Only banks win under new investment regulations
According to Simonis Storm Securities, amendments to increase the 35% domestic asset requirement to 50% for Regulation 28 of the Pension Funds Act and Regulation 15 of the Long Term Insurance Act, with the objective of developing and stimulating the capital market and channeling more savings into the Namibian economy, may do more harm than good.
This they say may not be the appropriate amendments to stimulate capital and infrastructural spending in the country and may continue to feed the property bubble, the super profits earned by banks and the export of profits to South Africa.
Last year, Regulation 29 was finally promulgated as a subset of Regulations 15 and 28 to include the requirement to invest in unlisted investments, effectively bringing private equity and venture capital under the ambit of these regulations which came into use in 1994 with the main requirements of having 35% of regulated assets invested in Namibia.
“Regulation 28 has been very beneficial to the Namibian commercial banks, while a large portion of the profits generated by the banks were exported to South Africa”, the report states.
“Over the years, we have noted the imbalance between regulated capital and assets available to allocate this capital to.” The Simonis Storm Securities Director of Research and Securities, Purvance Heuer said this has resulted in large sums of cash being held in time and similar deposits at banks to ensure compliance with the Regulations due to a lack of suitably qualifying investments.
Noting how regulatory assets have grown over the period, to what extent deposits have stimulated growth in the banking industry and how banks used those deposits to support their lending activities, particularly in construction and real estate through mortgages, the report draws attention to the growing imbalance on banks’ balance sheets.
“The construction and real estate sectors benefited through the funding provided by the commercial banks resulting in a property boom over the past 15 years. Note that we are starting to see speculation in the property market which has resulted in a bubble.” Simonis Storm Securities argues this could be threatening considering the interest rate outlook.
The report on regulated assets in Namibia goes further to illustrate the breakdown of local assets into primary listed investment, fixed income investments, dual listed investments and implied cash that is used to reflect the calculation on the estimated gap between the amount of assets and the amount of capital locally.
“We are therefor implying that it must be held in term deposit accounts in Namibian commercial banks.”
As implied cash deposits in 2014 were N$37.4 billion, if the limit is increased to 50% of total assets, an additional N$12.6 billion will flow into the local banking sector, not necessarily reaching any targeted development investment.
The implied deposits to total deposits ratio has gradually decreased from 2005 to 2015 where implied deposits were 1.6 % of Total deposits of Financial Corporation in Namibia under an assumption that 35% of total assets under management were invested in Namibian assets.
“Contrary to a 35% allocation of total assets regulated by NAMFISA, a 50% allocation brought forth a lower compounded annual growth rate of implied deposits of 19.2%” the report states noting the detrimental long-term effect.
If 50% of all Regulations 28 and 15 assets were to be invested in Namibian assets, implied deposits will exceed total corporate by about N$10 billion. “In other words, deposits with local banks would increase, assuming no new local listings of equities or bonds” indicating that local liquidity will spike, further fuelling the property bubble.