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Namibian Government Bond Market

Namibian Government Bond Market. Background Strategies Outcomes of strategies Government bond market Measures taken Summary. Background. Namibia in CMA (RSA, Lesotho & Swaziland) Free flow of funds Tendency of funds flowing to more sophisticated RSA market (contractual savings)

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Namibian Government Bond Market

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  1. Namibian Government Bond Market • Background • Strategies • Outcomes of strategies • Government bond market • Measures taken • Summary

  2. Background • Namibia in CMA (RSA, Lesotho & Swaziland) • Free flow of funds • Tendency of funds flowing to more sophisticated RSA market (contractual savings) • Banks dealing with counterparts in RSA • Poorly developed money and capital markets, poor infrastructure, lack of market activity • Challenge to develop local financial markets

  3. Strategies to develop local financial markets • Fund budget deficit locally • Raise funds domestically • Issue securities to develop markets by forming benchmark issues • Liquid asset requirement for banks • Prudential requirements • Encourage demand for local securities • Tax incentives, exemptions • Individuals • Non-residents • Local investment requirements • 35% of assets to be invested locally

  4. Outcomes of strategies • Establishment of debt and equity markets • Namibian Stock Exchange • Stock broking firms • Asset Managers • Unit Trusts • Skills and capacity development • Interbank transactions • More issues by parastatals

  5. Government Bond Markets • Bonds issued to fund deficit and develop market • First issue, 1992 • Original maturity of less than 6 years • Number of bonds increased to 13 in 1998 • 1998 trading was still sporadic and market highly fragmented and illiquid • Strategy bond consolidation • Buy back and issue new bonds

  6. Bond Consolidation (Objectives) • Enhance liquidity by issuing few but large issues • Reduce cost of borrowing through reduced liquidity premiums • Reduce fragmentation and create local benchmark issues reasonably spread across the yield curve • Meet market needs by providing alternatives to investors and government as a borrower • Benchmark against RSA bonds for price referencing

  7. Bond Consolidation (Results) • 13 Bonds consolidated into 3 • GC02, 12%, due 2002, 4yrs • GC05, 12%, due 2005, 7 yrs • GC10, 12%, due 2010, 12 yrs • All these bonds were listed on the Namibian Stock Exchange (NSX)

  8. Current Situation • Amount outstanding in bonds N$3.2 bln • Nearly 50% of Government domestic debt securities • Most of the trading on NSX and OTC • Bonds in issue • GC05-12%, GC07-12.5%, GC10-12%, GC15-13% • Challenges • Low activity and liquidity • Lack of market information • Relatively low demand for longer dated securities

  9. Reasons for current state of affairs • Buy and hold attitude • Passive management of bond portfolios • Lack of skills • Remote offices • Limited number of alternative issuers • Unison view in the market • Relatively low amount of debt outstanding • Absence of sovereign credit rating

  10. Measures Taken (secondary auctions) • Bring together willing buyers and sellers • Objectives • Establish regular market prices • Create degree of liquidity • Stimulate trading • Facilitate introduction of market makers • Success limited • Cyclical market • Unison view

  11. Measures taken (switch auctions) • Switch from source to destination bonds • Objectives • Smooth redemption, alleviate cash flow • Reduce investor rollover risk • Increase benchmark bonds • Lengthen maturity structure • Results • Successful, GC02 redemption and increased benchmark bonds

  12. Other Measures • Book Entry System • Frequent primary issues • Transparency and Infor • Brochures • Issue calendars • Full auction results • Debt Mgt Strategies

  13. Summary • Initiatives take resulted in some market development – various instruments across the yield curve and ability to fund deficit • Competitive and well functioning primary market • Challenges • Liquidity • Lack of market information • Relatively low demand at the longer end of yield curve

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