The Motives, Outcomes and Opportunities of Accessing Local African Debt Markets

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1 REPUBLIC OF NAMIBIA The Motives, Outcomes and Opportunities of Accessing Local African Debt Markets Fourth Annual African Central Banks Conference Hon. Carl-Hermann G Schlettwein Minister of Trade and Industry Namibia 15 April, P age

2 Director of Ceremonies, Central Bank Governors and officials, Captains of Industry Distinguished Invited Guests Ladies and Gentlemen, 1. Allow me, right at the onset, to thank you and ABSA for inviting me to address this annual gathering. I am also grateful to the conference organizers for the excellent arrangements. The diversity of expertise gathered here today is testimony to the prominence of peer learning and the role of Central Banks in policy implementation and oversight functions to enhance free market allocation of resources to alternative uses in the economy. We have also gathered here today to take stock of developments in the global and regional financial markets and to learn from the experiences of countries represented at this indaba. 2. As we interrogate aspects of public finance management, the role of capital and financial markets in supporting Africa s development agenda and how central banks can enhance this role as well as the sharing of diverse country experience, it is important to note that Africa as a continent has made noticeable progress in the areas of macroeconomic stability and public debt management. This progress has not only boosted competitiveness on the continent, but 2 P age

3 also ushered in a conducive environment for better market engagements, terms and conditions. 3. African sovereign issuers have increasingly recognized that an international sovereign benchmark bond will provide an important and fundamental market pricing reference for bank and corporate issuers in their country s private sector as they seek to attract foreign capital. 4. As such, the pipeline for African international bonds is growing. Several African states have been able to access capital from the international markets through sovereign issuance. The international investor community has also demonstrated confidence in the African markets and public sector. Much of the sovereign issuance from Africa has been over-subscribed and co-financing of investment undertakings has gained prominence. The more recent euro bond issuances of Namibia in 2011 and of Zambia in 2012 are examples. 5. It is, however, disheartening to note that intra-africa issuance are minimal and capital market development in most African countries still has a long way to go. A conducive environment is needed in terms of competitiveness of offerings and market efficiency. Central banks have a role to play in creating this conducive environment through appropriate policy implementation and development of financial infrastructure as well as promoting market activities, especially secondary market trading. 3 P age

4 6. Indeed, raising capital has associated costs and risks. From the point of view of public finance, these relate to high servicing costs, cost of carry and long-term debt stabilisation. Most important, there is also the associated opportunity cost. If raised funds are not put to productive use and so done in a timely manner, the concomitant development outcomes are muted and the cost of debt servicing remains high. Central bankers have a venerable duty as specialists and a technical advisory arm to advise government in developing and deepening domestic capital markets and prudent management of public debt. Namibia s Experience 7. Namibia is one of the prime examples of increased domestic sourcing of capital. A national Debt Management Strategy is adopted, setting out public debt management benchmarks, hedging strategies and domestic capital market development goals. 8. In terms of this strategy, up to 70 percent of the public debt is sourced from the domestic market and the remaining 30 % from foreign sources. This is a conscious policy strategy to develop domestic capital market. The actual outcomes are in conformity with this policy direction. As a result Namibia has established a reliable 4 P age

5 source of funding in the domestic market with a long bond in excess of 20 years. 9. Total public debt for Namibia progressed from a low base of N$14.6 billion or some 25.4 percent of GDP in 2002/3 to a low base of 16.6 percent of GDP in 2010/11 fiscal years, seen against the national benchmark of 35 percent. 10. We have been able to drive down public debt prior to the onset of the global financial crisis, thanks to accumulated fiscal surpluses buoyed by the commodity price boom. However, an upsurge is public debt was witnessed in recent years due to fiscal counter-cyclicality aimed at supporting economic recovery and jobcreation. Overall debt currently stands at 27.8 percent of GDP and this is projected to rise to 30.7 percent by 2015/16. Government is conscious that growth in public debt needs to be stabilized by reining in expenditure growth in the during the medium-term expenditure framework for the next three years. 5 P age

6 11. In terms of sourcing, the proportion of domestic issuance has fallen slightly, from 76.6 percent in 2010/11 to about 67.0 percent in 2013/14 due to the recent sovereign issuance. 6 P age

7 12. We also maintain oversight on debt servicing costs by capping interest rate payments at no more than 10 percent of total revenue and total operational expenditure is limited to within 30 % of GDP. 13. State-Owned Enterprises, especially those with strong balance sheets, are encouraged to raise their capital in the market which enhances complimentarily with Government borrowing plan. This has the benefit of decoupling the reliance of SOEs on the Central Government budget. 14. The Government has developed and started to implement a 10-year Financial Sector Strategy, which focuses on, among others, financial inclusion, financial deepening and development, strengthening financial safety nets and skills development. 15. Namibia issued her debut 500 million dollar-denominated sovereign bonds in This was followed by the issuance of the R850 million-bond on the Johannesburg Stock Exchange in the following year. The issuance of the JSE bond is a demonstration of confidence in the African market tapping on African resources and diversifying the finding sources. The first issuance of the JSE bond is just the beginning, given that this is a drawdown bond to the tune of R3 billion. 7 P age

