How does one measure a fair return on investment?
Driving around Windhoek one wonders where all the people will come from to fill the hundreds of offices in the new government and government agency buildings. The same question arises, though in a slightly adjusted form, when one considers all the new private sector buildings – where will all the tenants come from?
These are just two very obvious questions since they stem from empirical observation. There are so many new building, each with so much office or letteble space, so from somewhere the new occupants must come, but from where. There are also a string of secondary questions like what will happen to all the vacated old buildings? What is the anticipated impact on the construction sector when the building spree comes to an end? What is the future of the thousands of workers who found employment on the many building sites? What will be the impact on rental property when hundreds of offices in older buildings enter the market?, and my favourite, what will be the impact on GDP growth when the extraordinary stimulus dries up?, and then finally, at what point will the capital market revolt?
Perhaps the most serious question relates to financial services and that is, what will happen to commercial banks’ balance sheets, when the blazing property market starts reverting to normal.
When looking for guidance to make a meaningful assessment of the medium term economic future, the Medium Term Expenditure Framework gives the clearest indications of where we are heading. The first tell-tale sign of a sovereign in distress is when almost no adjustment is made to expenditures from last year to this year. The second tell-tale sign comes from the GDP projections which have, without convincing assumptions to the contrary, gone from a 10% average annual nominal growth rate to a 15% rate. On what basis?
Except for a handful of mega infrastructure projects, the building spree will certainly come to an end this year. The state coffers simply can not continue to fund any more buildings without some form of measurable return on investment. And since this type of investments typically needs several years to show up in the growth figures, the distortions will remain for a number of years. The return on investment issue will surface in 2017 when the ratio of sovereign debt to GDP will show whether this year’s assumptions were on the mark or not. When GDP does not perform as expected, the debt ratio will climb instead of coming down. That will be a clear signal that the artificial stimulus has not produced the anticipated results, or that it will take much longer than initially projected, to show up in nominal figures. And if we continue to stoke the fire, then even real growth rates will become an issue as it will be a stark reminder that stimulated growth leads to impressive nominal figures but it also breeds inflation.
I concede that the six years of stimulus from 2010 to 2015 were necessary. It is also a fact that all the required money had to be borrowed and that this commitment, while at this stage still manageable, may quickly get out of hand, especially if the broader economy takes longer to catch up. The first warnings came already in September last year, and despite any official claims to the contrary, the fiscal position is not as rosy as the government wants us to believe. If it were so, then all the talk about a consolidation year, the need to save, and the unadjusted expenditure framework, would be nonsense.
The biggest problem to solve during this year is to design an exit strategy so that the government can stop being an investor and return its focus on what it should be, an enabler. When a government is an investor, it needs to access capital. This was easy up to recently with institutional investors falling over their feet to buy Namibian sovereign instruments. But if the expected return on investment does not materialise for any number of reasons, then the capital market will revolt again.
If, however, the government re-assumes its role as enabler, then the immediate pressure to show a return on investment is relieved since progress is then measured by such alternatives as the human development index, the rate of gross fixed capital formation, and the productive capacity of the economy as a whole.
It is a very simple comparison, but I estimate that the increased size of the government as investor, which took about six years to achieve, can only be unwound by a factor of three. So, we shall only be back to normal in another 18 years.