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Namibian Government Bond Market. Background Strategies Outcomes of strategies Government bond market Measures taken Summary. Background. Namibia in CMA (RSA, Lesotho & Swaziland) Free flow of funds Tendency of funds flowing to more sophisticated RSA market (contractual savings)

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Namibian government bond market l.jpg
Namibian Government Bond Market

  • Background

  • Strategies

  • Outcomes of strategies

  • Government bond market

  • Measures taken

  • Summary


Background l.jpg
Background

  • Namibia in CMA (RSA, Lesotho & Swaziland)

    • Free flow of funds

    • Tendency of funds flowing to more sophisticated RSA market (contractual savings)

    • Banks dealing with counterparts in RSA

  • Poorly developed money and capital markets, poor infrastructure, lack of market activity

  • Challenge to develop local financial markets


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Strategies to develop local financial markets

  • Fund budget deficit locally

    • Raise funds domestically

    • Issue securities to develop markets by forming benchmark issues

  • Liquid asset requirement for banks

    • Prudential requirements

    • Encourage demand for local securities

  • Tax incentives, exemptions

    • Individuals

    • Non-residents

  • Local investment requirements

    • 35% of assets to be invested locally


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Outcomes of strategies

  • Establishment of debt and equity markets

  • Namibian Stock Exchange

  • Stock broking firms

  • Asset Managers

  • Unit Trusts

  • Skills and capacity development

  • Interbank transactions

  • More issues by parastatals


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Government Bond Markets

  • Bonds issued to fund deficit and develop market

  • First issue, 1992

    • Original maturity of less than 6 years

    • Number of bonds increased to 13 in 1998

  • 1998 trading was still sporadic and market highly fragmented and illiquid

  • Strategy bond consolidation

    • Buy back and issue new bonds


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Bond Consolidation (Objectives)

  • Enhance liquidity by issuing few but large issues

  • Reduce cost of borrowing through reduced liquidity premiums

  • Reduce fragmentation and create local benchmark issues reasonably spread across the yield curve

  • Meet market needs by providing alternatives to investors and government as a borrower

  • Benchmark against RSA bonds for price referencing


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Bond Consolidation (Results)

  • 13 Bonds consolidated into 3

    • GC02, 12%, due 2002, 4yrs

    • GC05, 12%, due 2005, 7 yrs

    • GC10, 12%, due 2010, 12 yrs

  • All these bonds were listed on the Namibian Stock Exchange (NSX)


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Current Situation

  • Amount outstanding in bonds N$3.2 bln

    • Nearly 50% of Government domestic debt securities

  • Most of the trading on NSX and OTC

  • Bonds in issue

    • GC05-12%, GC07-12.5%, GC10-12%, GC15-13%

  • Challenges

    • Low activity and liquidity

    • Lack of market information

    • Relatively low demand for longer dated securities


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Reasons for current state of affairs

  • Buy and hold attitude

  • Passive management of bond portfolios

    • Lack of skills

    • Remote offices

  • Limited number of alternative issuers

  • Unison view in the market

  • Relatively low amount of debt outstanding

  • Absence of sovereign credit rating


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Measures Taken (secondary auctions)

  • Bring together willing buyers and sellers

  • Objectives

    • Establish regular market prices

    • Create degree of liquidity

    • Stimulate trading

    • Facilitate introduction of market makers

  • Success limited

    • Cyclical market

    • Unison view


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Measures taken (switch auctions)

  • Switch from source to destination bonds

  • Objectives

    • Smooth redemption, alleviate cash flow

    • Reduce investor rollover risk

    • Increase benchmark bonds

    • Lengthen maturity structure

  • Results

    • Successful, GC02 redemption and increased benchmark bonds


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Other Measures

  • Book Entry System

  • Frequent primary issues

  • Transparency and Infor

    • Brochures

    • Issue calendars

    • Full auction results

  • Debt Mgt Strategies


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Summary

  • Initiatives take resulted in some market development – various instruments across the yield curve and ability to fund deficit

  • Competitive and well functioning primary market

  • Challenges

    • Liquidity

    • Lack of market information

    • Relatively low demand at the longer end of yield curve