fellows’ development program: debt management technical...

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FELLOWS’ DEVELOPMENT PROGRAM: DEBT MANAGEMENT

TECHNICAL PAPER - NAMIBIA GOVERNMENT DEBT SECURITIES MARKET: CHALLENGES AND THE WAY FORWARD

Fellow: Titus Ndove1

E-mail: [email protected] [email protected]

1 I am indebted to Ms Ceyla Pazarbasioglu, my Mentor and Division Chief of the Capital Market Development Division in the Monetary and Capital Markets Department of the IMF for her continuous advice and support. The usual disclaimer applies.

T. Ndove: Technical Paper – Namibia Government Debt Securities Market

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ABSTRACT The development of domestic debt markets is seen as one of the key measures

undertaken to strengthen the financial sector and reduce external debt related risks.

Namibia has one of the most sophisticated and developed financial systems in the

African continent. The diverse range of financial institutions in Namibia comprises of

private commercial banks, insurance companies, pension funds, a stock exchange,

assets management companies, unit trust companies and other specialized lending

institutions. The Namibia economy is also vibrant as reflected in a healthy growth rate,

stable prices, disciplined fiscal policy as reflected in strong fiscal position and low debt,

high national savings and healthy current account surpluses.

As a result of sound macroeconomic fundamentals, the country was assigned a

favourable sovereign credit rating of BBB- by FitchRating agency during 2005, which

was re-affirmed during 2006. This rating put Namibia in the same league as countries

such as India and Croatia. Namibia took advantage of the good credit rating and

accessed the international capital market during 2006 when it contracted a 364 day

syndicated debut loan facility of US$50 million, which was oversubscribed. The Bank of

Namibia is currently looking at accessing the international bond market in order to create

contingency borrowing sources when such need arises. At the same, time this will create

benchmarks for future issues by the Namibia institutions.

Having one of the highly developed financial systems in the African continent, however,

does not insulate the country from being confronted by a number of challenges in the

Government domestic debt securities market. The key challenges facing the

Government domestic debt securities market are among others, the development of a

deep and liquid secondary market, stemming capital outflows and supply of enough debt

papers to the market. Various initiatives are recommended in this technical paper to

improve liquidity in the secondary market and finding other means to increase the debt

papers in the market given the significant reduction in the Government financing

requirements, especially during 2006/07 to 2007/08 fiscal years.

Namibia has a well developed pension fund and insurance companies sector which are

important for the development of a fixed income securities market. These contractual


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savings are, nonetheless, not invested in the local market given a relatively well

developed market in the neighboring South Africa. Namibia is a member of the Common

Monetary Area (CMA) with Lesotho, Swaziland, and South Africa. CMA provides for free

capital outflows among member countries and free access to each member’s financial

markets. Consequently, the investment of the country’s national savings in South Africa

put pressure on the country’s foreign exchange reserve.

As a response to these outflows, the Government introduced domestic investment

requirements/captive funding on pension funds and insurance companies, which is set at

35 percent of their assets. Although many countries are using, this or similar regulation

in practice, it is not a good policy, according to the IMF (2002). Another study conducted

by the IMF (2006) argued that capital controls have large costs on the economies of the

countries that introduced these measures. These costs are in terms of efficiency losses,

less market discipline and reduced capital flows. Many countries in Western Europe and

some English speaking countries, including South Africa introduced captive funding in

the early stages of financial market developments. Although, this created captive

demand for domestic Government bonds it was found to be the stumbling block to the

market developments as the debt issues were not based on market conditions. As a

result, most of the countries that introduced captive funding have done away with it in

order to develop a sound and vibrant Government debt securities market.

In the case of Namibia, removing domestic investment requirements should be a gradual

process where the Government should first develop the financial markets. A haste lifting

of these requirements without creating competitive products in the financial markets,

could exacerbate the capital outflows to South Africa and this may lead to severe

implications on the country’s financial stability as the official reserves possibly will be

depleted.


