the authorities allowed
undertaking of active debt management operations to reduce the overall cost of the
portfolio. Improvement on issues such as tradability of instruments, building of a yield
curve and transparency are given priority with a view to deepen and enhance liquidity of
the secondary market.
Developing a Sound Governance and Institutional Framework
The objectives for debt management in Slovenia are: (a) to minimize the borrowing costs
over the long term with the maturity structure which ensures a sustainable level of risk in
refinancing the debt; and (b) to create a currency and interest rate structure that
minimizes the exposure to exchange rate, interest rate and other risks.
During 1998, Slovenia introduced for the first time, an annual borrowing program of
financing the Government budget deficit, stating among others, strategic and operational
objectives and the targets. The annual financing or borrowing program indicates amount
to be financed the source of financing, the choice of the market, the period whether
short-term or long-term. The strategic objectives identified includes the provision of
sufficient and timely financing of the budget, cost minimization, maximum reliance on
financing in the domestic market, broadening the domestic and foreign investors’ base,
and foreign currency risk, just to mention a few. The operational objectives comprises of
review of the mix between short-term versus long-term, foreign borrowing against
domestic, floating versus fixed interest rates.
Institutional Framework
The Ministry of Finance is exclusively responsible for issues relating to borrowing and
debt management on behalf of the Central Government. These responsibilities are
clearly stated in the in the Public Finance Act. Within MoF, there are three departments
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responsible for debt management, namely, international, liquidity management and
public debt management. The international department is tasked with sourcing funding
from international financial institutions, liquidity management department for contracting
and managing short-term domestic debt and cash management. The public debt
management department (PDMD) is tasked with the execution of the annual borrowing
program and managing central government debt. This department also provide back
office functions and short-term projections on debt service for budgetary and liquidity
management uses. The PDMD within the Treasury also exercises central administrative
and control functions over debt of public sector entities, whose debt are contingent
liabilities of the Central Government. PDMD is also tasked to interact with the rating
agencies and provide them with all information required. As a core department, PDMD,
approves and monitor all public sector borrowing and government guarantees entered
into by the Minister of Finance.
The three departments responsible for debt management co-ordinate issues among
themselves and share information on regular basis and communicate in various forms
such as through internal committees, and common work. In a view of proper co-
ordination, MoF is contemplating the idea of establishing a separate debt office
responsible with all issue related to the debt management. It can be an independent
office or within the ministry. This separation will enable the centralization of borrowing
and debt management operations, increase responsibility for the executions of
operations, establishment of clear and measurable debt management goals, isolation of
debt management functions from political interference and simplify procedures for
provision necessary resources.
Co-ordination of Monetary and Fiscal Policies
There should be proper co-ordination of monetary and fiscal policies. The central bank is
independent and does not form part of the executive. The Government is not allowed to
borrow from the central bank. Once the financing program is complete, it is discussed
within the scope of fiscal policy documents and also shared with the central bank, but
this is not binding. However, during the preparation of the annual financing program, the
MoF and central bank discuss general liquidity conditions in the economy. Debt
managers between the two institutions also share on Government’s current and future
borrowing requirements, where MoF provides intentions in advance and in turn central
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bank gives information on market conditions. The institutions meet frequently either
formal or informally to understand the scope of the execution of each others policies. On
formal a level, MoF provides two types of monthly forecasts. The first forecast is for a
period of three months in advance, and consists of day-to-day cash flows and revenue
and expenditure, while the second forecast provide the same information one month in
advance.
Within MoF, regular meetings by the liquidity committee are held on weekly basis. The
meetings of the liquidity committee focus on monitoring monthly liquidity situations and
determine necessary activity versus financing and against budget expenditure
management. Budget, tax and customs, debt management and liquidity management
departments are permanent members of the committee.
Transparency and Accountability
The borrowing plans, its objectives and accomplishments are regularly announced to the
public. The documents in this regard are available to the public, and in particular to the
financial community. The objectives and instruments of the debt management policy are
made public through the annual borrowing plan, and other documents which indicate the
macroeconomic and fiscal scenarios. The information is disseminated on MoF’s website
and other Government’s websites. MoF also distributes a public finance bulletin on the
website that contains data on general and central government and structure of the debt
portfolio on monthly basis. There is also an annual report on debt management,
including information pertaining to the execution of the strategic objectives of debt
management, instruments to be issued, analysis of government debt portfolio, general
and public debt, central government guarantees, and international comparison.
The auction results are disseminated on the MoF website and quotes are displayed on
the Stock Exchange. Quotes on the treasury bills that are traded over the counter are
available through the market markers. This is all done to improve transparency and
contribute to the deepening of the domestic financial markets. The MoF is also trying to
maintain awareness by international investors by making available rating information on
bonds. Transparency, accountability, and reliability in debt issues, as well as market
approach, have been the prime policy objectives of Slovenia. To maintain further the
principle of transparency and accountability, the tax treatment issues of public securities
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is clearly disclosed in the prospectus of each of the securities and disseminated to the
general public. In addition, debt management activities are audited annually by an
independent auditing film and outcome made public.
Debt Management Strategies
In deciding where to borrow, the main consideration has been to give priority first to the
domestic market on the basis that it does not disrupt the market conditions or crowd out
the private sector. In the foreign market, MoF strives to establish market presence and
establish benchmark for all Slovenian borrowers. Secondary borrowing from foreign
market enables the broadening of the investor base, especially from the Euro market.
Most of Slovenia’s trade, accounting for two-thirds is with Europe and with the Euro
being a potential currency for the country. This makes sense for Slovenia to target Euro
zone to increase its investor base as the Euro is the most exchange risk – neutral
market for the country.
The Ministry of Finance is continuously moving toward a degree of standardization of
domestic issues that is geared to provide the market with necessary supply. At the
moment, instruments issued ranges from 3 year, 5 year variable bonds, and the 10 year
Euro-denominated bonds. Treasury bills are issued in form of 3, 6 and 12 months series.
During 2002, the Treasury issued a 15 year Euro-denominated bond.
Despite this progress, there are some problems constraining the domestic market
developments. These include among others, the capital controls, although finally lifted in
2002. Portfolio inflows were subject to some prohibitive costs that applied to both long-
term and short-term securities without exception. As a result, foreign investors were
discouraged to participate in the Government securities market.
Active Debt Management Strategies
The Ministry of Finance carries out active debt management strategies to reduce debt-
service cost. Among these operations, are the debt buyback operations and call options.
Buyback operations have been conducted in international markets up to 2002, because
of the relative small size and the modest level of development. In the domestic market,
the main instrument has been the call options, considering the overall borrowing
capacity of MoF. Active debt management strategies are practiced regularly in Slovenia
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to save costs or improve the debt portfolio structure without increasing the amount of
debt outstanding.
Development of the Market for Private Sector Debt
The Ministry of Finance is cognizant of the significance of the Government debt
securities and the role that the benchmark yield curve plays in the economy. They serve
as a basic reference point for pricing of private sector debt. Efforts are on-going in the
international market to expand the investor base. In the domestic market efforts have
had been undertaken to build a domestic yield curve. As a result, the target has been
shifting from issuance of indexed debt to fixed-rate instruments and this is done
gradually. This process started first with the introduction of variable instruments as an
intermediate step toward fixed rate instruments, standardization maturities, and the
introducing of short-term fixed-rate instruments. The next phase was to issue long-term
fixed rate instruments and extending their maturities. A 10-year Euro-denominated bond
was issued in the domestic market, followed by a 15-year Euro-denominated bond that
helps the pricing for other long-term instruments in the market.
Developing the Markets for Government Securities
As mentioned before, Slovenia experienced budget surpluses before 1997, and was
characterized by hyperinflation. It was only in 1998 that treasury bills with maturities of 6
and 12 months were issued denominated in local currency. Issuance of these
instruments before 1997 was infrequent due to the surplus recorded on the fiscal
position of the Government and they were indexed to inflation given the hyperinflation in
the economy.
Things changed, however, from 1997 onwards when the Government started recording
a budget deficit. Slovenia started issuing bonds regularly since 2000 according to the
pre-announced calendar in the key maturities zones of 3 and 5 years locally and 15 and
10 years maturities denominated in the foreign currency and payable in domestic
currency. The spread across the standard maturity zone are necessary to minimize the
roll over risk. During 2002, the Government of Slovenia issued for the first time a 3 year
fixed-rate bond denominated in domestic currency and Government will gradually shift
other maturities into fixed-rate instruments. The introduction of fixed-rate instruments
aims at reducing market risk and developing an identifiable yield curve and enhances
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trading. It is also a strong believe of the Slovenian Government that the liquid market in
Government securities can only be built by way of fixed-rate instruments.
On-the-run issues are reopened several times during the year in accordance with the
pre-announced calendar until the desired level is reached. Slovenia has three types of
treasury bills, the 3-month, 6-month and one-year bills and these bills aim at establishing
a flexible and cost-effective source of short-term borrowing to finance liquidity shortages
and also have contributed decisively to the move toward nominal rates in the economy
and the creation of money market yield.
Auctions
Securities in Slovenia are issued via the auction process whereby the bonds are issued
by means of multiple-price auction and treasury bills through a fixed-price auction. All
participants bid through primary dealers (banks) that are registered to undertake such
obligations. All sectors can participate in the auctions for both short-term and long-term
papers, except the central bank of Slovenia.
Secondary Market
It was noted by the Government of Slovenia that the development of an efficient
secondary market of Government securities, the first task has been to provide
instruments that can be easily marketable and have simple features and clearly
indefinable cash flow in the market. This goal was achieved as a result of the
implementation of the strategy to normalize the main borrowing instruments. Among
others, this includes the introduction of treasury bills with different maturities and a shift
from inflation-linked instruments, first, toward variable-rate instruments and then to fixed-
rate instruments. This process was carried gradual in phases, simplifying of bonds
formulas in order to avoid the disruption of the market.
The Central Bank of Slovenia (BOS) conducts open market operations exclusively with
the central bank bills, which can deter secondary trading of Government securities.
However, the BOS had a catalytic role in contributing to establishment of over the
counter (OTC) trading in short-term government securities in 2001, i.e. designing of
regulatory framework. The OTC trading in Government bonds started in 2001 and an
increased in the secondary trading have been noted in both types of instruments. The
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observed rise in OTC transactions can be attributed to the lower costs, resulting from the
lack of brokerage fees and low commissions charged by the depository and settlement
company in that country.
The Government of Slovenia has taken note of the investor’s preferences into account
and their preferences for particular instruments are considered in the preparation of the
annual financing program, within off course the limits of borrowing needs. The Ministry of
Finance in that country maintains frequent contact with the market and monitors financial
market developments. In the market there should a size of issue that ensures a certain
degree of liquidity for investor which does not at the same time cause a refinancing risk.
