Nam’s Eurobond debt surges
Government may have to roll its US$500-million Eurobond which matures next year.
Jo-Maré Duddy – The free-fall of rand, and therefore the Namibian dollar, against major world currencies has led to the spike in government’s Eurobond debt, the first of which has to be repaid next year.
Government has to settle Namibia’s first Eurobond of US$500 million in 2021.
According to Bank of Namibia (BoN) data, the exchange rate between the Namibia dollar and the US dollar was 14.1 at the end of last year. According to this, the debt of the first Eurobond at the end of 2019 was N$7.05 billion.
Yesterday at 12:30, the Namibia dollar traded at 18.9 against the greenback, pushing up the debt of the first Eurobond to N$9.45 billion.
Namibia issued its first Eurobond, denominated in US dollar, in 2011, followed by a second one of US$750 million in 2015. Government’s total Eurobond debt of US$1.25 billion has jumped from N$17.7 billion at the end of 2019 to around N$26.3 billion by yesterday due to the exchange rate – an increase of just below 50%.
“The Eurobond has always been quite a big risk because of the exchange rate,” analyst Dylan van Wyk of IJG Securities said yesterday.
Economist Rowland Brown of Cirrus Securities described the situation as “very tricky”.
Sinking funds
Government has been preparing for redeeming its debt by saving in two sinking funds at the BoN – one in rand for debt redeemable in the South African currency and the other in US dollar for foreign debt.
Former finance minister Calle Schlettwein last year said there was R858 million in the rand sinking fund at the end of March 2019, while the US dollar sinking fund contained US$350 million. Last month, the Economic Association of Namibia (EAN) and Cirrus estimated that government had R2.3 billion and US$400 million respectively in the two sinking funds.
New finance minister Iipumbu Shiimi, announcing his economic stimulus and relief package of N$8.1 billion last week, will however have to dip into the sinking funds.
Shiimi last week told Market Watch that a “portion” of the “up to N$8 billion” government has set aside “over the years for the purpose of debt redemption” will be “utilised now”.
“Arrangements will be made during the next two years to rebuild these savings and manage the debt redemption liabilities,” he said.
Referring to the sinking funds in their report last month, EAN and Cirrus said “this emergency should not supersede the current emergency [of the Covid-19 impact]”.
Van Wyk yesterday said: “Although there is a dedicated sinking fund for its redemption, there is a good chance that we might need those reserves to fund stimulus packages or emergency expenditure.”
‘Roll it’
Dipping into the sinking funds to pump cash into the economy and provide relief to businesses and households affected by the lockdown, means government “will have to roll the US$500-million Eurobond, or part thereof, to maintain our foreign reserves”, Van Wyk said.
“However, with global yields as low as they currently are, there is a good chance that government might be able to borrow the funds and hedge the foreign exchange exposure, at a lending rate equal to or possibly even lower than the current local government bonds,” he added.
EAN/Cirrus said: “With the current major global liquidity injection, once the short term panic has passed, flows can be expected to be seen into emerging markets and emerging market debt.”
This will cause the currency to strengthen, demand to increase and the cost of borrowing to decrease, their report states.
“Thus, in a heterodoxical manner, the current environment bodes well for the ability of government to roll hard currency debt forward, from mid-to-late 2021,” EAN/Cirrus said.
Government could also consider to seek support from the Government Institutions Pension Fund (GIPF) to “underwrite the roll of Namibian hard currency government debt for the next two years, thus ensuring that no crisis occurs during this period”.
“As such a guarantee is off-balance sheet, it will enable GIPF to remain invested as desired (and not realise current mark-to-market losses), and will not drive a deterioration in the debt-to-GDP ratio,” EAN/Cirrus said.
Debt
Brown said Cirrus estimates that debt to gross domestic product (GDP) will jump to “75% or more this year”.
In the main budget tabled by Schlettwein about a year ago, government targeted a debt-to-GDP ratio of 51% for 2020/21. Its threshold is 35%.
Shiimi said last week government will use a combination of sources of funding so as to mitigate adverse impacts on any single source.
Brown said the debt-to-GDP ratio is expected to increase dramatically this year as both debt is increasing while the GDP is falling. However, the ratio will “partially recover if the GDP recovers”, he added.
“So if the government interventions are right, they should be able to keep the economy in life support so that it can rebound quickly,” Brown said.
Fin24 yesterday quoted Bloomberg as saying the rand hasn’t hit rock bottom yet.
The median forecast of economists in a Bloomberg survey put the rand at 16 per US dollar by year-end. But there is less than 30% chance of this, according to Bloomberg’s probability calculator based on prices of options to buy and sell the currency.