8 16. As Markowitz would say, this issuance comes with related benefits of diversifying risk exposure such as currency risk and market risks. 17. Both the Eurobond of US$ 500 million, about N$4 billion equivalent and the JSE bond and were overly subscribed. The Eurobond coupon rate of 5.5% was especially lower, compared to the domestic rate of 8.0%, given the benefit of low interest rate environment in the United States.. The average JSE bond coupon in comparison was 8,26 %, which is similar to the domestic rate. This outcome met our expectations, since it did not increase cost and it prevented cannibalisation of the domestic bonds. 18. Of course, the cost of borrowing is an important criterion on sourcing and, in an environment of capital mobility, domestic financiers, and also the African Development Bank and regional infrastructure funds, have become increasingly competitive in their offerings. 19. In the case of Namibia, a low yield environment in international finance markets offered the opportunity to refinance at a much lower rate than in domestic markets. Compared to domestic funding the government saved in yield terms. The preponderance of domestic issuance is counterbalanced by the objective of realizing domestic capital markets development. 8 P age

9 20. Namibia is a member of the Common Monetary Area (CMA) and thus maintains a one to one currency peg with the South African Rand. The Common Monetary Area (CMA) regulations have served us relatively in cushioning the economy and other CMA economies from exposure to the first-round effects of the global financial crisis. In this regard, and in addition to price stability considerations, CMA arrangements remain an important monetary policy option for Namibia. 21. However, one feature that emerges for the local currency denominated bonds is the volatility of the South African Rand. 22. On average, the USD/ZAR exchange rate fluctuates within a corridor of +/ % around the mean value, making it one of the most volatile currencies of our times. This highlights the need to 9 P age

10 alleviate risk brought about by such volatility. It however does not in our opinion justify the abandoning of the peg. 23. There is a further aspect that I want to touch on briefly. Namibia is a very open and small economy with a Gini co-efficient of 0.58 and a pro capita GDP of $ 4700 (2011) Namibia is hence classified as High Middle Income Country. As a result of this classification access to concessional multilateral and bilateral development assistance has dried up. 24. Secondly and linked to the above development assistance, even when at concessional terms, comes with conditionality s, These conditionality s are costly for the economy and more often than not, significantly erode policy space. These two factors obviously make the open market in the current climate an attractive alternative. Not only are the terms competitive, but also more importantly it comes without costly conditionality s. Financing for industrialisation and regional economic integration 25. A critical element in sovereign issuance is the management and utilization of the proceeds from borrowing. Development finance should be accessed for the purpose of investing in productive undertakings for the economy to reap the benefits of growth and generating repayment capacity. This raises the indispensable need to have a national growth and industrialisation 10 P age

11 plan in place as well as credible project selection, management and monitoring and evaluation framework. Any erosion of policy space as often imposed by bilateral and multilateral financiers can be costly and to the detriment of the growth potential. We believe that the open market offers a competitive additional source. 26. Public, Private Partnerships promise opportunities for financing for development, especially in the African context where the opportunities for developing productive social and economic infrastructure abound. 27. One such avenue to productively utilize the proceeds of borrowing is the financing for domestic and regional infrastructure. Africa needs to vigorously advance the regional integration agenda and improve our regional trade and supply-side constraints, based on complementarities in the framework of regional economic communities. 28. Namibia is a member of SACU and SADC, and in the case of SADC, not only for revenue sharing purposes, but also, and most importantly, for further meaningful regional economic integration. 29. In terms of the management of proceeds of public borrowing, the strategy should entail aspects of mitigating the cost of carry. Thus, objective criteria need to be maintained by weighing the 11 P age

12 options of facilities such as sinking funds against automatic roll-overs at maturity in the context of long-term sustainability of public debts. Prerequisites 30. I should, however, stress the prerequisite of maintaining fiscal prudence and macroeconomic stability which is core to price stability and credit worthiness of Government. A predictable and competitive policy environment is needed to retain and improve credit ratings and investor confidence. These dimensions are important for maintaining and improving national competitiveness and domestic economic policy. In this respect, public finance management emerge as important facet in this regard. Needless to state, peace and political stability are taken as a given. 31. Namibia has been able to retain its sovereign credit rating by Fitch and Moody s Investor Service since 2005 and 2011 respectively. One of the key drivers in retaining the sovereign credit rating is the policy certainty, fiscal sustainability and revenue management and credible policy reforms. 32. A conducive regulatory environment and investment in financial infrastructure is needed to support market efficiency and financial stability. 12 P age

13 Conclusion 33. In short, the adoption and adherence to fiscal rules has served us well in ensuring sustainability of fiscal operations. In addition, a stable policy and investment environment is crucial to remain and even improve domestic macroeconomic stability. 34. A bias towards domestic sourcing of capital has the effect of realising domestic capital market development. Other supportive policies could enhance the outcomes. One could wish for affordable domestic sourcing in comparison with sovereigns. 35. Namibia has benefited from this policy package, but several lessons from elsewhere could strengthen efforts going forward. I thank you for your attention. 13 P age