Clearing and Settlement
In Slovenia, the electronic system is used to settle and clear all security transactions
occurring on the stock exchange. All trades conducted on the stock exchange are
automatically transmitted to the Depository and Settlement Company (DSC), which
clears and settles transactions. The settlement in Slovenia is T+2 on deliver-versus-
payment basis. The DSC’s rules comply with international standards.
Tax Treatment
Given the implications of tax policy on financial markets, Slovenia somehow tried to
strike a balance with the principles of good taxation and the interest of developing
domestic financial markets. The capital gains and interest income from the Government
debt securities are taxed in Slovenia. However, interest income from Government debt
securities are exempted for personal income tax purposes. Profit arising from
appreciation in the price of the security, when sold within three years of its acquisition, is
treated as a capital gain for personal income tax. For taxation purposes on Government
debt securities, both financial and non-financial corporations are treated the same.
Furthermore, no distinction is drawn between current income and capital gains for
corporate tax purposes. Income derived from government securities are not charged
withholding tax for both residents and non-residents. To simply the tax regime further,
the primary and secondary transactions with securities and shares are also exempted
from value added tax.
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5.2 Poland
Background and Economic Conditions
Poland experienced difficult years following the exogenous shocks of Russia in 2000
and downturn in Germany in later years. This has taken a toll on employment levels, the
fiscal deficit had also widened and the stock on non-performing loans also rose.
Although inflationary pressures were low, allowing cuts in interest rates, the real
exchange rate appreciated. However, the growth prospects for Poland remain strong.
Developing a Sound Governance and Institutional Framework
The new objectives for debt management were incorporated in the strategy of debt
management and the shift is putting emphasis on the goal of cost minimization, from
reducing the cost burden in the three-year time horizon to long-term. The goal of
minimizing debt service cost is achieved through an optimal selection of debt
management instruments, their structure and issue dates. In the new objective, there is
also emphasis to minimize exchange rate risk and the risk of refinancing in foreign
currencies and this is undertaken mainly via lessening the share of foreign obligations.
The Public Debt Department (PDD), a unit responsible for debt management is located
at MoF. The PDD manages day-to-day debt policy, prepares the strategy of debt
management, and cooperates with the Polish and international financial markets in
spheres of borrowing and the development of treasury securities market. There benefits
and drawback for the PDD to be located in the Ministry of Finance. At the early stages of
the development of the financial market in Poland, the PDD has enough instruments to
support the development of the market and prepare efficient legal and infrastructure
environments. However, due to the further development of the market in terms of
sophistication of market participants, the securities’ base increased and various hedging
instruments are available as the new challenges have emerged. These new challenges
need to be addressed with innovative risk management of debt, more flexibility and
active approach of debt management. Given the bureaucratic structure in MoF, the
active debt management approach was hampered. Many countries, especially the
OECD (Organisation for Economic Co-operation for Developed Countries) countries
managed to overcome the bureaucratic in Government by creating separate and
independent debt offices outside Government. Experience from OECD countries indicate
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that a separate debt office avoid direct intervention in the borrowing policy and able to
minimize debt service cost on the medium and long-terms.
The major operating risk of debt management is the lack of an integrated information
system for debt management. This was caused by the fragmentation of the databases
and not fully compatible with each other. In order to solve this problem, the integrated
debt management system was implemented by the end of 2002.
Coordination of Monetary and Fiscal Policies
In a view of the importance of coordination between monetary and fiscal policies, the
committee of public debt management was established during 1994.The membership to
this committee includes representatives from the MoF, central bank and the ministry of
finance. The committee meets on fixed dates on monthly basis. The committee
discusses monthly plans for financing the state budget borrowing needs, budgetary
situation, and the situation of the money market. The department tasked with liquidity
management is hosted in MoF and the main instruments used are short-term deposits of
surplus cash and issuance of short-term treasury bills.
Debt Management Strategy
The strategies and policies are implemented to ensure that the public debt management
is undertaken in a prudent and predictable way, with the ultimate objective of minimizing
possible threats to public finances and to the economy of the country. Poland is no
exception to that golden rule. To ensure that the country does not become heavily
indebted, a limit on the public debt to GDP ratio was imposed, including special
procedures of what to be done and limit the debt beyond certain levels. The upper limit
of 60 percent was set by the Constitution of Poland.
It is very important to maintain the credibility of public debt management. In order to
keep this credibility intact, the council of ministers submits to parliament the debt
management strategy for the coming three years. Among others, this includes a set of
clear goals of debt management, the assessment of executing the objectives of previous
strategies, and analysis of possible scenarios regarding public debt. The typical risk
which faces the Government with regard to foreign currency debt portfolio is the
refinancing, interest rate and the exchange rate risks. Poland committed itself to the
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development of the domestic financial markets. Therefore, the policy directive was to
reduce the foreign debt outstanding and financing the Government budgetary
requirements from the domestic market. This resulted in the developments of a large
and stable domestic debt market that reduces the exposure to foreign currency crises
and other undesirable external shocks.
Active Debt Management Strategies
Countries now and then need to carry out active debt management strategy to manage
properly the portfolio for foreign currency debt and domestic foreign currency debt.
Active debt management strategies, among others, includes debt buybacks of the
domestic and foreign debt before maturity, regular switch auctions, swaps transactions
and use of derivates. In Poland, the MoF is planning to conduct swap transactions and
use of derivatives. Buy back options was exercised as well to buy back some bonds.
Development of the Market for Private Sector Debt
As the practice in many developing and emerging market economies, the debt market in
Poland is dominated by Government securities, accounting for around 90 percent. The
remaining balance of 10 percent is taken up by the corporate debt. The significance of
the private sector debt is acknowledged by the Government and therefore, is developed
through the development of public debt market. It is a basic principle that the
development of the public debt market constitutes a fundamental prerequisite of the
development of the private debt markets.
Developing the markets for Government Securities
The debt management strategy of Poland for 2002-04, stipulates that government
borrowing should be sought mainly in the domestic market. Borrowing in the foreign
market is limited to the refinancing maturing debt.
The increasing significance of minimizing costs, over time determined by the maturities
of debt management instruments with the longest maturity, affected the structure of
sales of treasury securities, especially in 2001. Decisions concerning the choice
between the issuance of short and long term instruments was determined by market
conditions and the predicted future shape of the yield curve. The increase in the average
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term to maturity is recognized as the main means of reducing the refinancing risk of
domestic debt.
Poland issue instruments, ranging from zero-coupon, fixed rate, floating, etc. The fixed
rate bond was issued for the first time in 2002. Retail instruments are used to back up
sales of wholesales instruments, widen the investor base and promote national saving.
The tasks within this area include the diversification of instruments offered and the
increase in their accessibility to potential investor.
The main maturity bonds issued on international capital markets is constrained by the
existing foreign redemption profile. Until 2001, because of very low funding needs, the
MoF executed only one benchmark transaction a year in the international market, not
exceeding the amount of principal payments. The main reasons for issuing bonds in the
international market are to maintain access to the most important segments of the
international capital market because of possible necessity of refinancing most or all of
the foreign debt in the years 2004-09 and to create a benchmark for issues of Polish
corporate bonds.
Auctions
Treasury bills and bonds are offered for sale in the primary market at auctions organized
and held by the National Bank of Poland (NBP). The detailed information on forthcoming
auction is published on the MoF’s website and on Reuter’s two days before the date of
the tender. The sale and management of retail bonds are handled by a brokerage
house.
Secondary Market
Following below are the main actions taken to increase the liquidity, effectiveness, and
transparency of the treasury securities in the secondary market.
♦ Elimination or reduction of restrictions in the settlement infrastructure, for
example, the implementation of the real-time gross settlement (RTGS) system
and securities borrowing, the reduction of transaction fees and commissions, and
the development of the repo market
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♦ Support trading on the electronic platform for debt instruments and their smooth
incorporations into the registration and settlement system
♦ Continuation of the policy to increase the depth of the treasury securities market
through sizable issues of different series, which means fewer maturity dates for
different types of treasury securities and an increase in the value in the individual
series
♦ Support of the activity toward elimination of regulations aimed to subject repo
transactions to the system of mandatory reserves and
♦ Introduction of switch operations.
Poland was already in process of introducing primary dealer system when this draft was
forwarded to IMF, by now it might have been introduced. In 2001, the rules governing,
selecting, and properly assessing primary dealers, and an evaluation of the scope of
their rights and duties, were prepared, and verified during meetings with the banks. The
cooperation with the primary dealers will also lead to the identification of risks for public
debt management and the development of the treasury securities market. The process
of monitoring and evaluating the candidates began on April 2002.
It is crucial that a proper relationship with the financial community; between debt
managers and investors. Such kind of relationship ensures effective management of
public debt. This is achieved by way of holding regular meetings with groups of domestic
investors such as banks, brokerage houses, pension funds, investment funds, and
insurance companies. Individual meetings with important domestic and foreign
participant in securities are also held.
Tax Treatment The interest and discount income, and the income from the sales of Government debt
securities undertaken by legal entities are subject to income tax. That is the rate of
income tax applicable to income realized by legal entities in the same year as the one
income was obtained. For individuals, income from the sale of securities other than
bonds issued by MoF is subject to personal income tax. In addition, withholding tax of 20
percent is charged on individuals for income or discount on all securities issued by the
MoF. The nonresident legal entities are also taxed as the resident entities when buying
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Government debt securities in the domestic market, unless there is a treaty signed
between that country and Poland to avoid double taxation. If no treaty signed, then the
nonresident entities are charged the withholding tax rate of 20 percent and income tax
(for either bonds or treasury bills), the same rate as the one charged on their income the
same year. On the other hand, foreign private persons and residing outside Poland are
liable to tax only on income from work done within the territory of Poland.
5.3 Special Case Study of a CMA Member - South Africa
Background and Macroeconomic Conditions
The South African government securities market has undergone through various
development phases since the late 1970s to achieve the level where they are today. The
bonds were initially issued at par three or four times a year, normally to match with the
date of maturing bond. Several investigations of the market were commissioned and the
findings on the needs for the market highlighted the need for changes. A broad
consensus was formed among the market participants to commit for market
developments. As a result, the first bond issued at discount in South Africa was in 1981
by a public entity. The Government started issuing bonds as well, but there was no
separation between issuing to finance Government spending and open market
operations.
