Analysts tense over budget deficit financing

ANALYSTS say they are uneasy about how the government will be able to finance this year’s budget – especially the “larger-than-normal” N$21 billion deficit.

During tabling, minister of finance Iipumbu Shiimi said the budget would be funded by “own savings” and domestic and external borrowing.

The minister did not give a detailed explanation on how this would be done, but it is expected that “own savings” means funds set aside to redeem maturing bonds.

Domestic and external borrowing would then be actual loans from financing institutions and the issuing of government bonds and treasury bills.

Although this has always been the fashion of funding the government’s spending, especially the deficit, analysts have raised concerns over a further possible cornering of pension funds to fund this year’s N$21 billion deficit, or at least the bigger part of it.

Expectations are that the government will increase the domestic asset requirement this year to between 50% and 55%.

This domestic asset requirement is a regulation dictating how much mainly pension funds should invest within Namibia. It is currently at 45% of total assets.

The government has been increasing this rate over the years, a move that left pension funds no choice but to take up government debt, if they were to meet annual returns requirements.

In their budget commentary statement, analysts at Cirrus Capital say the government is expected to increase local asset requirement to 50% or 55% from the current 45% to aid with the financing requirement.

The concern with this is that it is not expected to yield the same pension funds demand as in the past.

“The artificial stimulus created by the amendment of pension fund regulations is no longer present and will lower the demand for longer-dated government securities,” the analysts say.

According to them, if the government intends to keep domestic funding costs stable or marginally higher, it must issue more short-term debt, as compared to longer dated instruments, or further amend pension fund regulations.

However, both options are undesirable, they say in the statement.

“The government maturity profile is a concern and pension funds are facing a challenging environment for returns, and following these short-sighted strategies will only heighten these risks,” they say.

They also caution that issuing shorter-term notes launches a dangerous cycle which could lead to a debt trap, whereas further decimating workers’ pension savings comes with long-term dangers.

“Because of this, upward adjustments in interest payments are somewhat likely,” they say.

Former finance minister Calle Schlettwein in the past had said investing in government debt is never forced on investors.

“Investors are invited to partake in the auctions, and they can do so at their own discretion based on their investment needs and portfolio structure,” the minister had said.

reported last year that the Government Institutions Pension Fund (GIPF) was bailing out the government to fund their operational budget as the fund took up most of the government’s debt.

The GIPF, however, refuted this, claiming they were responsible investors whose domestic regulations and the dominance of government debt on the market caused them to take up much of the debt.

The GIPF is expected to this year again occupy a bigger chunk of government debt.

Early this year, before the national budget tabling, the cornering of pension funds sparked debate, with South African online publication Fin24 reporting the hiking of the domestic asset requirement was indeed a trick to fund government needs, and not entirely to grow the local financial market.

“The government created legislated demand for bonds,” James Mnyupe, managing director of Allan Gray Namibia, told Fin24 at the time.

This then accordingly 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.

Government bonds and treasury bills now stand at N$70 billion.

According to the Namibia financial system stability assessment issued by the International Monetary Fund (IMF) in February 2018, the fund said the local economy has a large pool of funds chasing very few investments.

As concerns linger, the government’s creditworthiness is also on a downward trend, and investors are more likely to be repelled by the debt burden and debt non-affordability risks that come with it.

Email: lazarus@namibian.com.na

Twitter: @Lasarus_A

In an age of information overload, Sunrise is The Namibian’s morning briefing, delivered at 6h00 from Monday to Friday. It offers a curated rundown of the most important stories from the past 24 hours – occasionally with a light, witty touch. It’s an essential way to stay informed. Subscribe and join our newsletter community.