2016 – Annus Horribilis for the government, the private sector and just about everybody else
The expression Annus Horribilis became famous late in 1992 when the UK’s Queen Elizabeth used it to describe the spate of bad luck that has befallen the royal family.
We can borrow and apply that expression for 2016 in Namibia.
This is the year when government funding hit the proverbial brick wall. That such an event can happen was almost unthinkable in the minds of our policy makers. “Where in your wildest dreams can you imagine that OUR government ever will not have enough money” was the sort of typical response I got up to about May this year.
Then the big crunch came, and suddenly every tenderpreneur had to learn the hard way that there is an end to everything, even to government resources.
Admittedly, it came as big shock to us all. Although I warned against the fantasies that prevailed regarding the capital market, as early as September last year, the successful placement of the Eurobond lulled all local money spenders into believing there is no end to the goodwill for Namibia. Alas, they (we all) were wrong. Needless to say, the problems surfaced first closer to home, in Johannesburg to be exact, when local investors were not convinced the risk profiles of the two Namibian bonds matched the reality they saw reflected in the budget and in the national accounts.
Be that as it may, by March next year it will have become history, albeit an unpleasant one. I think what is far more important is the lessons we learned this year, and how to apply that insight for future financing, and future policy making.
The first and most important lesson is that the government’s role in the economy is too big, way too big. The statistics to determine its direct contribution, are not all that clear, or dependable, but from many calculations I have made personally, it is safe to state the government’s direct share of the economy is between 44% and 46%. If one brings the multi-plyer effect into consideration, the distortion becomes even bigger. Depending on your model and your assumptions, the government generate as much as 65% of local liquidity. Some estimates put this as high as 75% which may be a tad exaggerated. Still, if I consider that a recent well-researched report by Simonis Storm Stockbrokers show the private sector, excluding construction, to be in recess since 2012, and if I bring into account, the enormous GDP growth figures, then it may not be farfetched to say the government is three quarters of the economy.
My consistent criticism against all the expansionary budgets since 2010, is that there never was an escape route. The government borrowed and spent as if there were no tomorrow. Every time any analyst asked questions about sustainability (a government buzzword, like intervention), then he or she was labelled as unpatriotic. “How can we not borrow to grow the economy if all that funding is available” was another typical response.
But if I look at the return and what it cost us, I wonder how fruitful this so-called investment borrowing was after all. Unemployment is back where it was in 2010, the funding for the projects has all but dried up, our future interest payments will haunt us for another ten years, but most disconcerting, our sovereign debt has increased fourfold.
During the years when Private Sector Credit Extension ran consistently at around 19% monthly, year on year, I often wondered how could it be possible to post a real growth of only 5%. These calculation are not simple but neither are they very complex. Private sector credit growth is a good proxy for new nominal investment. It means, in very simple terms, if the demand for money grows by 19% there must be a commensurate growth in economic activity, or close to it. If real growth measures only 5%, then it means 14% of the new money flowed through the cracks somehow, or the other point to consider, real inflation was around 14% and not the published 3.5%.
In technical terms, the “lost” investment is called attrition, but similar to pilferage in the retail sector, there are also certain limits to minimum and maximum attrition. When attrition exceeds 2.5% in a year, there are major and serious flaws in the financial accountability of the government.
The final question then for 2016 is: What happened to all the new investments, more specifically to all the newly created credit from 2010 to 2015. Where is it?