The key market participants in the mid 1980s established a forum to engage the
Government on some issues or concerns in the market. Among this concerns were the
captive funding as pension funds and insurance companies were obliged to invest part
of their funds in Government bonds, Government guarantees bonds and homeland
bonds. The market participants were also concerned about small amount being kept in a
particular bond and some of which were illiquid. The National Treasury or MoF
responded positively to the market concern with the abolition of prescribed assets
requirements as it was a stumbling block to financial market developments since the
issues were not based on market rates. In addition as well, the National Treasury
consolidated several small issues to create benchmarks in the 5, 10, 15 and 20-year
maturity zones. Some public entity as well started making two-way prices in their bonds.
The authorities also noted the need for self regulation by the market is more desirable
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and a right thing to do. This culminated into the forming of Bond Association of South
Africa (BESA) for clearing and settlement among members. Other institutions are such
as Central Depository and the introduction of Primary Dealers in Government debt
securities.
The government introduced a macroeconomic framework program of philosophies and
principles in order to bring total debt to manageable levels. South Africa's pursue
prudent and sound macroeconomic policies which resulted in a stable exchange rate,
low inflation and low debt levels. Under the Growth, Employment, and Redistribution
(GEAR) Strategy it is committed to moving ahead with other key structural reforms.
Developing Sound Governance and Institutional Framework
The public debt office was established and referred to as the Asset and Liability
Management, located in the National Treasury. This office is empowered with all the
resources and was given a new structure. The office is able to recruit the best skills
available in the South African financial markets. The new debt office was divided into
new identified priority areas, namely, liability management, asset management, financial
operations and the strategy and risk management. The National Treasury is responsible
for designing the annual borrowing plan, but consults the Reserve Bank (SARB) for
inputs. However, the reliance of the National Treasury to the technical advice from the
SARB is not as much as before given the technical experts the National Treasury
managed to build up. SARB’s role changed as well from being an issue, settle and
market-making agent in Government bonds to the one of conducting auctions of
benchmark bonds according to a fixed borrowing plan.
Co-ordination of Monetary and Fiscal Policies
In South Africa before market reforms, there was no separation between issuing to
finance Government spending and open market operations. Recently, however, there is
clear separation of activities between the two, and the inherent conflict of interest is well
understood. The National Treasury issue to finance the budget deficit, while the SARB
issue its own instruments for open market operations. The two institutions however, co-
ordinate their activities and have a formal working relationships via different committees.
This close co-operation was also evident during the discussions of the integrated
approach on inflation targeting and the issuance of inflation-linked bonds.
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Transparency and Accountability
The National Treasury and SARB established a good relationship with the investors,
both at home and internationally. Maintaining this relationship with the investors is one of
the top priorities in promoting the South Africa bond market. Given its significance, the
investor relations program is run by the top management at the National Treasury and
SARB. It worth noting that investors relations is practiced at all levels and before the
decision is made of what of instruments to be issued the National Treasury consults the
key market participants about their views which are taken into account both in South
Africa and abroad.
Debt Management Strategies
During the 1990s, the Government of South Africa was experiencing high budget deficits
and naturally, the debt servicing costs shot up. This situation led to debate in the country
on the sustainability of the Government’s debt servicing costs. Furthermore, the interest
was also high and the average maturity of the Government debt portfolio was due within
five years. This means a two legged problems in form of the financing of net new deficit
and the financing of the existing debt stock in the environment of high interest rates.
There was a great fear of South Africa falling into debt trap, and thus, the urgency for
prudent debt management.
The announcement to review the entire debt management policy was announced during
the budget review in 1996. As a result, a framework on philosophies and principles to
manage public debt, cash, and risk was developed and approved by parliament. This
framework identified strategies to be followed to achieve the prudent debt management.
Following suggestion in the framework, a public debt office was established, named
Asset and Liability Management in the National Treasury. The objective of debt
management shifted as well from strategic to tactical debt management. Tactical debt
management focuses on active debt management, whereby the outstanding stock of
debt and its composition is actively managed to reduce the cost of debt to within
acceptable risk limits.
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Active Debt Management Strategies
The objective of debt management in South Africa since 1996 was based on strategic
debt management policy. The strategic debt management focuses at the overall design
and the implementation of the debt management program. This issues ranges from the
design of primary issuance and debt instruments and the provision of liquidity. So far,
the practice in South Africa with regards to the strategic objectives has been
accomplished and the needs in Government securities market evolved. The focus
should be aimed at tactical debt management, an active management of the existing
portfolio with a view to reduce debt servicing costs, avoiding unwanted bundling across
the yield curve and consolidate illiquid securities when the chance presents itself.
The tactical debt management approaches introduced includes debt consolidation
(switches), of bonds, debt buy backs, inflation-linked bonds, stripping of Government
bonds and swaps. Debt consolidation was launched to reduce the fragmentation of
bonds on the yield curve and smooth out the maturity profile. It was introduced to
minimize the refinancing risk, especially easing the pressure at the short end of the yield
curve where there was a concentration of maturing debt. The number of small
outstanding issues with high coupons was converted into larger liquid bonds with low
coupons.
The National Treasury as well focused on reducing the debt service costs in the medium
and long term. Small, illiquid, high-coupon bonds of less than R1 billion and ex-
homeland bonds were purchased back from the market. The Government also realized
the need to reduce the long-run cost of debt, subsequently, responded by introducing
inflation-linked bonds. These bonds matches well the institutional investors long-term
liabilities, provides as well an objective measure for inflationary expectations. And act as
benchmark for other issues.
Development of Market for Private Sector
The development of the market for the private sector was done jointly with the
development of Government debt securities market. Institutions established to this effect
are such as Bond Exchange of South Africa, Universal Exchange Corporation, etc.
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Auctions
The National Treasury introduced a fixed borrowing program, which is conducted by
SARB on behalf of the treasury. The annual borrowing program is announced to all
markets participants in timely manner. The announcement to the market participants
covers information on the extent of the borrowing requirements, auction dates, maturity
structure and size of issues, and the instruments on offer. An announcement on what
instrument to be issued is done seven days before the weekly auction.
Achievements in South African Secondary Government Securities Market
The implementation of a new debt management approach in South Africa brought in
some remarkable successes. The liquidity in the bond market improved significantly,
reaching new high record levels. The comprehensive reforms introduced in the domestic
markets managed to make the Government debt securities in South Africa among the
most sophisticated and developed bond markets in the emerging market economies.
The total South African bond market turnover increased from R 5 trillion during 1997 to
the highest of R11 trillion in 2000, before declining to R 8.1 trillion by end of 2005. The
notable decline resulted from the relative attractiveness of equity investments compared
to the bonds. Another indicator of liquidity secondary market, the proportion of total
market turnover for South Africa increased to 91 percent in 2000 from a mere of just 55
percent during 1995. The resilience and the sophistication of the South African bond
market was demonstrated during the 1997-98 financial market crises when South Africa
was one of the few countries to issue and fund in the longer-dated bonds.
The yield curve is well developed and the bonds are issued over the maturity horizon of
the curve. The introduction of the new debt management approach also resulted in a
diversification of fixed income instruments, including floating, variable, fixed variable and
inflation-linked bonds. Other notable achievements include the transfers of market
making, trading and investment risks to the appointed Primary Dealers, active cash
management, the establishment of institutions such as BESA, etc. The appointment of
the primary dealers reduced refinancing risk for the government, improves liquidity and
efficiency of the government bond market and also created clear and transparent price
formation. Other benefits of the primary dealership in South Africa are the improved
analysis and research in the government bond market.
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Challenges in South African Government Securities Market
The South African government is faced with the challenge of upholding an efficient,
transparent and liquid bond market in environment of declining borrowing needs. The
decline in the supply of government papers is generally interpreted as a decrease in the
liquidity of the bond market in many emerging markets. The National Treasury went
around this challenge without sacrificing liquidity in the market. They used active debt
management tools such as debt switches and buybacks as well as the introduction of
inflation-linked bonds just to mention the few.
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6. EXPERIENCES REVIEWED AND KEY LESSONS FOR NAMIBIA 6.1 Good Attributes to be Emulated by Namibia
Slovenia Slovenia is a young, small and open economy similar to Namibia in many ways.
Although Slovenia is one year younger than Namibia, there is a lot to learn from
Slovenia experience in money and capital market developments. On the macroeconomic
front, Slovenia experienced hyperinflation in the 1990s and in order to provide security
for investors seeking protection against inflation, the Government started issuing
inflation-linked bonds (ILBs). Inflation-linked bonds, however, are not only issued to
guard inflation, but these days are integral part of active debt management strategies.
Experience indicated that countries that introduce ILBs managed to reduce the cost of
borrowing since the yields on these instruments are substantially lower in comparison
with nominal bonds. The long-term overall financing cost for the Government could,
therefore, be lowered. This will augur well for the Government which is trying to reduce
high spreads between the nominal bonds of Namibia and their respective benchmark
instruments in South Africa. These instruments are also renowned for their capability to
diversify funding sources as it increases the investors base the one thing the Bank and
the Government have been working to improve since independence.
As the case of Namibia, Slovenia also funds its budgetary requirements from the
domestic markets and minimizes risk associated with funding the budget deficit with
external debt. This undertaking helped to develop the domestic market and reduce
reliance on foreign financing. MEFMI countries which want to develop and deepen their
domestic debt markets should learn from this experience, but off course, the analysis
has to be carried out to determine the right mix between domestic and foreign funding.
Christensen (2004) argued that the extensive use of domestic borrowing might not be
desirable, especially when domestic interest rates are higher than foreign rates. This can
as well get complicated by shallow financial markets and narrow investor base.
Therefore, countries which want to rely on domestic financing have to be wary of the
potential repercussion to the economies. Namibia as Slovenia is already funding its
borrowing requirements from the domestic markets and has taken the necessary steps
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to avoid severe implications on the economy. The important lesson here is the
broadening of investors’ base via the development pension, insurance and retirement
funds, where in Namibia these institutions are well developed, accounting for about 80
percent of GDP.
Annual Borrowing Plan/Program
One of the most important facets of debt management is the announcement of the
borrowing in advance. The annual borrowing program in Slovenia is detailed, containing
information about the operational and strategic objectives. This information is
disseminated to the market. This something Namibia should consider incorporating in its
annual borrowing plan because what is disseminated at the moment does not cover
strategic issues.
Co-ordination of Monetary and Fiscal Policies It is argued that policy co-ordination and separation is a prerequisite especially in cases
where the central bank is involved in developing the bond market in order to avoid
potential conflict of interest. Normally, the Government is concerned with the
minimization of cost of borrowing, while the central bank is about price stability. The
central bank of Namibia is heavily involved in the development of money and capital
markets, and thus there should be a clear separation. The experience from Slovenia
indicates that there is a clear separation between monetary and fiscal policies. In
addition, the Government is not allowed to borrow from the central bank. The MoF draft
the annual borrowing program and it is shared with the central bank. To consolidate the
co-ordination between monetary and fiscal policies, the bank and MoF discuss the
general liquidity conditions during the preparation of the annual financing program.