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TABLE OF CONTENTS

Glossary .......................................................................................................................... 6�

1. � Introduction ........................................................................................................... 8�

1.1 Background ........................................................................................................... 8�

1.2. Macroeconomic Conditions of Namibia ............................................................... 10�

1.3. Objective of the paper ........................................................................................ 12�

2.� Perspectives of Government Debt Securities Market ......................................... 14�

2.1 Institutional and Legal Framework ....................................................................... 14�

2.2 Strategy for Public Debt Management ................................................................. 16�

2.3 Primary Market Issuance ..................................................................................... 16�

2.4 Secondary Markets Activities in Government Bonds ............................................ 17�

2.5 Government Bonds .............................................................................................. 21�

2.6 The Size of the Bond Market ............................................................................... 22�

2.7 Benchmarks ........................................................................................................ 24�

2.8 Investor Base ...................................................................................................... 25�

2.9 Composition of T-bills and Bonds ........................................................................ 27�

2.10 Strategy for Redeeming Maturing Bonds ........................................................... 28�

2.11 Safe and Timely Title Registration, Transfer and Settlement ............................. 29�

2.12 Tax Treatment of Government papers and Other Client Costs .......................... 30�

Box 1� Credit Rating and Impacts on Government Bonds ................................... 31�

3. � Measures taken to develop Namibia Capital Markets ......................................... 34�

a. Introduction of Local Investment requirements/Regulation 28 ................................ 34�

b. CMA Agreement .................................................................................................... 35�

Box 2 Implications of the CMA Arrangement on Capital Markets ............................... 36�

c.� Liquid asset requirements ............................................................................... 38�

(d) Sovereign Debt Management Strategy (SDMS) ................................................... 39�

(e) Introduction of Market Making .............................................................................. 40�

(f) Interactive webpage for secondary bond trading ................................................... 41�

4. Impediments to the Developments of Government Securities Markets ...................... 43�

Current Challenges ................................................................................................... 43�

5. Literature Review ...................................................................................................... 46�

5.1 Case Studies of Selected Countries .................................................................... 46�


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5.1 Slovenia ........................................................................................................... 46�

5.2 Poland ............................................................................................................. 54�

5.3 Special Case Study of a CMA Member South Africa ........................................ 59�

6. Experiences Reviewed and KEY LESSONS for Namibia .......................................... 65�

6.1 Good Attributes to be Emulated by Namibia ........................................................ 65�

Slovenia ................................................................................................................ 65�

Poland ................................................................................................................... 70�

South Africa ........................................................................................................... 74�

6.2 Lessons to be Avoided by Namibia ...................................................................... 76�

Slovenia ................................................................................................................ 76�

Poland ................................................................................................................... 76�

South Africa ........................................................................................................... 78�

7. The Namibian Experience - Lesson for the MEFMI Region ....................................... 80�

8. Recommendations Towards A ROBUST Government Debt Securities Markets in

Namibia ......................................................................................................................... 85�

8.1 Sustaining Stable Macroeconomic Environment .................................................. 85�

8.2 Developing the Government Bonds Markets ........................................................ 86�

8.3 Improving Corporate Governance ........................................................................ 92�

8.4 Institutional and Legal Framework ....................................................................... 92�

8.5 Tax Treatment ..................................................................................................... 94�

8.6 Broadening Investor Base ................................................................................... 95�

8.7 Needs for Reforms – Sequencing ........................................................................ 96�

9. Conclusion ................................................................................................................ 98�

10. References ............................................................................................................ 101�


