The Namibian debt capital market

The Namibian debt capital market: a rough diamond ready for polish

By Ray Auala Jr

The benefits of a deep capital markets is well known and established catalyst for sustainable growth. At the centre, is the bond market - a fundamental pillar that ensures that ensures liquidity between borrows and lenders in any economy.

Although researchers may debate the specific impact the debt capital markets have on economic growth in developing nations, they cannot dispute that a positive link does exist. It is a factor welcomed when one considers the strides the Namibian bond market has made in recent years towards becoming a world-class capital market.

Here are a few:

• The local debt market has 29 corporate and SOE (state-owned enterprise) bonds, including one green bond
• The Government bond market is strong and growing, with 20 bonds (15 fixed-rated and five Inflation-linked bonds) with maturities ranging from 11 months to 30 years.
• The Government’s bond exhibits continued commitment to policy deepening by issuing debt on a regular and predictable basis, while employing best efforts to stick to a borrowing plan.
• Despite being a predominately OTC (over the counter) market, the annual secondary market trades on the Namibian Stock exchange increased significantly from N$0.1bn to N$2.5bn+ since 2015
• Ranked 5^th place (out of 23) in the Absa Africa Financial Markets Index 2020
• Bank of Namibia is in the process of implementing a Central Security Depository in the first half of 2021 to dematerialise bond certificates

It is clear, that the groundwork has been laid in unearthing and developing Namibia’s debt capital market. The question is: how do we polish our bond market so that it can be displayed on the global stage? There are myriad steps and actions one could take to unlock its value. The greatest impact would most probably be achieved if efforts were focused towards adding value of the individual market stakeholders in the following three aspects, which would multiply exponentially when carried out collectively:

• Proactive participation
• Courage to lead
• Empowerment of the individual

Proactive participation

According to the Absa Africa Financial Markets Index 2020 research report, illiquid markets is one of the biggest challenges in Namibia’s rankings. This reflects the ease with which our bonds are purchased and sold without meaningful changes to the value of those assets.

At the heart of this is the pricing dynamics and methodology of local paper thus emphasising the importance for the individual market players to proactively and regularly carry out intrinsic bond valuations; which in-turn will identify any mispricing. If this is identified, the most important step would be for the participants to execute the trade(s) that would unlock value. Such proactivity is essential to correcting any market inefficiencies, enabling real-time price discovery.

This has played out quite well over the last few months in the short end of the local government curve. The previously illiquid 1- to 2-year region of the curve has seen strong price discovery as a direct result of monthly switch auctions by the central bank and the elevated secondary market activity for these bonds (N$ 588m YTD as of 18 Nov 2020 – 27% of total secondary market trades for the calendar year). Reliable price discovery underpins the formation of accurate and dynamic benchmark curves that form the basis of pricing other assets and potential derivative instruments that are purely Namibian.

Courage to lead  

With that in mind, it is understandable why liquidity is one of the cornerstones to any developed capital market and is essential to attracting local and offshore participants. But it has evolved into a kind of “chicken and egg” scenario in our space where potential market players will only participate if there are several market players already participating. But once one fully understands the exponential benefit to the wider market of each of us making that “first” move, it can’t help but entice others to action – after all every pathway started with a single footprint. This is not just the duty of the market-making trading desks, but also the issuers, “buy and hold” investors and the “active” investors.

Whether it is a bank issuing the first Namibian social bond, or a trading desk’s commitment to showing two-way pricing on those social bonds, all stakeholders have a role in the development of Namibia’s bond market. As the popular adage goes; “liquidity begets liquidity”.  

Empowerment of the individual

Individuals agreeing to the objective of creating a world-class local capital market was the first step. However, it is vital to embrace the often-forgotten reality that the “market” is made up of individuals trying to navigate their way along the value chain of the Namibian economy. We need to realise that behind every Bloomberg chat or GC26 brokers note are people trying to understand their purpose and achieve their aspirations. Thus, the next, and most important, step is creating the environment that enables individuals to discover and enhance their own talents while determining the best way to align those with the collective goal. While placing the onus on leadership structures of private and public sector organisations the regulators and policymakers need to set up personal development programmes.

Resources should be dedicated to bursaries; self-realization and development programmes; mentorship programmes; and regional and international secondment opportunities. Empowerment in this form would fuel diversity of thought, which is the bedrock of innovation. And if we agree that the whole is greater than the sum of its parts in the context of capital markets, then if every individual is given the platform to continuously develop or is given the avenue to become the best versions of themselves, the potential of the collective local market is unimaginable.

It goes without saying that developing any capital market is a challenging task. My hope is to be able to shed some light on the notion that focusing on the value offered by the individual is a necessity to unlock the true potential of the collective. This applies whether the said “individual” is a settlement official in a local asset management firm; or even the Namibian debt capital market in its entirety. A rough diamond has to be unearthed before it is cut, polished and made to sparkle. Now the responsibility sits with us to leverage the solid foundation that has already been laid to make our gem shine.

Ray Auala Jr is from RMB’s Trading and Structuring team