Furthermore, debt managers share information on the current and future borrowing
requirements which is provided by MoF, and market conditions by the bank. This kind of
relationship represents a good co-ordination between monetary and fiscal policy, and
therefore is something Namibia can emulate. Currently, the Government of Namibia is
allowed to borrow from the central bank, and although government has not made use of
this right yet, it has the potential to generate into conflict of interest.
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Transparency and Accountability
Despite the fact that the Slovenian domestic market is relatively young, the country has
made significant progress with regard to transparency. As pointed out already in
previous sections, the documents on borrowing plans, its objectives and
accomplishments are regularly disseminated to the public. Information of underlying
macroeconomic and fiscal scenarios is also communicated to the public. The
communication tool has also been used to make available rating information on bonds.
Namibia and rest of MEFMI region should be cognizant of the fact that communicating
and engaging the investors and public should be at core of their efforts to develop the
local domestic debt market and improve transparency.
Active Debt Management Strategies Nowadays, most of developed countries and some of the emerging market economies
are pre-occupied with managing the outstanding stock of debt and its composition in
order to reduce debt service cost of debt. Countries use different approaches to conduct
active debt management, in including, debt consolidation, debt-buy backs, issuing
inflation linked bonds, stripping of Government bonds, swaps, and call options. Slovenia
conducted buy back operations up to 2002 and this was undertaken mainly in the
international markets. The restriction of buy back operations to the international markets
was due to the fact that the development in the domestic market is relatively modest.
The active debt management strategy carried out in the domestic markets is call options.
In Slovenia, there is a law which regulates the criteria to be used for active debt
management and any strategy can only be allowed to be conducted after evidence or
proof of cost savings or improvements in the debt portfolio without increasing the current
amount outstanding.
This lesson from Slovenia is one of the most important best practices of debt
management that a country like Namibia can immensely benefit from. So far, Namibia
has only used debt consolidation in 1998 to lengthen maturity structure, enhance
liquidity in these bonds and create local benchmark instruments. However, during
2007/08 fiscal year, MoF and the central bank have committed to buy back the most
expensive Government bonds. The buy back option is made possible by the improved
fiscal position of the Government. However, as in the case of Slovenia any active debt
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management strategy should only be carried out after evidence of cost savings in the
debt portfolio.
Secondary Market
The development of a vibrant secondary market for Government debt securities is
identified as one of the most difficult aspect for domestic debt market development. It is
argued that to have a successful secondary market, the participation of key market
players is very crucial. If the key market players are not involved in the whole process
and give blessings to Government’s actions than the efforts could end up yielding no
satisfactorily results.
One of the good attributes of Slovenia’s secondary market development is the way the
instruments are designed. The first task was to provide instruments which are easily
marketable, have simple features and clearly identifiable. This objective was achieved
and resulted in instruments of various maturities on the yield curve. The secondary
market trading was helped immensely by the increased number of trades undertaken via
OTC. The OTC trading picked up because of lower costs, resulting from the lack of
brokerage fees and low commissions charged by the depository and settlement
company.
MEFMI countries, in particular Namibia, should note that high brokerage fees and
commission hinder secondary market trading. In Namibia, complaints have already
surfaced with regards to high brokerage fees and other client costs charged by the stock
brokers and the stock exchange. A study is necessary in Namibia to review these
commission and fees and to the extent they are hindering secondary market trading.
In addition to develop the domestic markets, efforts are on-going in Slovenia to build a
domestic yield curve. This serves as a basic reference point for pricing of private sector
debt. Namibia should undertake as well to construct its own yield curve.
Tax Treatment
It is argued that the taxation of financial instruments has significant implications for
financial market development (IMF and Worldbank 2001). Poor tax policies can be a
stumbling block to a well functioning financial markets and inappropriate tax system may
hamper the emergence of new financial instruments. The IMF and Worldbank further
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noted that authorities responsible for tax issues and financial market developments
should communicate regularly in order to adopt tax policies that are compatible with
financial market development, while at the same time not compromising principles of
good taxation.
In Slovenia, interest income from Government debt securities is exempted from paying
tax. For taxation purpose on Government securities on both the financial and non-
financial corporations are treated the same to simplify the taxation. The same treatment
goes for current income and capital gains for corporations where no distinction is drawn
either for tax purpose. All the primary and secondary transactions are exempted from
value added tax. The tax incentives are generally used to promote the long-term bond
market, especially in developing countries where the debt composition is skewed toward
the short-term. These incentives however should be managed in consistent manner;
otherwise they may distort the prices and lead to inefficient resource allocation.
In Namibia, the Income Tax Act no. 24 of 1981 exempts interest income, received by or
accrued to any person (other than a company) or any external company not carrying on
business in Namibia, from treasury bills and bonds issued by the Government or any
representative authority or local authority in Namibia. Capital gains are usually not
taxable. However, should a taxpayer’s activity of making capital gains be of such a
nature that it can be interpreted as trading, it may be taxable. This might be subjective to
personal interpretation and difficult as well to draw a clear line between what constitute a
trading activity and which one does not. The determination of the taxability of capital
gains should not only remain with Inland Revenue officials, but be clearly stipulated in
policies. The Slovenian lesson of giving similar treatment to both income and capital
gains for corporate could be useful in simplifying taxation in Namibia. In addition,
Namibia might also review the valued added tax of 15 percent on transfer fees for bonds
as the case for Slovenia where no VAT is charges on listed securities.
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Poland
Institutional Framework The Public Debt Department located in the Ministry of Finance is faced with some new
challenges. Due to sophistication of market participants new needs have emerged and
require to be addressed with innovative, flexible and active debt management
approaches. The location of the debt unit at MoF hampers this office to address those
challenges effectively given the bureaucratic structure at the ministry. Experiences from
some countries indicate that the creation of separate and independent office is a best
way to overcome bureaucratic structure.
In Namibia, the debt unit, Cash & Debt Management division is in the Ministry of
Finance. However, at the moment this office is also faced with challenges and a plan is
underway to restructure the office in line with international best practice. The debt unit is
planned to be divided into three sub-divisions: a front office, a middle office and a back
office.
Co-ordination with Monetary and Fiscal Policies A very good lesson from Poland is the way the debt management with monetary and
fiscal policies are coordinated. The public debt management committee was established
to coordinate monetary and fiscal policies. This committee includes members from MoF
and the central bank. The meetings of the committee are held on monthly basis and the
main areas covered include the monthly borrowing needs, the budget situation and the
development of the money market.
In Namibia, to facilitate proper co-ordination between monetary and fiscal policies, the
MoF and BoN have set number of committees, namely:
Cash Flow Committee
The Cash Flow Committee, which comprises members from the Bank of Namibia and
the Ministry of Finance, co-ordinates Government cash flow trends, prepares cash flow
forecasts, and agrees on the domestic borrowing program and calendar.
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The Committee has recently developed a model based on the past revenue and
expenditure data to project the Government’s cash flow positions. The cash flow
projections are updated on a weekly basis and are presented to the committee every
month. The Committee also collects information on the implementation of budgeted
projects, as well on regular debits and credit transactions, such as typical tax and salary
payments dates. This information serves as input into generation of cash flow
projections.
The Hedging Committee
The Ministry of Finance and the Bank of Namibia have also established a Hedging
Committee to co-ordinate the hedging of Government external loans (where appropriate)
in order to neutralise exchange rate risks of foreign currency denominated loans.
Active Debt Management Strategies
As the case of Slovenia, Poland exercises some active debt management strategies to
manage the existing debt portfolio. Among these strategies undertaken includes debt
buyback, switch auctions, some swap auctions and derivates. Namibia has undertaken
some of these active debt management strategies as indicated under the discussion for
the case of Slovenia.
Developing the Market for Government Securities
In the process of developing the Government debt securities market, the Polish
Government committed itself to the development of domestic financial markets. The
policy directive was, therefore, to finance the Government budgetary requirements from
the domestic market. This decision bore fruits as the country today has a large and
stable domestic debt market which enables the reduction of exposure to foreign currency
crises and other undesirable external shocks.
Poland also participates in the international capital markets, but because of very low
funding needs, MoF executes very limited transactions per year. The reasons for the
participation in the international capital markets is not because Poland needs funding but
to maintain access to the most important segments of the international capital market
and to create a benchmark for issues of the corporate sector.
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The path Poland choose to develop the markets for Government debt securities is the
same one Namibia has committed herself too. For an example, it is also a policy
directive by the Namibian Government to finance budgetary requirements from the
domestic markets. This process also has worked well for the Namibia since today the
country has a stable and reliable domestic market where the Government can reliable
finance its requirements. Namibia has, nevertheless, a lot to learn from the experience of
Poland especially with regard to what determine the issuance of short and long-terms
instruments. In Poland this is driven by market conditions and the predicated future
shape of the yield curve.
The presence of Poland in the international capital markets also stands out as one of the
very good examples for Namibia to follow. During August 2006, the central bank
accessed the international capital markets, through issuing a syndicated loan facility for
US$50 million. This idea is echoed by leading European banks as there are number of
investors in Europe who are looking for exposure to countries with credit rating of BBB-.
The success of Poland is encouraging since Namibia is also in the process to borrowing
from the international bond market to establish its name in market and for benchmarking
for the private sector.
Secondary Market Developments
Various measures were introduced by MoF and the central bank in Poland to develop
the secondary markets. However the notable one where Namibia can draw lesson from
is the introduction of the primary dealer system in Government debt securities. The main
reasons for the primary dealer system is to improve liquidity in Government debt
securities (in particular), improve the secondary trading by quoting continuous two way
prices that could lead to the price discovery process in the market and prepare the
foundation for transparent continuous trading in the future. The Primary Dealer System
is expected to develop the Government debt securities market.
The Government of Namibia is also considering introducing the Primary Dealer System
in order to develop deep and liquid markets for Government securities. This is of critical
importance to the Government since it could reduce the cost of Government debt. Thus
far, a market survey was carried out where the majority of the respondents indicated a
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definite need for market making for Government securities in the country. A paper in this
regards is finalized by the central bank and been approved by MoF.
The development of the repo market as in the case of Poland will go along way in
improving the liquidity in Government debt securities market. However, this will face
some challenges given the CMA arrangement where commercial banks in Namibia can
easily get funds from their parent companies in South Africa. The current practice in
Namibia is that only one commercial bank which has majority Namibian ownership is
using the repo.
