As the Rand goes down, our international commitments go up
As the latest spate of Zumantics continues to cause serious economic fall-out for our southern neighbour, our umbilical link to South Africa’s economy again becomes an issue to be scrutinised.
Where Namibia is most compromised is with its currency. De facto, the Namibia Dollar and the South African Rand are the same thing. We can cloak the distinction in fancy jargon like “legal tender” or “par value” or “one to one peg” but all these only serve to reinforce the common perception that it is one and the same currency.
This puts us in a rather tight spot. We are also, like many other African countries, the struggling owners of a London-listed Eurobond. But unlike all our continental peers, ours is still rated investment grade, and I am sure we would like to keep it that way.
Enters the South African government and its hazardous political gyrations. This lead to their downgrade as a currency issuer implying that the credibility of the currency is also at stake. Next to consider is an investment technicality called mandate. When investment managers register new funds, one of the elements that have to be clear to investors, is the fund’s mandate. In other words, the investment manager commits to a certain risk profile, asset selection and quotas. This functions like a pre-investment guarantee to potential investors.
Therefore, when a fund’s mandate exclude junk bonds, an investment manager has to liquidate his position in certain bonds, if previously they were investment grade, but have now fallen a notch to junk. In the case of South African bonds, he has to sell if his mandate does not allow him to keep junk assets on the books. This releases a flood of capital, reversing the portfolio flows on the JSE, in turn weakening the currency. Over the past week we witnessed first-hand how dramatic and swift currency depreciation can be.
There goes our easy payment on our Eurobond. It is self-evident that our Eurobond commitments are far more affordable at R12-60 than at R13-80. The difference is slightly more than 9.5%. Add that to the interest we have to pay investors, and the Eurobond becomes punitive. And there is nothing we can do about it as long as our fortunes are tied to the damage caused by Zuma and his cronies.
A similar mechanism that applies to bond trades is also relevant to currency trades. As far as I know there is no international trade in Namibia Dollar but there is substantial trade in ZAR. So, if a sovereign is downgraded as a currency issuer, funds that hold ZAR as an asset have to sell these if their mandates so prescribe. Again, as ZAR positions are liquidated, the currency weakens.
For us to wean our currency from its South African dependence will not be that easy. I am not proposing we go cold turkey, chucking the Rand overnight, but I do suggest that we look at alternative ways of determining the external value of the Namibia Dollar.
In this regard, I am fond of citing the Botswana Pula which relies on the Rand for only half of its value. The other half is determined by the IMF’s so-called Special Drawing Rights, which means that the Pula is far better hedged against Rand fluctuations than we are.
But there is another alternative, in a sense somewhat risky, but only in the short term. That is to back the value of the Namibia Dollar with gold and silver assets.
In Namibia, gold is mined directly while silver is a by-product of both copper and zinc mining. Where the government’s mining investment arm, Epangelo, has a small shareholding, I propose that we accept physical gold as payment instead of dividends, and where not, we take physical silver in lieu of an export levy.
These can be stored with the Bank of Namibia as custodian, who will then also be responsible to have our gold and silver holdings audited every few years, and afterwards, communicate the value of these assets to the investor community.
This is not an overnight process but if we do not start somewhere to find alternative high-value asssets to back our currency, we will always be at the mercy of South Africa. They may get a responsible leader or they may not. That is not something we control, but going by the damage we suffered due to their political infighting, I am convinced we must recognise the currency link as a clear risk, and start making plans to mitigate this risk.
If, after some years, the Bank of Namibia has accummulated a substantial amount of physical gold and silver, perhaps then we can cut the umbilicus, or instead, have a much stronger foot on which to negotiate when next we have to talk to them about the Common Monetary Area agreement.