Covid: Who is going to bail Nam out?
Why can the billions upon billions of dollars Namibians have in savings not save government's from its biggest cash crunch yet? James Mnyupe, managing director of Allan Gray Namibia and host of the new regular show Gray Matters in Business7's video Facebook broadcast, explains why.
27 May 2020 | Economics
Of course we going to need to spend more than ever in order to sustain the economy ... James Mnyupe, MD: Allan Gray Namibia
Namibians have a stash of savings invested in non-bank financial institutions, but government can only borrow a portion of that to finance what is expected to be a mammoth budget deficit this year.
As a result, government will likely have to start funding the budget from multiple sources and not just local assets. It may have no choice but to consider international sources more or maybe even multilateral funding institutions as well, says the managing director of Allan Gray Namibia, James Mnyupe.
In its latest ratings action issued on Friday, Moody's said it expected a “sharp widening of the fiscal deficit” to 10% of gross domestic product (GDP) in the 2020/21 budget, which new finance minister Iipumbu Shiimi will table in parliament this afternoon. The estimated figure for 2019/20 was about 4% of GDP.
According to the international credit rating agency, the deficit is expected to moderate “only slowly” to 8.5% in the next budget year, “declining further in future years as the fiscal situation progressively normalises”.
Debt is forecast to climb to 68.5% of GDP in the current fiscal year.
Funding a larger part of the deficit with foreign currency will come at a price though: government's long-term debt in foreign currency, excluding the rand, is rated two notches below investment status at both Moody's and Fitch Ratings.
Moody's on Friday added a negative outlook to Namibia's junk status.
“The decision to change the outlook [from stable] to negative reflects the challenges the government faces as a result of the coronavirus shock and the difficulties in addressing the vulnerabilities present in the rigid structure of the Namibian economy and government budgetary position,” Moody's said.
'Why are we broke?'
Statistics from the latest Financial Stability Report of the Bank of Namibia (BoN) and the Namibia Financial Institutions Supervisory Authority (Namfisa) show that Namibians had about N$316.3 billion in “some form of national savings or assets” at non-bank financial institutions (NBFI) in the country at the end of last year.
“Namibia's GDP is maybe N$175 billion, therefore we have about 175% of GDP in assets. That's cash we have. So why is it that we're broke?” Mnyupe says.
The answer is simple: “Not all of that money is available to be used just willy-nilly,” he explains. “In fact, some of that money has been promised to stakeholders who have contributed towards to those assets.”
Mnyupe elaborates: “If you think about the GIPF or Rössing, they probably had N$120 billion worth of assets as at the end of 2019, but all of those assets had corresponding liabilities that almost equalled those assets.”
That's the case with nearly all defined benefit pension funds in the country, he says.
The Financial Stability Report shows the funding level of the local NBFI sector at the end of last year was 101.49%.
“This means we had only 1% of assets more relative to those promises we've made to those people or liabilities,” Mnyupe says.
“These promises essentially means that if I retire from government and I've contributed to the GIPF [Government Institutions
Pension Fund], they've promised to pay me a certain amount of my salary over my lifetime,” he says.
According to Mnyupe, “about 30% of that money has already been promised to people”.
“That's one thing to bear in mind. The other thing to bear in mind is about N$70 billion of the NBFI sector is actually invested in what we commonly call unit trusts or collective investment schemes,” he says.
About 36.6% of that money comes from companies, while around 25.5% of it belongs to natural persons – “people like you and I,” Mnyupe adds.
Prior to the outbreak of Covid-19 and the lockdown, Namibia already experienced “deteriorating fiscal trends” and a “prolonged recession”, Moody's said on Friday.
Adds Mnyupe: “What do we know about the situation we're in?
“We know companies are in a lot of trouble and they're retrenching and cutting costs where they can and of course those very same people are also in a lot of fiscal constraint. Some of them's salaries are being cut, some of them are getting unemployment - which means that it is highly likely that they will draw on those savings to sustain themselves through these very, very trying and testing times.”
According to Mnyupe, “pretty much 80% of that N$70 billion in the collective investment scheme sector is invested in very, very liquid assets”.
People put their savings in the money market – usually not for long - where they can access it easily within two or three days. A big portion of the N$70 billion falls in this category, Mnyupe says.
“So again, that money has also been promised. So it's not like the government can just go and raid that money to fund the budget,” he adds.
Mnyupe expects this afternoon's budget and medium-term expenditure framework (MTEF) may contain “challenging if not worrying” news to a lot of people.
Namibia could move from a scenario of debt equalling 54% of GDP now to one where it makes up more than 80% of the economy within three years.
“That will come with a contraction in the economy and of course we going to need to spend more than ever in order to sustain the economy,” he says.
“At the same time, the amount of money we're going to spend to pay interest rate costs will increase significantly.” Now about 11% of government's revenue pays for interest costs. Three years from now it could be 15% to 16%, he says.
“That means a lot less of that revenue is available to do a lot of key developmental activities like education, health and infrastructure spending,” Mnyupe points out.
* Tune in to the Business7 programme tonight at 18:30 on the Facebook pages of Namibian Sun, Republikein and Allgemeine Zeitung where James Mnyupe will share more of his insights in Gray Matters.