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South Africa
The location of a Public Debt Office
The South African Government adopted a framework of philosophies and principle to
manage debt, cash and risk. This framework recommended the debt office to be located
in the Ministry of Finance, referred to as the National Treasury. The new office, Asset
and Liability Management (ALM) is empowered with resources it requires to operate
effectively. The debt office is tasked with variety of functions, which is divided into front,
middle and back offices. The ALM is endowed with the best skills available in the South
African markets.
The public debt office in Namibia also falls under the Ministry of Finance. The Cash and
Debt Management (CDM) division within the Asset, Cash and Debt Management
Directorate will be restructured in line with international best practice. Namibia has learnt
a great deal from the South African case study especially because of historical
connections, membership to CMA and proximity. As in South Africa, the public debt
office in Namibia is planned to be divided into three sub-divisions: a front office, a middle
office and a back office.
Transparency and Accountability The National Treasury and the Reserve Bank (SARB) regards the establishment of good
relations with investors locally and abroad as one of the top measures used to develop
the domestic money and capital markets. In a view of the importance of investors, the
top management at SARB and National Treasury run this program. Road shows are held
at the beginning of every the year informing and is used as an opportunity to seek inputs
from the local and international investors about the borrowing program for that specific
year. Always before the auctions takes place the key segment of the market is consulted
to give their opinions.
This is one of the far reaching experiences Namibia can adopt in its markets. However,
given the urgent needs to create investment opportunities in the financial markets and
stem out capital outflows, the investors relations program should be used as one the
priority tools to develop the local money and capital.
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Measures Taken to Maintain Liquidity in Face of Low Financing Needs
At the moment, the supply of debt papers in the Namibian market is very limited. In this
connection, Namibia can learn a lot from South Africa that faced the same dilemma not
so long ago. South Africa managed to reduce the supply of Government papers in line
with the Government’s financing needs, without sacrificing liquidity in the bond market.
This was achieved by carrying out some of the active debt management strategies such
as debt consolidation or switches of bonds, debt buy backs, inflation-linked bonds and
strips. Namibia already adopted some of these measures such as debt consolidation
and plans are under way to introduce buy back option during the 2007/08 financial year.
For inflation linked bonds; the paper is finalized and just awaiting to be adopted at the
right time.
Success of Reforms in South Africa
The reforms undertaken in the South African domestic financial markets brought
remarkable success in a short period. The developmental initiatives resulted in improved
liquidity, bond market turnover, development of yield curve, just to mention a few. The
adoption of a new debt management approach has propelled South Africa to be among
the most sophisticated and developed bond market in emerging market economies.
Therefore, given the closeness of the two economies, Namibia can learn a lot from the
success of South Africa. Namibia should refine these approaches for its own case.
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6.2 Lessons to be Avoided by Namibia
Slovenia
Institutional Framework
In Slovenia, there are three departments responsible for the co-ordination of debt
management. As a consequence, the responsibilities of execution of operations and any
other debt management operations are blurred. The MoF is, therefore, contemplating on
introducing a separate debt office which will deal with all issues related to debt
management. This idea is a general problem for many countries which have many
players involved in debt management. Therefore, the idea of having a separate and
independent debt office is a lesson for countries to embrace, especially when the current
setup is plagued by political interference, lack of adequate resources and lack of
resources. Namibia has a separate debt unit similar to the Asset and Liability
Management at the National Treasury of South Africa. The proposed structure and
remuneration of staff is not yet fully implemented. The current office experiences a high
staff turnover and relies heavily on the central bank for technical support.
Debt Management Strategies Despite significant progress, there are some problems constraining the domestic market
development in Slovenia. These include among others, the capital controls, although
finally lifted in 2002. Portfolio inflows were subject to some prohibitive costs that applied
to both long-term and short-term securities without exception. As a result, foreign
investors were discouraged to participation in the Government securities market. In
Namibia there is no capital controls on the portfolio inflows, however, the country has to
be wary of their implications on financial markets in case it may be considered in the
future. This is also a lesson for the rest of the MEFMI region to take note of.
Poland
Institutional Framework
The major operating risk of debt management in Poland is the lack of an integrated
information system. This resulted from the fragmentation of the various databases which
were not fully compatible with each other. In order to solve this problem, the integrated
debt management system was implemented by end of 2002. Namibia should also avoid
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installing various databases which are not compatible with each other. Currently, the
domestic debt are recorded in excel worksheets at both MoF and the central bank. The
plans are in the pipeline to record data on domestic debt in the Commonwealth
Secretariat Debt Recording and Management System (CS-DRMS) which is already
recording foreign debt. In addition, a shared network will be developed to link the bank
and the debt unit at MoF to allow real-time sharing of debt-related data, with appropriate
controls to ensure data integrity.
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South Africa
The abolishment of Captive Funding The reliance on captive funding characterized most of Western Europe and some
English speaking countries until the 1980s and 1990s for South Africa. Although
developed countries moved away from that, captive funding is still prevalent in many
developing countries, including Namibia. The South African Government abolished
captive funding as requirements for pension funds and insurance companies whereby
these institutions were obliged to invest part of their funds in Government bonds,
Government guarantees and homeland bonds. The prescribed captive funding was
meant to guarantee the demand for the public debt securities. Although this process
contributed somehow to keep savings home, at the same time it was a stumbling block
to financial market developments since the issues were not based on market conditions
or interest rates. The market participants campaigned vigorously against captive funding
in which the Government responded positively to the demands.
Following the persistent outflows of capital to the developed South African financial
markets, the Namibian authorities introduced captive funding to the pensions funds and
insurance companies. As in South Africa, this has been credited with the developments
of the Namibian Stock Exchange, asset managers, unit trusts, and stock brokers.
However, as argued by the IMF (2001), in order to develop a sound and vibrant demand
for Government securities, policy makers need do away with reliance on captive funding
of Government needs. The option is to draw from voluntary sources of funds that offer a
better reflection of true cost of financing and prevent distortion of resources. However, in
the case of Namibia, this will be a gradual process where the Government will have to
develop the financial markets first. If lifted without creating competitive products in the
financial markets, this could exacerbate the capital outflows to South Africa which in turn
could deplete further the country’s official reserves. The authorities in Namibia should,
therefore, aim at creating more investment opportunities which are competitive for
Namibia investors and keep the huge savings the country generate at home.
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The issuance three-legged bonds
In South Africa, as early 1998, the Government debt policy was not designed to improve
the marketability of Government debt. A new and separate bond was issued for each
funding requirement. Meaning that these distinct bonds for each funding requirement
have different own terms and conditions. It also worth noting that once issued they were
not re-opened again. This led to the issuance of a large number of bonds with small
nominal amount outstanding that contributed to the lack of liquidity.
The National Treasury after consultations with the market participants decided to
consolidate these bonds and replace with four new three-legged issues10. The three-
legged instruments was aimed at increasing marketability of Government stock and
competitiveness of the Government as a borrower in the capital markets, and create the
benchmark yield curve. The three-legged bonds’ unintended side effect was the making
of bullet bonds more illiquid, although have large nominal outstanding amounts. This
unfortunate effect made only the three-legged bonds liquid and thus, the Government
was forced by the circumstances to keep issuing only the three-legged bonds.
The three-legged instruments are priced on the mid second leg, meaning that the three
maturities on the yield curve have the same price and this compromise price efficiency.
A number of investors in the South African market have indicated to the National
Treasury that the time of three-legged bonds is long gone since it is impacting negatively
on the price efficiency and discovery. The other main problems facing the National
Treasury with regards to these bonds is that there only two year gap maturity between
most of these three-legged bonds and the Treasury will not able to issue them again. As
a result, the National Treasury has taken a decision to split these bonds into bullet
bonds.
This is a good lesson to MEFMI countries, especially Namibia which aspiring to follow
the comprehensive program of reforms that South Africa introduced. This is also
supported by the global trend which is leaning to bullet bonds due to their price
efficiency. The objective of increasing liquidity can be achieved with bullet bonds.
10 A bond with three maturities
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7. THE NAMIBIAN EXPERIENCE - LESSON FOR THE MEFMI REGION
The rest of the MEFMI region could learn a great deal from the initiatives implemented
by the Namibian Government and the Bank of Namibia to develop the local domestic
securities’ market. At independence in 1990, the bond market in Namibia was non-
existent and the only financing source available was from the urban-based commercial
banks. The Government needed reliable and sustainable financing sources to redress
social inequalities inherited from the previous dispensation, such as, poverty, high
unemployment, income inequality and building of infrastructures. As a result, some
measures and policies specifically for the Namibian situation were designed and
adopted. All these initiatives were aimed at developing the local capital market where the
Government intended to finance its borrowing requirements.
Among these measures introduced by Namibia which is a good lesson for the MEFMI
region are, inter alia:
1. The Sovereign Debt Management Strategy. To meet its obligations, the Cabinet
adopted the Sovereign Debt Management Strategy (SDMS) during 2004, which is
designed to ensure that Government debt levels remain measurable, affordable,
sustainable and of low risk. The SDMS is based on the international best practices, and
was adapted for Namibia’s specific needs and circumstances.
2. The CMA Agreement. In order to maintain confidence and monetary stability in the
economy, the Namibian Government deliberately assumed membership in the CMA to
which South Africa, Lesotho and Swaziland are also parties. Participation in the CMA
was envisaged to enhance fiscal, exchange rate and monetary stability, which create
favorable conditions for capital market development. By joining the CMA arrangement,
Namibian authorities have chosen to align themselves with the monetary policy of the
South African monetary authority.
3. Domestic Investment Requirement. The 35 percent domestic investment
requirements applicable to insurance companies and pension funds was introduced to
retain funds that go out of the country in the form of contractual savings and make such
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funds available for domestic investments. It contributed significantly to the development
of the stock exchange, stock broking firms and the asset management industry Namibia.
South Africa also introduced captive funding at early stage of development and in a
number of developed countries such as Singapore; the domestic investment requirement
for pension funds is still present. With various measures in place to develop the
Government debt securities market, the authorities in Namibia will continue monitoring
these capital controls. They could be deregulated partly or fully when the implications of
capital outflows no longer poses severe danger to the country’s financial stability and I
particularly the country’s foreign exchange reserves. It should, however, be noted that
although captive funding create captive demand for the Government debt papers, the
IMF (2006) argued that it hampers the development and modernization of the financial
markets.
