Guest Contributor | Mar 16, 2018 | 0
Let us make our own market through our own flavour of quantitative easing
We are faced by a classic Josarian Catch 22. For economic activity to return to the lofty heights of 2013 and 2014, interest rates need to be low. But this in turn, stokes consumer spending, partially being responsible for direct inflationary pressures.
However, to create space for both the Bank of Namibia to lower short term interest rates, long term rates have to come down first, and that is not dependent on policy, only on market sentiment.
This reality we experienced last year starting around July when the spread between Namibian government bonds and their benchmark counterparts on the JSE, started widening. Very small at first but by September, to such an extent, that the Ministry of Finance baulked. This lead to the urgent launch of the second Eurobond in October which saved us in the nick of time.
The obvious question that presented itself then was why the market would perceive Namibian bonds to carry a higher risk than South African bonds, when in fact, the opposite is true.
Taking my cue from the European Central Bank this week, I think it is valid to ask what prevents us from implementing our own, more restricted strategy for quantitative easing. When the ECB started buying corporate bonds on Wednesday in the telecoms, insurance and utility sectors, the market reaction was immediate. Yields came down to historic lows. Later in the day, government bonds followed the corporate trend with the yield on German Bunds sinking to an astonishing 0.058%, and in the UK to 1.253%. This trend accelerated on Thursday with many bonds reaching year to date low yields.
If the ECB can manipulate the market in this way with these results, why not the Namibian central bank. If, for instance, the Ministry of Finance needs a quick N$100 million, it would typically put the amount on tender under one of the existing registered bonds. If the pattern (sentiment) of the past eights months continue, the government will have to pay a premium on these loans. If, however, the Bank of Namibia participates, not only as issuer but also as market maker, then it can come in at a substantially lower bid on the expected yield. This will make the bonds more expensive (lower yields) but it will make the government’s borrowed money cheaper.
As the issuer of the Namibia Dollar, the Bank of Namibia uses that right, just like the Federal Reserve, to buy government bonds at rates that forces the rest of the private sector to follow, and follow they will have to, to comply with Regulation 28 requirements. The private sector is not excluded, like in Zimbabwe in 1999, but is merely encouraged to come in at yields that are more favourable to the borrower (issuer), the government. It is not my intention that rates go absurd like the Fed’s (almost) zero interest rates, but only to force long-term rates to more bearable levels so that short term rates can be brought down, so that liquidity can be enhanced, so that our economic growth expectations can be realised.
The Bank of Namibia then grows its balance sheet, of course, but the bonds they buy become assets, and as long as the government continues to service the interest on these bonds, there is no reason why they should endanger the central bank’s balance sheet. It gives a nice, unexpected boost to the central bank, making it that more assertive when in future, it has to consider more offshore bonds. This strategy has been implemented with good results by both the Federal Reserve in the United States and the European Central Bank, albeit without any long-term guarantees, but it kept economies afloat that were on the brink of implosion.
I am not advocating an irresponsible, fiat money spree, instead I am proposing a scheme that must be conducted with the utmost diligence, and with due regard to market sentiment, otherwise we shall have runaway inflation.
I think the door to a mechanism like this has already be opened earlier this year although not by the Bank of Namibia. When the GIPF took up the entire issuance following a tender in which private investors were reluctant to participate, citing unreasonable conditions, the principle was at least established. The GIPF can not take up government bonds without a certain risk to its pensioners, but the Bank of Namibia certainly can.