By Johannes !Gawaxab
The Namibian Government has announced its intention to prescribe to all institutional investors, i.e. retirement funds and insurance companies, to invest a minimum of 5% of their total assets in unlisted investments (companies) in the country. Numerous opinions have been expressed about this policy intervention and I wish to contribute to the debate with the view to giving momentum and traction to its implementation.
The local financial services industry was consulted on the proposed policy framework and supported the intended ruling following a robust and rigorous engagement. The industry task force on domestic asset requirements presented proposals for a pragmatic and prudent implementation of the decision. It is my understanding that the Government has tasked NAMFISA to draft the necessary regulations to facilitate the implementation of the decision.
Currently, all pension funds and insurance companies are obliged to invest 35% of their total assets in qualifying Namibian assets such as shares, bonds, cash and properties; 20% in international instruments; and approximately 50% in South African bonds, equities, cash and property. The proposed 5% minimum investment in unlisted Namibian companies is included in the 35% that should be invested locally and amounts to an estimated gross amount of N$2.6 billion on total assets of N$51.8 billion. On a net basis the figure is around N$1.3 billion.
The 5% ruling is seen in many circles as controversial and contentious. The IMF and the World Bank regard the prescription as risky and as having the potential to lead to continuous losses, depending on how it is implemented.
Both bodies have commented that the Namibian Government will be ill advised to have a minimum of 5% invested in unlisted Namibian companies. It is also submitted that, given the limited investable universe in Namibia, the 5% rule could lead to asset price inflation, risky behaviour and efforts to circumvent regulation. It is additionally argued that the prescription will overheat the local economy, be inflationary and generate lesser investment returns to pension fund members and policyholders, relative to performance that could potentially be produced by investing in South African and/or international instruments.
Furthermore, best practice arguments in managing pension funds of prudence, diligence and transparency would seem to delay the implementation of the decision. These arguments are generally valid, reasoned and do have sound basis in economics.
Namibia currently saves more than it is investing and the bulk of Namibian savings are presently invested in South Africa, earning good investment returns. As a matter of principle, I’d like to contend that we should never throw good money after bad money, nor subject institutional assets to undue risks.
There are four fundamental issues on the flip side that we need to consider regarding regional and offshore investments.
Firstly, Namibia and other countries in Sub-Saharan Africa – relatively poor developing countries – are subsidising the rich, developed world. Economic theory holds that money should flow downhill. Indeed, money does both well and good: investors get a higher return than they could get in their own mature economies, and poor countries get the capital they need to get richer.
In many circles, transferring money from the rich developed world to poor developing countries is seen as a justification for economic globalisation.
This remains an argument advanced by many a protagonist of globalisation.
According to the United Nations, in 2006 the net transfer of capital from poorer countries, including Namibia, to the developed world was $784 billion, up from $229 billion in 2002. We are money exporters and in fact are redistributing wealth upwards. Why this absurd situation? The US is by and large the banker for the world and most countries accumulate hard currency reserves, to cover their foreign debts, mitigate against speculation against their own currencies and for import cover or to use in case of natural or financial disasters.
Investing in US bonds and Treasury Bills, in effect, boils down to us lending money to the US, which in turn allows the US to keep interest rates low while running up massive deficits with no apparent penalty. Does the current US twin deficit really matter given this absurd situation? In a Namibian context, this is similar to any local commercial bank paying higher interest on deposits than it is receiving from its lending activities.
The cost of this to Namibia and similar, poorer nations is considerable. Whilst it is true that the instruments in question are risk-free and allow investors to achieve stability, the returns are relatively low and the money could have been used, or at least some portion of it, to develop the local economy.
Investing billions of Namibian savings in South African bonds and Treasury Bills, despite generating good investment returns, means we are lending money to the South African government to develop the South African economy. Instead, should we not support the intention of the Namibian Government to require institutional investors to invest 5% in Namibian unlisted companies and ultimately contribute to the development of our own economy?
Development requires that local savings be locally invested and there is something strange about poor Namibians financing the consumption of US residents or South African residents in the name of higher investment returns. Is it not time for local institutional investors to balance higher investment returns offshore and within the region against the development of their own country?
Secondly, it is an accepted fact that most economies that have successfully developed have re-directed some of their savings towards domestic capital accumulation. Japan, Korea, and Taiwan, to a lesser extent, are good examples in this regard. Most local observers would agree that the introduction of domestic asset requirements has been pivotal in the development and expansion of domestic capital markets. Does the intention to introduce the 5% rule, in a prudent manner, not deserve support?
Countries like Singapore and Japan that have succeeded in implementing domestic asset requirements have made use of their respective governments to apply prescription whereby these governments have either operated as direct owners (Singapore), or as guides to bank lending (Japan).
Thirdly, the industry has proposed that private equity and alternative investments are included in the definition of unlisted companies to ensure the proper management of risks involved. Using a portion of pension fund assets to fund unlisted investments is relatively novel in Namibia and it is understandable why more than two years have been spent in crafting the framework for a smooth implementation of this decision. Is it not time for the country to give momentum to its intentions?
The future is not shaped by people who don’t really believe in the future. Men and women of vision and vitality have always been prepared to bet their futures, even their lives, on ventures of unknown outcomes. Is it impossible to implement the decision prudently and responsibly by mitigating the risks known to us and adjust accordingly as the situation evolves?
Fourthly, there are some philosophical undertones, at least in my estimation, to the 5% prescription. What would the quality of our living standards be at retirement if retirement fund members and institutional investors have the best of investment returns in this world, and the country in which they retire (Namibia) lacks basic infrastructure such as roads, water, electricity, hospitals, medical centres, firms, etc. that provide basic necessities? “Should we thus not, in the case of 5% of our assets, consider trading off the need for the “highest possible investment returns” in the “safest possible environment”, for what could amount to marginally lower overall returns from investments in assets that would contribute to the long-term development of Namibia???????’??