(4) Well developed Pension System
Namibia is blessed with a well developed pension system, which at more than 60
percent to GDP is one of the highest in the world (see Section 2.8). As pointed out
already in this paper, the developed pension system goes hand in hand with the bond
market development. Due to well developed institutional investors, Namibia managed to
generate saving surpluses that enabled the country to establish a reliably source of
funding the Government financing requirements. According BIS (2002), Chile has a well
developed pension system which is credited with making that country being the most
developed capital market in Latin America. Without a well established pension system in
Namibia, the strides made today in developing the domestic market could not been
possible.
(5) Commitment to Borrow from Domestic Markets
As evident in the cases of Poland, Slovenia and South Africa, the borrowing from the
domestic debt market enable countries to develop their domestic markets. At the same
time, it also enables countries to reduce external debt related risk and create
contingency borrowing source for future needs. The domestic debt markets in Namibia
could not have been at this level if it was not for the Government commitment to borrow
from this market. However, as indicated already, the country need to have a well
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developed pension system and thus, other countries in MEFMI region with less
developed pension system should undertake the necessary pension reforms.
(6) Guarantees for Parastatals Bonds. In a view of encouraging the issue of non-
central Government papers and development corporate bond market in the economy,
the Government provides guarantees on debt issued by the state owned enterprises
which have good balance sheets. This strategy realized benefits as witnessed in an
increased bond issues by the State Owned Enterprise. Furthermore, given the lack of
debt papers in the market, this initiative increased somehow the supply of debt securities
in the market and also lifted the pressure off the Government as the largest issuer in the
market.
(7) Sovereign Credit Rating.
Namibia was assigned a favourable sovereign credit rating during 2005 which was
reconfirmed in 2006. FitchRatings has assigned the Republic of Namibia a long-term
foreign currency rating of BBB- and a long-term local currency rating of BBB, in the
same peer group as Croatia and India. The good rating provides impetus for the
establishment of a well functioning market as it gives investors unbiased and objective
opinion on the relative risk of the bond issue. As a result of that credit rating, the high
credit premium attached to Namibia decreased and promoted Namibia’s reputation in
the international market as credible borrower. The credit worthiness of Namibia was
reaffirmed by the launch of the first international Namibia Dollar bond by the European
Investment Bank in March 2006 and over subscription in the syndicated loan contracted
by the BoN in August 2006. BoN is also planning to issue a bond during 2007 in the
international capital market, following in the footsteps of Poland, Slovenia and South
Africa.
(8) Debt Consolidation. As the experience from South Africa indicates, Namibia also
had fragmentation of bonds on the yield curve and these instruments were of small
amounts and short maturities, and illiquid. In order to lengthen their maturity structure, to
enhance their liquidity, create local benchmark instruments and easing the pressure at
the short end of the yield curve, most of these bonds were later consolidated in 1998 into
three major bonds namely GC02, GC05 and GC10 maturing in 2002, 2005 and 2010,
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respectively. Consequently, the secondary market trading improved and Government
was able to issue long-dated securities with around 20 year maturity.
(9) Easing the Pressure on Short-End. The composition of the Government domestic
debt was strongly skewed towards the short end of the yield curve. This has a potential
to cause cash flow problems and a rollover risk for the Government. The Government
borrowing strategy was reviewed and aimed at issuing more of longer dated government
securities and less short-term debt securities over the past two years, continued through
2006/07 financial year. In a period of two years, the Government strategy worked
beyond the expectations as the share of long-dated Government papers rose
tremendously to 61.3 percent by end December 2006 as opposed to the share of only
42.1 percent during December 2003.
(10) The IRS Redemption Account. The borrowing plan for 2006/07 made a provision
for the creation of the permanent Internal Registered Stock Redemption Account
(IRSRA) that will be used for the redemption of maturing bonds. This account was
initially created on the back of the successful redemption strategy of the GC05 that
matured in 2005. The immediate bond which has to be catered for is the GC07, maturing
in July 2007. The borrowing plan for 2006/07 fiscal year projected that at least N$600
million or 50 percent of the N$1.2 billion outstanding for GC07 will be transferred to the
IRSRA by the end of the fiscal year. These funds are raised by means of Internal
Registered Stocks’ primary auctions, whereby 50 percent of the proceeds from each
auction will be transferred to this account. In addition, Government can also transfer
excess funds from the State Revenue Fund at any point as circumstances allow. The
commitment was also made that by the end of each fiscal year, the excess balance of
over N$250.0 million should be transferred to this account. So far, the accumulation of
funds on IRSRA exceeded the expectations, with over N$1.8 billion already collected by
the end of January 2007. These funds are invested with local banking institutions.
(11) Debt buy-Back Operations. Given the improved fiscal position during the period
of 2006/07 – 2007/08 financial years, the MoF embraced the opportunity to buy back
some of its outstanding expensive domestic debt in order to reduce the financing cost of
these debt. The debt buy back option have been exercised by many countries and as
the case studies indicated, South Africa, Poland and Slovenia use this option to actively
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manage outstanding stock of debt. South Africa has undertaken successfully this option
to buy back its most expensive and ex-homeland debt to reduce the debt service costs.
The Government of Namibia has already committed funds during 2006/07 financial year,
which is ending during March 2007. The buy back program provides the Government
with new means of actively managing the stock of its outstanding debt. The bonds to be
targeted are those with current market prices lower than the prices when these bonds
were originally issued.
(12) Access to international Capital Markets. As discussed already, the Bank of
Namibia and Namibia at large have established a good credit record as credible
borrowers in the international capital markets after the contraction of a syndicated loan
during 2006. There is so much excess liquidity in the world today which is also looking
for assets to buy in emerging market economies. The country stands to benefit from
these encouraging developments. Testimony to these favourable developments is the
over subscription of a US$50 million 364-day loan syndication debut facility contracted
by the BoN during 2006. After the maturity of the syndicated loan during August 2007,
Namibia could continue showing presence in the international debt markets via issuing a
bond with a longer maturity.
By issuing a bond Namibia is able to augment the level of the foreign exchange reserves
when and as such a need arises. This is expected as well to have positive spinoffs on
reducing the spread between Namibian Government bonds vis - a - vis the South African
Government benchmark bonds. Some benefits realized when issuing a bond are such
as establishing repayment history and independent benchmark for future issues by the
Government and potential issuers in Namibia looking for long-term financing. MEFMI
countries can learn from this experience and borrow in order to establish their names in
the international capital markets.
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8. RECOMMENDATIONS TOWARDS A ROBUST GOVERNMENT DEBT SECURITIES
MARKETS IN NAMIBIA
The development of a robust Government debt securities’ market is very complex
process and depends on the maturity of each country’s financial sector. The consensus
has been reached that each country has its distinctive characteristics and, thus, would
choose a different path to develop its market. Macroeconomic and financial sector
stability is vital prerequisite for the building of efficient markets for Government debt
securities (IMF 2001). It is further noted that it is also a prerequisite for an efficient
government debt securities’ markets to have a credible and stable Government, sound
fiscal and monetary policies, effective legal and regulatory framework, market
infrastructures, efficient clearing and settlement and a liberalized financial system. If any
of the basic requirements is missing then the priority should be to implement them.
The Government debt securities market has gone a long way in Namibia since
independence when it was in effect not-existent. The achievements achieved should,
therefore, be developed further for the country to increase avenues for sourcing much
needed financing from the domestic market for the public and the private sector, and
reduce any dependence on external financing. A vibrant, efficient and robust financial
market is expected to enable Namibia to create investment opportunities that could
reduce capital outflows and in return result in the removal of captive funding. Following
below are the key recommendations for Namibia to develop robust and vibrant
Government debt securities market.
8.1 Sustaining Stable Macroeconomic Environment
The development of a Government debt securities market can be more successful if it is
accompanied by a consistent macroeconomic environment. Fabella and Madhur (2003)
noted that in general bond markets and in particular corporate bond markets have
developed at faster pace in countries with stable and predictable macroeconomic
environments. Therefore, any investor, foreign or domestic is willing to invest their funds
in the market which is characterized by stable inflation and interest rates, credible
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exchange rate regime, and prudent and sustainable fiscal policies. A country with
prudent macroeconomic environment is expected to have lower funding costs over the
medium and long terms, better then the ones with imbalance macroeconomic conditions.
According to the IMF (2001), Government should entice the investors to invest in
Government securities by showing ability to prudently manage its fiscal affairs. On cases
where Government is found not to have the ability to manage its fiscal affairs prudently,
investors perceive a high default risk and as a result, the cost of financing for
Government rises. The same goes for volatile inflation, when it is high it affects the
nominal securities yields.
To maintain confidence and monetary stability in the economy, the Namibian
Government deliberately assumed membership in the Common Monetary Area (CMA) in
order to enhance fiscal, exchange rate and monetary stability, which create favorable
conditions for capital market development. In this arrangement, the exchange control
regime and the policies are harmonized. By joining the CMA arrangement, Namibian
authorities have chosen to align themselves with the monetary policy of the South
African monetary authority. In addition, the Government also introduced sound
macroeconomic policies that resulted in a stable macro economic environment as
indicated under the section 1.2 of macroeconomic conditions of Namibia.
The Government of Namibia should continue to maintain a sustainable and predictable
macroeconomic stability that is conducive for the financial markets development.
8.2 Developing the Government Bonds Markets
The financial crisis which happened in late 1990s highlighted that the over-reliance on
bank lending for funding requirements render the economy vulnerable to the risk of a
failure in the banking system. Therefore, the availability of an active and efficient bond
market provides an alternative means of raising debt capital (Bank of Namibia Annual
Symposium, 2004). The mature bond market offers a wide range of opportunities for
funding the Government and the private sector. Among these opportunities or benefits of
the mature markets include avenue to provide the domestic funding of the budget
deficits, the transmission and implementation of the monetary policy, increase overall
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financial stability and intermediation, just to mention a few. The global experience points
out that before the benefits of developed domestic markets are realized some basic
elements should be present. These elements that the market should have include the
number of issuers, investors, intermediaries and the robust and safe infrastructures (IMF
2001).
Despite the fact that the Namibian bond markets are reasonably developed with regards
to existing infrastructures, some challenges still remain. Among these challenges is the
unsatisfactory trading in the secondary market which leads to low liquidity.
The following measures could contribute to the improved trading in the secondary
market and thus, improving liquidity in the Namibian Government debt securities market.
(1) Improving Trading Transparency
According to Mohanty (2002), the lack of liquidity remains a major obstacle to the
development of domestic bond markets in many emerging market economies. In
Namibia, the lack of liquidity has been identified as one of the key challenges facing the
bond market development. The low liquidity is reflected in limited trading taking place
either through the stock exchange or OTC relative to especially the South African
market where the country’s capital go to looking for investment opportunities. For that
reason, the secondary market in Namibia is not efficient since the investors are not able
to exchange assets at a fair value in the shortest time, although there a least degree of
settlement risk. Another factor identified as contributing to lack of liquidity in the market
is the fragmentation of market into narrow niches, such as pension funds, banks and
retails investors having different investments perspectives. These groups have different
attitudes towards the trading positions and holding of the securities.
