Finweek_English_Edition_-_March_19,_2020__

42 finweek 19 March 2020 http://www.fin24.com/finweek

in depth prescribed assets

n

amibia’s budget speech to its

parliament is nearing, and the

question is how finance minister

Calle Schlettwein is going to

fund the mineral-rich country’s state

spending after pension funds were

indirectly used last year.

The nation of less than

3m people relies heavily on

developmental aid from South

Africa – in the form of customs

revenue sharing – to fund

its public outlays. Namibia,

however, has a large pool of

investment money relative to

its economic output.

It was this segment that

the country’s finance ministry

targeted last year and the year

before. In a similar vein to SA,

Namibia’s retirement fund industry

is forced to buy a certain amount of

“domestic assets”, or local assets – be they

shares or bonds. In Namibia, the threshold was

35% local assets and in SA it is 70%, excluding

investments in the rest of the continent.

By the end of 2018, as Namibia’s fiscal

situation deteriorated, the finance ministry

retrospectively forced pension funds to shift

money from abroad back into the country.

The government issued amendments to the

country’s Pension Fund Act – the same one

that is also used in SA, albeit amended – which

increased the local asset requirement to 40% on

31 August 2018, 42.5% on 30 November 2018

and 45% by the end of March last year.

Earlier in 2018, the SA government increased

the allowance for offshore (excluding the rest of

Africa) exposure for local pension funds from 25%

to 30%. When the rest of the continent is included,

SA pension funds can move a maximum of 40%

of their assets out of the country.

The problem with the rest of the continent

is the lack of investable and liquid shares listed

on stock exchanges. This was the case in

By Jaco Visser

Namibian government’s sneaky

trick to tap local retirement funds

The Namibian government changed the requirement for domestic investments for the country’s pension fund

industry. This forced pensioners’ money into government bonds to fund the budget gap.

Namibia when fund managers had to bring up

to N$20bn back into the country. The Namibian

Stock Exchange has 40 listed shares and eight

exchange-traded funds.

“The government created legislated

demand for bonds,” says James

Mnyupe, managing director of Allan

Gray Namibia. “It increased the

local asset requirement from 35%

to 45% for our non-discretionary

savings pool (retirement and

insurance funds). Over a year or

so we attempted to repatriate

anything between N$15bn and

N$20bn. You need to remember

that the size of the economy

is only about N$190bn. So, we

tried to inject 10% of GDP in a few

months.”

This led to a ballooning in the

returns on Namibian government

bonds as asset managers scrambled to

find healthy investable assets amid a dearth

of stocks.

“If I look at the Namibian All Bonds Index over

the past year, their total returns are in the middle

double digits,” says Mnyupe. “Typically, the

Namibian 10-year bond is yielding somewhere

in the area of 9% to 10%. So, for the return to

exceed 15% to 16% means there was significant

capital appreciation in the price of those bonds

over the year in question.”

When bond prices rise, Mnyupe says there

may be two reasons for it. Firstly, the quality of

the issuer could have improved significantly and

therefore justifies a higher price for its bonds.

It means the risk, also called credit risk, of the

issuer not repaying the bond or future coupons

(interest payments) has decreased, he explains.

“Secondly, decreasing interest rates could also

drive up bond prices,” he says. Due to the inverse

relationship between bond prices and yields, a

decrease in the interest rate will lead to an inverse

increase in the price of bonds, he explains.

Whereas the Bank of Namibia, the country’s

When the rest of the

continent is included, SA

pension funds can move a

maximum of

40%

of their assets out of

the country.