After the hot air has settled, now is the time to realise we must just stick with our debt strategies
The downgrade of Namibia’s sovereign paper by Moody’s is the non-event of the decade. On the Monday after the announcement, the first trading day, the movement in the yields was a mere 3 basis points on the two Eurobonds, that is three hundreds of a percentage point. That is nothing.
Compared to the collapse of Greek and Cypriot bond prices, Namibia’s debt instruments came through like chocolate candy for children.
Later during last week the yields went up by another basis point hovering between 4 and 6 basis points more than the previous Friday when Moody’s sent the Cabinet into a flurry by their unsolicited, unconsulted, unilateral action.
Early on the Saturday moring I received several calls asking me what will happen now that our bonds are so-called junk status. I declined to give any comment saying merely that we will have to wait and see what the market does. On Monday I started tracking the Eurobond yields and the NAM001 on the JSE, benchmarked by the South African R2023. Movements were minimal and a comparison of spreads to when these instruments were listed actually showed that spreads between the Namibian bonds and the South African benchmark counterparts, have narrowed. In other words, the yield curves have flattened.
This week, the Namibia Chamber of Commerce and Industry came out with the best analyses by far so far. I chuckled when I read that their analysts also refer to the downgrade as a non-event since I used that exact same word a day earlier when voicing my opinion on NBC Radio.
The analysts also monitored the yields and came to the same conclusion, i.e. the market (and investors) is ignoring the downgrade.
Much can be said about Moody’s Modus Operandi, but I believe the best tack comes from the Minister of Finance himself when, in a circumspect way, he said the downgrade was unexpected.
Perhaps the biggest immediate impact was the massive scare it gave the government and in a sense, I do not think this is bad. We needed an independent third party to tell us that if we do not address our debt curve, we will run into trouble. However, the way Moody’s went about it does not find my approval. On the contrary, almost everything the minister said I agree with. The only difference is, he is a very polite person and I am not. I would have said it in a much more in-your-face way.
Nevertheless, the tone of both the Friday and the Monday finance ministry statements is quite revealing. Here one senses the government realised they are in a minefield and they have to step very carefully. So, purely by the tone of the discourse, I have to commend the Cabinet and the Minister of Finance for their deliberate, yet tactful appraisal of the situation.
In the week following the downgrade, we were flooded by a barrage of clueless, hot air from just about everybody who think he or she knows how bond markets work, or what the impact of a ratings agency is. When that subsided, it became time to assess the action and the possible fall-out while trusting the minister to take care of the diplomatic handling of the little storm in a teacup.
One sentiment I picked up from several opinionators was the rejection of the downgrade by the government. This is utter nonsense and the two official statements go to great lengths to play the ball and not the man. The minister was adamant to assure both us and Moody’s that the rationalisation programme is real and that the government remains committed to it. I believe he knows the official Fitch rating is due in just over a month, and I am sure there is nothing he will do to jeopardise our standing with Fitch.
But he is also entirely correct to state that the statistics used by Moody’s covered only four months since the new budget and that the intended results work on a longer time frame. It is now an important question whether Fitch will use statistics of a longer range, or will let themselves simply be guided by the Moody’s sentiment. I doubt the latter as it will probably reflect poorly on Fitch’s ability and independence but if we come to the next Article IV Consultations in November and we sit with the paradox of two opposing ratings, it may cause some problems further down the line.
Neither the government nor the minister would want to go into a confrontation with ratings agencies. In this regard, the relationships have to be protected and fostered for we need them deep into the future if we want to continue accessing the bond markets. And we have to because that is a major source of the capital Namibia requires for her development and that of her people.
Ultimately, the NCCI analysts are 100% correct when they observed that the only important consideration is what the market does. The rest is mostly statutory but rating are required to list bonds, so with ratings we will continue.
I have posted the summary of the NCCI’s analysis under Special Focus. The full document can be requested from them. It is an excellent assessment of what happened, where we stand and what we are to watch out for over the next few months. I am sligthly perplexed as to who the actual author is because nobody at the chamber that I know can do that level of accurate, incisive, insightful analysis.
I thank IJG Research for the visual I have used with this article. It is not to show anything other than the bond largesse we went through last year.