The trading transparency (availability of sufficient information) for an example seems to
be lacking and that is why the market experiences divergence views about the market’s
activities. Hence, the information on market activities should be available to all players at
reasonable speed and cost.
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(2) Use Regional Bond Markets
Though, there are arguments that the benefits in domestic bond market for small
countries like Namibia may not be realized, innovative ways have been used in other
small countries such as Slovenia, Taiwan and contributed to the development of the
market (Mohanty 2002). One way is to allow the entry of foreign banks and securities
firms in the financial sector which results in competition. The foreign entities increase
supply of papers, diversifying investment opportunities for domestic investors. The other
alternative is to use regional bond markets to issue or buy bonds in the region. At the
moment, Namibia as a member of the CMA, can issue bonds and have them listed
(corporate and sovereign) on the Bond Exchange of South Africa (BESA). These
benefits have now been extended as well to the rest of African countries (BESA Press
Release, October 2006).
(3) Credit Rating
One of the calls from the market was for the Government of Namibia to obtain a
sovereign credit rating. A good rating stimulates the development of a well functioning
bond market; attract foreign players and the markets become more efficient. The
Government of Namibia responded positively to the call and sought a sovereign credit
rating in 2005. FitchRatings Agency assigned a sovereign investment grade of BBB- to
long-term foreign currency rating to Namibia. This rating has been reconfirmed again
during 2006. The assessment for credit worthiness for the Government should now
occur annually, and the authorities must be working to improve weaknesses identified in
the previous rating outcomes in order improve the next rating. Multiple rating from either
Standard and Poor’s and Moody’s should be sought to enhance the credibility of the
rating.
(4) Establishment of NBA
The establishment of the Namibian Bond Association (NBA) by the market participants
during 2006 is expected to enhance liquidity in the secondary market. A regulated bond
market with well defined frameworks by the market itself for organized trading and
stability should improve liquidity. This association should be tasked with the formulation
of the requirements for issuing entities, qualification requirements for traders in the bond
market and other aspects of regulating the market. As pointed out earlier, a well
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resourced NBA will work together with the Government and the Bank of Namibia to
ensure a smooth functioning and transparent domestic debt market.
(5) Increasing of Debt Papers in the Market
The volume in Namibia has been low and is even lower now given the budget surpluses
anticipated from 200/07 – 2008/09. This situation also contributed to low levels of
liquidity experienced in the market and as a result, buys and hold attitudes persist in the
market. The supply constraints should discussed further between the Bank of Namibia
and the Ministry of Finance where alternatives will be found to supply debt papers
especially to the market to cater especially for liquid asset requirements for commercial
banks and creating investment opportunities to capital outflows. According to Fabella et
al (2003), several countries such as Hong Kong, China and Singapore issue
Government debt papers regularly, although neither issue to finance fiscal deficits. The
main aim is to issue for the market development and the development of the yield curve.
Alternatively, as indicated from the lesson of the case study, South Africa managed to
reduce the supply of Government papers in line with the Government’s financing needs,
without sacrificing liquidity in the bond market. This was achieved by carrying out some
of the active debt management strategies such as debt consolidation or switches of
bonds, debt buy backs, inflation-linked bonds and strips.
The other option to increase the supply of debt capital in the domestic market is the
existing potential corporate bond. The central Government dominate the fixed income
market, however, the corporate bond market is geared to come in the market and tap the
huge savings in the domestic market as longer as measures are put in place to enable
them to enter the market. The interest from the corporate world is there at witnessed by
new issuers to the market. The potential for corporate issuers is big given investment
opportunities such as the gas exploration and other infrastructural developments. The
market also has excess liquidity which outflow to South Africa on daily basis.
(6) Market Making
During its annual symposium on “Challenges Facing the Bond Market in Namibia
(August 2004)”, the introduction of market making function in Government debt
securities was among the recommendations made as a tool to take the Namibian
Government bond market into new heights. The paper on Primary Dealer System has
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been finalized by the Bank of Namibia and MoF has approved the proposal.
Implementation of the Primary Dealer System in the Government debt securities in
Namibia is planned for 2008/09 fiscal year. This system plays a very important role in the
market; improve liquidity in Government debt securities, improve the secondary trading
by quoting continuous two way prices that could lead to the price discovery process in
the market and prepare the foundation for transparent continuous trading in the future. In
the primary market system, Primary Dealers are much closer to the market to articulate
the needs better than the authorities.
(7) Dematerialized of Bonds
The delivery system should also be reviewed and revised, and replace physical scrip
with electronic or dematerialized scrip for bonds. The Government is in the process to
amend the State Finance Act to allow the incorporation of bonds into the Book Entry
System where they will be dematerialized as the treasury bills. To develop the bond
market further, there also plans to link the Book Entry System to the settlement system.
(8) Introduction of Inflation Linked Bonds
The experience from the South African case study indicate that the National Treasury
managed to decrease the supply of Government paper in line with lower Government
financing needs, without sacrificing liquidity in the bond market. The introduction of
inflation-linked bonds (ILBs) was one of the initiatives taken to maintain the liquidity
levels in the market. This is very good lesson for Namibia since the Government of
Namibia is also faced by lower borrowing needs and thus, reduced supply of
Government papers. Since the introduction of ILBs in South Africa, the markets have
also been calling for their introduction in the Namibian market. The calls from the
markets are justifiable given the recent spectacular growth in these instruments
worldwide. The lack of liquidity, high cost of borrowing base are some of the major
obstacles curtailing the development of the current domestic bond market in Namibia.
Global experience tells us that countries that introduce ILBs managed to reduce the cost
of borrowing since the yields on these instruments are substantially lower in comparison
with nominal bonds. Developments in South Africa show that the introduction of the ILBs
complemented the nominal bonds and not treated as substitutes. This means that the
ILBs are regarded a total different asset class for diversification and inflation protection
purposes and therefore they are not competing with nominal bonds.
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This will augur well for the Government which is trying its utmost best to reduce high
spreads between the nominal bonds of Namibia and their respective benchmark
instruments in South Africa. These instruments are also renowned for their capability to
improve liquidity or tradability of the bonds. In addition, ILBs also diversify funding
sources as it increases the investors base the one thing the Bank and the Government
have been working to improve since independence. Therefore, Namibia is likely to
benefit from the ILBs given that the timing for their introduction is right.
Global experience indicates that for any country to issue the ILBs successfully, the key
precondition is to have a well developed pension funds, insurance industry and other
institutional investors. Namibia has one of the highest ratios of pension assets to GDP in
the world and this advantage makes a strong case for the Government to introduce
these instruments and entice further the institutional investors to invest their funds locally
instead of continuous transfers of funds outside the country. Furthermore, the country is
faced with the challenges of developing the bonds market and this requires an active
debt management strategy with tools such as issuing inflation-linked bonds in order to
uphold and develop an efficient, transparent and liquid Government bond market. The
ILBs are also expected to suit the portfolio of some Namibian investors whose attitude is
to buy-and-hold since they provide cover for inflation uncertainty.
(9) Standardisation of Documents
The other important tool Namibia should undertake to develop the entire bond market is
the standardisation of documents required from entities wishing to issue bonds. This will
shorten the whole process and make it simpler to issue bonds.
The developed bond market in Namibia will go along way to create investment
opportunities which is currently flowing to South Africa. The country savings would have
huge impact on the development of the economy if these funds are invested in the
country.
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8.3 Improving Corporate Governance
As the Government is busy designing reforms to develop the debt securities market, it is
important as well to make provision for the dissemination of relevant and timely
information about its activities as indicated in the case studies of South Africa, Poland
and Slovenia. This information may include Government finances, debt portfolio,
borrowing strategy and information on the primary and secondary market activities. By
doing that it strengthens the Government’s credibility as investor would have information
on the level of Government indebtness and that help to reduce uncertainty. To facilitate
this process, it is better to have a regulation or policy on disclosure for the debt office.
The regulation could touch on issues such fair and equal access, audit and internal
control procedures, and disclosure.
In Namibia, the lack of sufficient information on market activity to all players at
reasonable speed and cost has been identified as one of the contributing factor to the
attitudes of trading against holding strategies. MoF is currently in the process to design a
policy on transparency, accountability and disclosure. In order to ensure general access
for all players in the market, all issuers, intermediaries and settlement agents need to be
involved to disclose information on their respective activities. If this cannot be done on
voluntary basis, one of the regulators, say the Namibian Bond Association may step in to
enforce the timely dissemination of information to all market players. In addition, steps
should also be taken to review the current debt issuance and operations, and ensure
that they are transparent.
8.4 Institutional and Legal Framework
As pointed out in section 2, the responsibility of debt management lies with MoF,
assisted by Bank of Namibia, the National Planning Commission and the Office of the
Attorney General. The State Finance Act, 1991 (Act 31, 1991) highlights these
responsibilities. According to the Namibia Sovereign Debt Management Strategy or
SDMS (2004), a sound debt management requires an institutional structure that provides
clear accountability and responsibility for managing debt with clear documenting lines
and co-ordination of information flows among the various units. It also requires well-
trained and adequately compensated staff with the necessary financial and economic
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skills to carry out their responsibilities effectively. Moreover, the debt management
framework needs strong support from political leaders and from senior management at
the highest levels (SDMS, 2004).
In Namibia legal mandate that spell out various responsibilities seems to be satisfactory.
The State Finance Act of 1991 is under review to close some loopholes and improves on
some stipulations of the Act. The SDMS sets out series action plans that should be
implemented to improve the current set up of the institutional and legal framework. The
current debt management office in the Ministry of Finance is restructured in line with
international best practice as displayed in diagram 1 below.
Diagram 1 Proposed Structure of Debt Office located at MoF
CDM Division
Debt Management(Front Office)
Risk Management
(Middle Office)
Financial Operations
(Back Office)
Domestic Foreign Cash Flow Analysis
Risk Analysis
Debt recording
and Analysis
IT Support
Source: MoF
However, since the adoption of the SDMS in 2004, the proposed structure is not fully
implemented due to some delay. The speedy implementation of the SDMS should be
considered as the top priority by the entities tasked with its implementation. Namibia can
learn a lot from the experience of the South African debt office which implemented more
the similar structure. In South Africa, the new office, Asset and Liability Management,
located in the National Treasury is empowered with resources it requires to operate
effectively. The debt office is tasked with variety of functions, which is divided into front,
middle and back offices and is able to perform its functions mainly due to its skilled staff.