The probability of the rand hitting 21 this year, however, is 52%.
[email protected]
Government has to settle Namibia’s first Eurobond of US$500 million in 2021.
According to Bank of Namibia (BoN) data, the exchange rate between the Namibia dollar and the US dollar was 14.1 at the end of last year. According to this, the debt of the first Eurobond at the end of 2019 was N$7.05 billion.
Yesterday at 12:30, the Namibia dollar traded at 18.9 against the greenback, pushing up the debt of the first Eurobond to N$9.45 billion.
Namibia issued its first Eurobond, denominated in US dollar, in 2011, followed by a second one of US$750 million in 2015. Government’s total Eurobond debt of US$1.25 billion has jumped from N$17.7 billion at the end of 2019 to around N$26.3 billion by yesterday due to the exchange rate – an increase of just below 50%.
“The Eurobond has always been quite a big risk because of the exchange rate,” analyst Dylan van Wyk of IJG Securities said yesterday.
Economist Rowland Brown of Cirrus Securities described the situation as “very tricky”.
Sinking funds
Government has been preparing for redeeming its debt by saving in two sinking funds at the BoN – one in rand for debt redeemable in the South African currency and the other in US dollar for foreign debt.
Former finance minister Calle Schlettwein last year said there was R858 million in the rand sinking fund at the end of March 2019, while the US dollar sinking fund contained US$350 million. Last month, the Economic Association of Namibia (EAN) and Cirrus estimated that government had R2.3 billion and US$400 million respectively in the two sinking funds.
New finance minister Iipumbu Shiimi, announcing his economic stimulus and relief package of N$8.1 billion last week, will however have to dip into the sinking funds.
Shiimi last week told Market Watch that a “portion” of the “up to N$8 billion” government has set aside “over the years for the purpose of debt redemption” will be “utilised now”.
“Arrangements will be made during the next two years to rebuild these savings and manage the debt redemption liabilities,” he said.
Referring to the sinking funds in their report last month, EAN and Cirrus said “this emergency should not supersede the current emergency [of the Covid-19 impact]”.
Van Wyk yesterday said: “Although there is a dedicated sinking fund for its redemption, there is a good chance that we might need those reserves to fund stimulus packages or emergency expenditure.”
‘Roll it’
Dipping into the sinking funds to pump cash into the economy and provide relief to businesses and households affected by the lockdown, means government “will have to roll the US$500-million Eurobond, or part thereof, to maintain our foreign reserves”, Van Wyk said.
“However, with global yields as low as they currently are, there is a good chance that government might be able to borrow the funds and hedge the foreign exchange exposure, at a lending rate equal to or possibly even lower than the current local government bonds,” he added.
EAN/Cirrus said: “With the current major global liquidity injection, once the short term panic has passed, flows can be expected to be seen into emerging markets and emerging market debt.”
This will cause the currency to strengthen, demand to increase and the cost of borrowing to decrease, their report states.
“Thus, in a heterodoxical manner, the current environment bodes well for the ability of government to roll hard currency debt forward, from mid-to-late 2021,” EAN/Cirrus said.
Government could also consider to seek support from the Government Institutions Pension Fund (GIPF) to “underwrite the roll of Namibian hard currency government debt for the next two years, thus ensuring that no crisis occurs during this period”.
“As such a guarantee is off-balance sheet, it will enable GIPF to remain invested as desired (and not realise current mark-to-market losses), and will not drive a deterioration in the debt-to-GDP ratio,” EAN/Cirrus said.
Debt
Brown said Cirrus estimates that debt to gross domestic product (GDP) will jump to “75% or more this year”.
In the main budget tabled by Schlettwein about a year ago, government targeted a debt-to-GDP ratio of 51% for 2020/21. Its threshold is 35%.
Shiimi said last week government will use a combination of sources of funding so as to mitigate adverse impacts on any single source.
Brown said the debt-to-GDP ratio is expected to increase dramatically this year as both debt is increasing while the GDP is falling. However, the ratio will “partially recover if the GDP recovers”, he added.
“So if the government interventions are right, they should be able to keep the economy in life support so that it can rebound quickly,” Brown said.
Fin24 yesterday quoted Bloomberg as saying the rand hasn’t hit rock bottom yet.
The median forecast of economists in a Bloomberg survey put the rand at 16 per US dollar by year-end. But there is less than 30% chance of this, according to Bloomberg’s probability calculator based on prices of options to buy and sell the currency.
The probability of the rand hitting 21 this year, however, is 52%.
[email protected]
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