Analysts have welcomed the N$3 billion African Development Bank (AfDB) loan facility secured by Government last week, while also advising Government to spend the money wisely.
Finance Minister Calle Schlettwein announced on Thursday last week that the regional multilateral development bank had approved the first tranche of N$3 billion from the envisaged N$6 billion to be used to finance the country’s budget deficit over a two-year period. Namibia was also expected to receive a further N$4 billion for infrastructure financing over the same period.
IJG Securities Research Analyst, Dylan van Wyk, said given the favourable terms of the loan, specifically the attractive interest rate, the loan facility was a very positive development, which would likely result in lower interest costs for the Government.
Van Wyk noted that other means of financing the budget deficit would have been treasury bills, local government bonds or Eurobonds, which in his view were not as attractive as the AfDB terms.
He, however, cautioned that such a lifeline should be used to invest in growth areas rather than increasing consumptive spending.
“In the most recent budget, transfers to State -owned enterprises (SOEs) have been decreased substantially. We do, however, remain concerned about the consumptive nature of the budget.
“We see a need for better governance within SOEs, as funding loss-making institutions diverts funds from priority projects. We believe that emphasis should be placed on developing critical infrastructure and projects, which would promote economic growth.
“Specifically, projects like desalination, renewable power, and road and rail infrastructure should be prioritised as access to these resources encourages investment into Namibia,” Van Wyk said.
PSG Namibia Research Analyst, Shelly Arnold, also defended the AfDB facility, saying that another Eurobond would have given Government headaches as it comes with the associated currency fluctuations risks, as seen over the past two years.
“The combined total amount of the operation over a two-year period is up to N$10 billion. The loan is rand-denominated. The Namibian Treasury will pay back the loan based on a three-month JIBAR (Johannesburg Interbank Agreed Rate) interest rate of 7,34 percent plus approximately 0.80 percent over 15 years, which includes a three-year grace period.
“This rate and the repayment terms are therefore favourable compared to other sources of funding for the government, including issuing bonds at market-related rates,” Arnold said.
Simonis Storm Securities Economist, Frans Uusiku, said the decision to borrow additional funds was inevitable given a slowing economy and the resultant decline in Government revenue, which made it necessary to create a fiscal buffer to safeguard the implementation of ongoing capital projects, while maintaining the fiscal consolidation course.
He, however, noted that the funds borrowed should be used to finance ongoing capital projects that would enhance the production capacity of the economy and not necessarily operational costs incurred by SOEs.
“The funds should be allocated to fund the implementation of development projects that would enhance Namibia’s regional and international competiveness as far as trade and investment is concerned.
“This should include addressing intermodal transport infrastructure challenges such as ports expansion - to increase cargo handling capacity, and the rehabilitation of road and rail networks to SADC standards,” Uusiku said.
He also said there is significant scope for investment in power generation, which would create the necessary comfort for investors to invest in value adding sectors such as agro-processing sectors, and thus create employment.
“Debt in general is not a bad thing. It becomes a problem if it becomes unsuitable. That is to say, if funds are not invested in sectors with higher growth multiplier effects on the economy so as to improve the repayment ability of the Government,” Uusiku said. In 2015, the Namibian Government issued a US$750 million Eurobond which was initially not hedged against foreign exchange risks, a move which saw the servicing of the debt ballooning causing further strain on the already struggling economy.
Borrowers normally hedge bonds to mitigate the adverse impact on the debt service cost resulting from the depreciation of the local exchange rate against other currencies.