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This debt office provides better condition of service, including competitive packages that
enable to retain the employees.
The Bank of Namibia and MoF ought to work towards improving the co-ordination of
work better. Among others, a network of real-time sharing of data should be developed.
The risk debt-forecasting model at MoF and at the central bank be utilized and staff in
the middle offices be trained since will provide more accurate forecasts .i.e. future debt
service obligations, impact of potential new borrowings, etc. Attachments of staff
between the two institutions should also be encouraged to improve better understanding
of strategies and operations in both institutions.
8.5 Tax Treatment
The taxation of financial instruments has implications on the demand of financial assets
and the development of the financial markets. The central bank and the Ministry of
Finance should co-ordinate properly so that the tax policies introduced should be
compatible with financial market developments. In Namibia, the interest income accrued
from treasury bills and bonds issued by the Government to an individual other a
company is exempted from paying tax. The same tax treatment applies to external
companies not carrying on business in Namibia. In addition, there is no capital gain tax
in Namibia. However, should a taxpayer’s activity of making capital gains be of such a
nature that it can be construed as trading, it may be taxable. Determination of the
taxability of capital gains should therefore be referred to Inland Revenue. There are
some similarities of Namibia tax treatment to advanced emerging market economies. In
Slovenia, individuals are also exempted from paying taxes on Government debt
securities. In Poland, however, income from the sale securities other than bonds is
taxable.
Despite the fact that at different market forums, the taxation of financial assets has not a
pressing topic, the authorities, however, has to consistently review its tax policy on
government debt securities. For an example, MoF and the Bank of Namibia should be
cognizant of the fact that various tax incentives might be used specially to target certain
financial assets to stimulate their developments. Some countries have used them to
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unlock demand for long-term bonds. Some countries have specifically made bond
transactions subject to lower taxation relative to other sources of financing and
consequently, companies issue bonds to finance their investments. These tax incentives
have to be employed diligently as they can also a source of problems to the
development of the market. If not employed properly, it could result in distortion of prices
which in turn may lead to inefficient allocation of resources.
8.6 Broadening Investor Base
According to Biekpe (2004), the development of sustainable and independent bond
market requires among other things, an adequate institutional investor base. The study
by the IMF (2004) has reaffirmed that the significant contribution the local pension funds
has on the development of local securities markets. The way how to broaden the
investor base has been a challenge for countries, especially the developing countries.
The strategy in many countries focuses on promoting institutional investors and
attracting foreign investors to the Government bond market (Mohanty 2002). Namibia
financial system is one of the most sophisticated on the African continent, dominated by
commercial banks and, insurance and pension funds. In fact, Namibia’s ratio of pension
assets to GDP in 2001 was estimated at 60 percent and if include life insurance, short-
term insurance, unit trusts and other funds it amounts to 80 percent of GDP, one of the
highest ratio in the world. As pointed out early, the challenge facing Namibia is how
entice institutional investors to invest their funds in the local capital market, instead
somewhere else in the CMA.
With regards to foreign participants, their participation has been sporadic. This
development was attributed to lack of credit rating and limited supply of debt securities.
After, Namibia obtained sovereign credit rating, the interest is picking at a fast pace. The
picking up in the interest in Namibian assets by foreign investors is reflected in the over
subscription for the syndicated loan facility contracted by the Bank of Namibia during
2006. This appetite also fueled by the launch of the first international Namibia Dollar
bond by the European Investment Bank (EIB) during March 2006.
What Namibia needs to do to cater for this new demand is to supply more bonds, either
corporate or/and sovereign. For the development of the bond market and take
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advantage of foreign interest in Namibia assets, the Government may come in and see
whether can issue more bonds, even though not for financing the fiscal deficits. China,
Hong Kong and Singapore are number of countries are issuing bonds regular even
though is not financial fiscal deficits. This contributed tremendously to the development
of the respective local bond markets. A number of Namibian public and private sector
and commercial banks are geared to issue new corporate bonds from 2007 onwards and
this expected to take off burden on the Government as the largest issuer of fixed income
instruments. There are mega projects in the pipeline and these entities indicated that
financing will be through the issue of bonds. In addition, the Government may also
introduce inflation linked bonds (ILBs). These instruments are also renowned for their
capability to diversify funding sources as it increases the investors’ base. The ILBs are
also expected to suit the portfolio of some Namibian investors whose attitude is to buy-
and-hold since they provide cover for inflation uncertainty
8.7 Needs for Reforms – Sequencing
The sequencing of different steps of reforms in developing the Government debt
securities market is not based on universal principal of application, but chiefly on each
country specific circumstances. Before deciding on the different market aspects to be
introduced, the appropriate sequencing initiatives should be driven by the country’s size
of the economy, competition, sophistication of the market and investors, investor base
and the development of the financial sector (IMF 2001). According to the IMF, in order to
establish a successful and efficient Government debt securities market some basic
principles should be present. These prerequisites include a credible and stable
Government, sound fiscal and monetary policies, effective regulatory, legal and tax
infrastructures, a smooth and clear settlement arrangement and a liberalized financial
system.
Namibia has most of the basic prerequisite necessary for the development of successful
of Government securities market. For instance, there is a stable Government, sound
fiscal and monetary policy (CMA), efficient regulatory, legal infrastructures, liberalized
financial sector and a sound settlement system. The country is also able to issue long
dated instruments, with a longest maturity of around 20 years. The key challenges facing
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the Namibian Government domestic debt securities market among others; are the
development of deep and liquidity secondary market, creating sound investment
opportunities to stem out capital outflows and direct these funds into the development of
local markets, and supply of enough debt papers to the market. The sequencing of
reforms should focus on those afore mentioned challenges.
The case of Namibia is unique and requires a different approach. The market making
has been approved by the Government and its implementation is scheduled for 2008/09
fiscal year. The market making together with other measures such the buy back
operation planned during 2007 is expected to improve liquidity in the secondary market.
Given the strong appetite from both local and international investors, the current supply
levels have to increase to help the curb the capital outflows which are leaving the
country to seek investment opportunities somewhere else. As a result of this unique
situation, all the key three challenges, namely the supply constraint, lack of liquidity and
measures to reduce capital outflows have to be introduced concurrently as introducing
one at a time might not improve the situation. For an example, by tackling the supply
constraint alone will not stop capital outflows as investors will still opt to take their funds
to a more developed and liquid capital market in South Africa. Alternatively, the solution
to stem out capital outflows could not be realized if not tackled together with improving
the supply of debt papers in the market and provide investment opportunities for these
excess funds. Simultaneously as well, the development of deep and liquid market would
not be possible without supplying the market with enough papers sufficient to generate
trading in the secondary market and solving the supply constraint. Consequently, all
these three challenges are intertwined and have to be engaged together.
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9. CONCLUSION
The Government debt securities market for the Government of Namibia has evolved in
different metamorphoses since independence. At 1990, it was a country where there
were no bond and equity markets present and the source of financing was chiefly the
commercial banks’ funds. After the introduction of various measures and policies to
develop the financial system, various institutions, such the Namibia Stock Exchange,
stock brokers, unit trusts, emerged. Nowadays, both the Government and the private
sector are able finance their borrowing requirements from the domestic bond and equity
markets.
Although Namibia has one of the most sophisticated and developed financial systems in
Africa, the country is faced with some policy challenges to develop a vibrant and sound
Government domestic debt market. These key challenges among other include the
development of deep and liquidity secondary market, creating sound investment
opportunities to stem out capital outflows and direct these funds into the development of
local markets, and supply of enough debt papers to the market. This technical paper
proposes various recommendations that could assist in developing the financial market
in Namibia. The country has most of the basic prerequisites needed for the development
of an efficient and robust Government domestic debt market. For instance, it has a
credible and stable Government, stable macroeconomic environment, sound fiscal and
monetary policies, well established contractual savings, liberalized financial system,
investment grade, among others.
As a response to the capital outflows, the Government introduced the domestic
investment requirements on pension finds and insurance companies, which is set at 35
percent of their assets. This is not a recommended good policy, although many countries
are using it in practice according to IMF (2002). The IMF (2006) argued that capital
controls have large costs on the economies of the countries that introduced these
measures. These costs are reflected in terms of efficiency losses, less market discipline,
reduced capital flows and hampering the modernization of the financial institutions. The
authorities in Namibia are familiar with these shortcomings of captive funding. Thus, the
rationale for putting in place measures to develop the financial markets. The authorities
in Namibia should continue monitoring the implications caused by captive funding and
determine the appropriate actions to be taken. Lifting captive funding without creating
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competitive instruments in the financial market could exacerbate the capital outflows to
South Africa. In turn this might have negative implications on the financial stability for the
whole economy as official reserves are expected to decline. 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 a hindrance to the
market development 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.
Despite the arguments that the benefits in domestic bond market for small countries like
Namibia may not be realized, there are innovative ways introduced successfully in other
small countries such as Slovenia, Taiwan and contributed to the development of the
market in these countries (Mohanty 2002).This has spurred Namibia on to go forward
and develop its market, especially given the well established pension funds and
insurance companies which gives long term demand for debt papers. Namibia is
therefore privileged to have these comparative advantages of contractual savings and
should take advantages of them.
The experience from the case studies of Slovenia, Poland and South Africa benefited a
lot the case of Namibia. All the three countries have so many similarities to Namibia. For
an example, all the three countries introduced captive funding during the early stages of
the developments of their respective Government debt securities markets. In addition,
they have Primary Dealer System to improve tradability of these papers, debt office
located within MoF and most importantly, they are committed to fund the Government
budgetary requirements from the domestic markets in order to develop the domestic
markets.
Although the local bond market has grown significantly compared to the level at
independence, a lot is still left to be desired in terms of improving liquidity, transparency,
efficient market trading and infrastructure, number and size of bonds in the local market.
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Issues for Further Research
This technical paper among others has highlighted the current practices in the Namibia
Government domestic debt market, addressed the current practices in domestic
Government debt markets in Namibia, the needs of this market, the impediments to the
developments of the market. It also proposed measures of how these impediments
might be removed. During the discussion however, some of the issues were covered,
but not sufficiently, and thus, the paper generated some areas which need to be
explored further. These areas are such as the construction of Namibia’s own yield curve
for benchmarking local debt papers and the remedial measures for the supply constraint.
A study is also need to be undertaken to review the current commission and fees
charged by the stock brokers, stock exchange, settlement banks, etc, and the extent that
these charges are hindering secondary market trading.
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Bank of Namibia (2005). “Marketing Making for Government Debt Securities”, Windhoek,
Namibia.
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