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Brexit to potentially affect exchange rate

Brexit to potentially affect exchange rate

The most crucial and yet subtle impact of the Brexit on Namibia is the resultant increase in the total public debt driven by the growth in external debt component according to Standard Bank Namibia’s economic and marketing research manager, Mally Likukela.
He said Namibia’s external debt stock is set to increase further if the local currency continues to weaken as the result of uncertainty caused by the Brexit.
“This development sent many currencies around the globe tumbling against the US Dollar and the local currency experienced one of the weakest episodes in many years,” he said.
“The resultant weakening in the local currency gave rise to fears that the weakening currency will result in the expansion of the external debt which is mostly denominated in the US dollar. Furthermore, the depreciation could also push up the cost of servicing these debts, a situation which will place additional pressure on the already constrained fiscal capacity and can ultimately challenge Namibia’s pursuit of fiscal consolidation,” he added.
Likukela said that the Eurobond dominates Namibia’s external debt profile. “Government’s external debt was standing at N$27.5 billion at the end of the fourth quarter of 2015/16, which is 16.6 percent of Gross Domestic Product (GDP). This is the portion of the government’s debt that was borrowed from foreign lenders which could include commercial banks, governments or international financial institutions,” he added.
Accordingly, these loans, including interest, must usually be paid in the currency in which the loan was made. Namibia’s external debt stock has grown over the past 12 months due to the issuance of the Eurobond and the JSE bond as well as the depreciation of the local currency against major currencies, particularly the US Dollar, in which the Eurobond is denominated.
“The Eurobond continues to dominate the external debt portfolio as it accounted for 68.1%. Bilateral loans made up the second largest portion of the total external debt accounting for about 13%t. Furthermore, multilateral loans accounted for 10.2%, while the JSE listed bonds made up of the remaining 8.7%,” he added.
He said that the weakening local currency will result in the expansion of the total debt and cost of servicing South Africa’s rand dropped the most since 2008 against the dollar as the United Kingdom (UK) voted to leave the European Union (EU), rocking markets globally.
“The currency slumped the most amongst the emerging markets, losing as much as 7.6 percent before recovering somewhat few days after the announcement. The most worrying concern in the aforesaid development is that the local currency weakened against the currency in which the most of government’s debts are denominated,” he said.
According to Likukela the US Dollar continued to be the dominant currency in the Government’s total external debt portfolio as at the end of the fourth quarter of 2015/16.

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