What has N$14bn Eurobond gained, as repayment nears

The success of government’s N$14 billion Eurobond, issued in 2015 and due for settling in 2025, is being questioned – but government insists the money was utilised to finance budget deficits.

Namibian Sun understands that although the Eurobond was secured under instruction that it would not be used for consumption expenditures, this directive was breached.

“The money was primarily borrowed to support our reserves and protect our sovereignty, but we soon used a part of it for consumption,” a top economist in government commented.

Finance minister Ipumbu Shiimi, during the tabling of his 2024/2025 financial year (FY) budget recently, announced that government would set aside N$3.5 billion, and N$2 billion in anticipated Southern Africa Customs Union (SACU) revenues, to meet the N$14 billion debt obligation due next year.

Academic and economist Dr Omu Kakujaha-Matundu questioned whether the debt obligation reflected any economic gains for the country over the last nine years.

“It begs the question: How much income and jobs did the Eurobond generate? Are the returns generated by the Eurobond able to repay itself?”

According to him, debt has the potential to compromise both operational and development priorities.

“The development budget, although increased in this current budget, still remains too small to cause meaningful economic growth and make a dent in unemployment,” the former member of the Bank of Namibia board of directors said.

Budget deficits

The finance ministry said the Eurobond was utilised to help government finance its budget deficits between 2015 and 2017.

“The proceeds from the US$750 million Eurobond issued in October 2015 were utilised for general budget deficit financing. In other words, the bond was not issued for dedicated projects, but rather to finance the budget deficit,” executive director Titus Ndove said.

“Accordingly, the proceeds from the bond were used to finance the budget deficit for FY2015/16 as well as FY2016/17. The proceeds benefitted the operational budget as well as capital projects in the development budget over the two financial years,” he added.

Repayment strategy

Outlining government’s strategy to honour the Eurobond obligation, Shiimi said it would, over a two-year period, channel a portion of SACU revenues amounting to N$5.55 billion in a sinking fund towards honouring what will be the largest single-day debt maturity in the history of Namibia.

“Consequently, the remaining one-third of the bond (US$250 million) will be refinanced utilising the most cost-effective instrument in the next financial year, cognisant of the prevailing high interest rate environment and the need to manage debt-servicing costs,” he said.

“In this regard, consideration will also be given to the domestic markets as well as financing from development finance institutions.”

Government’s approach towards redeeming the Eurobond obligation was premised upon the successful redemption of its first in 2022, which was at the time financed by the sale of the state's stake in mobile operator MTC, which was also listed on the Namibia Stock Exchange (NSX) that same year.

“This allocation underscores the ministry’s commitment to maintaining fiscal discipline while ensuring debt sustainability and follows on the successful redemption of the first Eurobond in 2022,” Shiimi said.

Debt-reduction strategy welcomed

The redemption of the Eurobond would go towards significantly reducing Namibia’s public debt stock, in line with international best practices, economist Klaus Schade said.

“The redemption of a large chunk of the Eurobond will reduce the debt-to-GDP [gross domestic product] ratio to some 56%, which is below the international threshold of 60%. Subsequently, interest payments will be reduced as well as the risk exchange rate fluctuations pose to overall debts and interest payments,” he said.

Public debt stands at N$165.8 billion - or 60.1% of GDP.

Going forward, Schade implored government to issue debt in the domestic currency to ensure local financial institutions and Namibian-based individual investors could benefit.

“Ideally, the remaining Eurobond amount is financed on the domestic market since it generates interest income for mainly domestic financial institutions and individuals investing in government bonds and treasury bills. However, interest rate levels are higher on the domestic market than on the international market and there could be liquidity constraints. Government needs to be careful not to crowd out the private sector from borrowing,” Schade said.

IJG Securities welcomed government’s strategy to honour its Eurobond obligation.

“The government has earmarked setting aside specific funds, including SACU receipts - showcasing a proactive and prudent stance towards reducing the debt-to-GDP ratio and foreign debt in particular. This allocation underscores the ministry’s commitment to maintaining fiscal discipline while ensuring debt sustainability and follows on the successful redemption of the first Eurobond in 2022,” it said in its preliminary budget commentary.