How National Savings Can Cushion Downturn

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By Johannes !Gawaxab

– Mobilising National Savings to Buffer Economic Slowdown, Boost Growth

Economic Slowdown

Following several years of solid global growth, a combination of developments has cast a dark cloud over prospects for the remainder of 2008 and 2009. These include the ongoing global credit crisis, record high global energy and food prices and worries over potential inflation pressures stemming from the rise in commodity prices.
The IMF’s recently released updated forecasts predict that global economic growth will slow to about 3.7% in both 2008 and 2009 from around 4.9% in 2007. These developments do have negative consequences for Namibian exporters and will lead to a reduction in our economic activity.
Rising global inflation continues to cloud prospects beyond 2008. Should commodity prices continue to rise and/or inflation generally escalates further, central banks around the world may have no choice but to tighten policy further. Such an outcome will ditch any hopes of a global recovery in 2009 and make the current slowdown more acute and extended.
The outlook for 2008 and 2009 is much less favourable. The combination of slower global growth, the high interest rate environment, higher inflation and the petrol and electricity crises will likely mean that real Namibian GDP growth will be around 3.9% in 2008 from 4.7% in 2007.
The Bank of Namibia has contributed significantly to ease the challenges faced by consumers by keeping rates unchanged on two occasions.
This is indeed the correct approach as inflationary pressures are not money- nor demand-driven but rather, caused by exogenous factors.
The Bank of Namibia will have little choice but to follow suit should the South African Reserve Bank hike interest rates in June, as the second round inflationary pressures, inflation expectations and arbitrage opportunities do require some management.
The Namibian consumer has been under pressure from higher interest rates, surging fuel and food prices and is also staring huge electricity tariff hikes in the face at present. It is common knowledge that repossessions of houses (mortgages), furniture and vehicles on hire purchases are on the increase and that most commercial banks are strengthening their collection units and re-financing assets for clients. As a result we expect consumer spending growth to slow both this year and next year. Capital formation, however, should continue to grow strongly as government’s capital spending drive gathers momentum.
With local inflation likely to rise further in the near term – higher wage demands to follow almost certainly – and expected to fall only slowly through 2009, local interest rates will remain elevated for an extended period and may rise even further over the remainder of 2008.
Rates are unlikely to fall before deep into 2009 as monetary authorities will want to ensure inflation is on a clear downward trend before cutting rates. This is unlikely to be evident before mid-2009.
Stormy and challenging economic times lie ahead and it is imperative that the recent decision by the Namibian Government to mobilise national savings to boost economic growth be implemented and supported. This policy intervention stands to contribute to job creation, poverty alleviation, stemming capital outflows, cushioning against current economic hardships, and mitigating against the impact of monetary accommodation – a decision to keep interest rates unchanged
Globally, many countries mobilise national savings to stimulate economic growth and pension funds, in particular, are known for supporting governments’ developmental goals.
There is nothing unconstitutional about it, nor is there any reason to postpone the implementation thereof, as these policy recommendations were announced in July 2004 for the first time.
Granted, the decision may disturb certain comfort zones and vested interests – however, the Minister of Finance should be applauded for following through on this bold decision.

Amendments to Regulation 28 and Regulation 15

Regulation 28 and Regulation 15 of the Pension Funds Act and the Long Term Insurance Act enables retirement funds and long-terms insurers (‘Investors”) to invest a minimum of 5% of its total assets in unlisted investments to be phased in as follows:
A minimum of 2% from 01 January 2008 to 31 December 2008 followed by , a minimum of 3.5% by from 01 January 2008 to 31December 2009 and a minimum of 5% from January 2010 onwards.
Unlisted investments means shares as defined in the Companies Act, excluding listed shares and debt instruments and any other investments as the Registrar may determine in concurrence with the Minister.
Portfolio companies should have at least 25% Namibian ownership, its financial statements should be IFRS compliant, it should adhere to internationally accepted norms of good corporate governance, and the Investment Manager should be approved by Namfisa prior to any unlisted investment being made by the Investors.
– Exposure to dual-listed shares on the Namibian Stock Exchange are to be reduced as follows:
30% from 1 June 2008 to 31 May 2009;
25% from 1 June 2009 to 31 May 2010;
20% from 1 June 2010 to 31 May 2011;
15% from 1 June 2011 to 31 May 2012
10% from 1 June 2012 onwards
How do we ensure the success and practical implementation of the policy recommendations?
It is evident to most market players that the regulations gazetted require some clean up and as the financial sector, we should be pragmatic in this regard. The following needs to be considered for ensuring a smooth transition and success of the regulations:

Definition of unlisted investments

The current definition of qualifying “unlisted investments” appears narrow given the available universe of investable assets, the fact that only N$1,1 billion government bonds will be issued this year (far below the demand of the local market), currently proposed phasing down of dual listed shares, and the lack of progress on partial divestiture from non-essential parastatals.
Consideration should be given to include equity stakes in companies not listed on any stock exchange, acquisition of minority stakes in existing unlisted entities and involvement in unbundling and delisting situations, as well as investments that take the form of equity and debt capital in infrastructure projects, including, but not limited to low-cost housing, civil works development of water resources and distribution, electrification, telecommunications, mass media, agriculture, tourism, SME’s and transport.
This broader definition has the potential to address concerns raised by those citing the lack of bankable projects in the country, who argue that the 5% unlisted investment is tantamount to throwing good money after bad. With this broader definition, the N$1.4 billion should surely find homes home(s).

Reduction of exposure to dual-listed shares on the Namibian Stock Exchange

Dual-listed companies on the Namibian Stock Exchange with Namibian asset status have made significant investments in Namibia and play a pivotal role in the local economy – employing Namibians, paying taxes, paying healthy dividends to Namibian investors while allowing Namibian investors to participate in the capital appreciation of the various counters.

Care should be taken to reduce dual listed companies on the NSX as qualifying Namibian assets in terms of the regulations, in the absence of providing an appropriate alternative to local investors. The proposed reduction also goes against the noble intention of regional integration and should be reviewed and phased in, if needed, over a longer period.

Conclusion

Given the above, and in an effort to stimulate local economic growth, create jobs and stem the outflow of capital, it is imperative that the decision to invest a small portion of our contractual savings in unlisted investments locally is implemented. It is therefore critical that the capacity of the relevant regulatory authority is strengthened and that the regulations are refined to ease interpretation and practical implementation thereof.
– Johannes !Gawaxab is the Managing Director Old Mutual African Operations

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