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The finance ministry only asked for one billion dollars, the market responded by offering 2.2 billion

The finance ministry only asked for one billion dollars, the market responded by offering 2.2 billion

Last week the Ministry of Finance took a calculated risk and it scored big time. As the government’s dealer, the Bank of Namibia held a special auction for a large spread of securities, targetting to raise one billion Namibia dollar in funding, and it came very close to that mark.

A few weeks back when the Bank of Namibia first announced the so-called special auction, I was a bit skeptical like many others. First, because the amount that would eventually come on tender was so huge, unprecedented actually, and second, because the instruments were spread over such a wide maturity range.

This auction, in my mind, was the all-time litmus test for the future potential of the capital market, and I think it has proven beyond doubt that investors have a strong appetite for Namibian government securities, and that there is more liquidity available than anyone in financial services would care (or dare) to admit.

The results were a mixed bag with some pointers I find weird, or at least out of line, and others confirming what I have suspected for many months.

Overall, the special auction was a thundering success. The ministry set out to raise N$1 billion, a target which I regarded as lofty and slightly leaning to the pink elephant side of the scale. Nevertheless, a cool and very substantial N$914 million entered the treasury’s account on Thursday 01 November 2018. After this, I am fairly certain, the finance minister is going to have the first relaxed Christmas in about three years.

The earlier documentation that accompanied the special auction announcement, stated that the Bank of Namibia frequently receive requests for private placements, and for participation in a limited number of more popular instruments. This is what prompted them to throw everything together in one big basket, and to make a public auction, – fully transparent, and fully guided by sound disclosure principles.

When I say the results produced a mixed bag, I am referring to some of the securities drawing only a lacklustre response, battling to get half the amount offered while other were so vastly oversubscribed, the Bank could easily have raised N$2 billion if it wanted to. In fact, the combined value of all the amounts tendered, came to a staggering N$2.24 billion. Now that will solve the government’s financing problems no end.

What is this indicative of?

Obviously, there is an enormous level of liquidity in the local economy. There is also a very substantial number of investors who believe that Namibian government securities are prime investment instruments, despite what any ratings agency want us to believe.

But on a far more ethereal level, there must be a widely-held perception that the government has achieved some tangible results with bringing its own financial house in order.

Calculating return on government bonds is not tricky, instead it is very straightforward, so every investor who comes in at a certain level for a certain maturity knows exactly what he, she or it will earn in coupon over the duration of the bond and what the value of that instrument will be at maturity. These are all conventional calculations, nothing there needs an actuary, and there is only one assumption the investor has to look at: Will the Government of the Republic of Namibia be able to pay the coupon and will it be able to redeem the bond? These are no longer calculable or quantifiable considerations, they depend strongly on perception and sentiment.

Internationally investors typically do not shy away from higher-risk bonds. That is why the junk bond market and venture capital funds are so active. But when there is the possibility of a default, the borrower is punished by the expected yield.

None so in our case. The yields came in around 10.5% to 12.4% for longer-dated instruments, even up to 2040, and between 4.4% and 6.1% for the inflation-linked bonds. Nothing punitive in those rates.

I am speculating but I believe the finance minister’s almost two years of what he calls “frontloading” has finally started showing results and is producing a credibility dividend for the government.

I hope he will prepare a document from the special auction results and distribute it widely among his colleagues in parliament, and especially to his cabinet co-members. Here is tangible proof that when there is credibility in the way a government manages its fiscus and its expenses, there are more willing investors than one can imagine.


 

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