Bond yields in Namibia expected to rise

PHILLEPUS UUSIKU

Bond yields in Namibia are expected to rise in 2022, more for the medium to long end of the yield curve, as foreign investors are expected to sell off emerging market bonds.

In addition, local investors are expected to adjust their inflation and interest rate expectations, according to Theo Klein, economist at Simonis Storm.

Short-term bonds (GC23 to GC27) are currently on average 42 basis points below their pre-pandemic levels. Medium-term bonds (GC30 to GC37) are 165 basis points higher on average and long-term bonds (GC40 to GC50) are 168 basis points higher on average, he pointed out.

Klein is of the view that this came as a result of Inflation and interest rate expectations being adjusted upwards due to supply chain bottlenecks leading to historically high inflation rates in developed countries and higher inflation in emerging markets.

In addition, having removed the time effect, it could be that market participants are expecting low inflation to persist in the short run in Namibia, and this could explain why short-term bond yields are below pre-pandemic levels.

Thirdly, persistent weak growth, weaker fiscal metrics and a slow pandemic recovery has increased the risk perception of bonds and therefore risk premia have increased, especially at the longer-end of the yield curve.

BoN

The Bank of Namibia (BoN) has a local and foreign sinking fund, used to repay the capital portion of domestic (local and JSE listed bonds) and foreign currency denominated debt respectively.

Funds from the state account was used to repay N$930 million outstanding capital on the GC22 bond on 17 January 2022 and not from the local sinking fund. The local sinking fund has a balance of N$1.88 billion.

The local sinking fund is mainly funded by incoming Southern African Customs Union (SACU) receipts. Between N$200 and N$400 million is transferred to the local sinking fund on a quarterly basis.

The management of the fund is split between asset management companies Ninety-One and Coronation (South African).

The central bank held five GC22 switch auctions in the last two years, with the first held on 18 November 2020. From the five switch auctions, a total of N$3.3 billion in bids was received and only N$2.1 billion was switched, Klein added.

Maturity

The next maturity, the GC23 bond, currently has a total debt of N$4.8 billion and matures on 15 October 2023.

“Given the current sinking fund balance of N$1.88 billion, we expect between four and six switch auctions to take place during 2022 and early 2023, assuming no funds emanate from the state account to assist in repaying the GC23 debt,” the economist said.

Bank of Namibia has also indicated that they will schedule switch auctions for GC24 towards the end of 2022.

If the -5% forecast in SACU revenue materialises for the next seven quarters ending September 2023, the central bank can contribute between a lower and upper limit of N$1.4 billion and N$2.8 billion towards the local sinking fund, depending on N$200 or N$400 million quarterly contributions.

Based on the current balance and the lower and upper limit contributions over the next 7 quarters, the local sinking fund will have a shortfall of between N$1.5 billion and N$140 million which would have to be switched into longer-term maturities, Klein said.

These calculations take into account that GC23 will be off-the-run (not offered in the primary market) so that the N$4.8 billion debt remains unchanged.

Across the yield curve, domestic debt currently stands at N$51.2 billion in fixed rate bonds only. Short-term bonds have a total debt of N$21.3 billion, medium-term bonds have N$18.3 billion and long-term bonds have N$11.6 billion. GC24 and GC25 are currently off-the-run, with the potential announcement of GC23 and GC27 also being off-the-run at the next Budget Speech, he said. [email protected]