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GLOSSARY

AG Office of the Attorney General

ALM Asset & Liability Management

AUM Assets Under Management

BES Book Entry System

BIS Bank of International Settlement

BON Bank of Namibia

BOS Bank of Slovenia

CDM Cash and Debt Management

CMA Common Monetary Area

CPS Cheque Processing System

CRAs Credit Rating Agencies

CS-DRMS Common Wealth Debt Recording Management System

EMEs Emerging Market Economies

CPI Consumer Price Index

CS-DRMS Commonwealth Secretariat Debt Management System

GC02 Government of Namibia bond maturing in 2002








GDP Gross Domestic Product

GEAR Growth Employment and Redistribution

ILBs Inflation Linked Bonds

IMF International Monetary Fund

IRS Internal Registered Stock

IRSRA Internal Registered Stock Redemption Account

MEFMI Macroeconomic & Financial Management Institute of Eastern & Southern

Africa

MOF Ministry of Finance


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MTEF Medium Term Expenditure Framework

NAMFISA Namibia Financial Institution Supervisory Authority

NBA Namibian Bond Association

NBP National Bank of Poland

NDP National Development Plan

NPC National Planning Commission

N$ Namibia Dollar

NSX Namibia Stock Exchange

OECD Organisation for Economic Co-operation and Development

OTC Over the Counter

PDD Public Debt Department

PDMD Public Debt Management Department

RTGS Real Time Gross Settlement

SACU Southern Africa Customs Union

SARB Reserve Bank of South Africa

SOEs State Owned Enterprises

SRF State Revenue Fund

USD US Dollar


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1. INTRODUCTION 1.1 Background

This paper reviews recent trends and challenges, as well as the way forward in the

domestic Government debt markets of Namibia, a member of the Common Monetary

Area (CMA)2. The paper primarily focuses on the current practices in domestic

Government debt markets in Namibia, the needs of this market, the impediments to the

developments of the market and how these impediments might be removed. The

domestic debt markets in emerging markets, including Namibia are generally small,

short-term in nature and often are characterized by a narrow investor base. In the case

of Namibia, the domestic debt market is less developed compared to other advanced

emerging markets such as, South Africa, Argentina, Russia and Korea.

The Government debt securities market in Namibia is confronted with a number of

challenges and this is better understood by looking at the country’s financial structure.

When the country became independent in 1990, the money and capital markets barely

existed. The financial system was mainly dominated by urban based commercial banks,

and insurance companies and pension funds. According to the IMF’s Financial Sector

Assessment Program (FSAP) on Namibia (2006), the country has one of the most

sophisticated and highly developed financial systems in Africa. These financial

institutions include four private commercial banks, 30 insurance companies, about 500

pension funds, a stock exchange, 32 asset management companies and a number of

unit trust management companies Namibia has also the development bank, other

specialized lending institutions including micro lending entities. These financial

institutions are predominantly South African owned given the historical past that Namibia

was part of South Africa until 1990.

Given a well developed pension funds the country generates huge savings in excess of

30 percent of GDP. However, Namibia’s contractual savings flow to South Africa instead

2 CMA is a currency union made up by Lesotho, Namibia, South Africa, and Swaziland. The SA currency,

the Rand circulates as a legal tender in other CMA member states along with their respective national

currencies.


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due to a relative well developed financial in that country. This resulted in a peculiar

situation where Namibia became a net exporter of capital to South Africa. To aid the

development of the financial markets and the local economy, the Government took

deliberate measures to develop the local market for the Government securities. More

specifically, the Government put the developments of the local money and capital

markets in the national development agenda in the First National Development Plan

(NDP1). As a result, Government instituted several measures to develop the local

market. The ultimate objective of developing the local bond market is to ensure

continuous access to funds in the market at affordable prices to develop the real

economy.

Although the local bond market in Namibia has grown significantly compared to the level

before independence in 1990, a lot is still left to be desired in terms of liquidity,

transparency, efficient market trading and infrastructure, number and size of bonds in

the local market. The limited market development is attributed to lack of active trading,

limited supply of bonds, and lack of skills, capital outflows and diversity in the market.

According to Biekpe (2004), small CMA countries3 have indicated lack of liquidity as a

major obstacle to the development of the local Government debt markets.

Methodology

The database for this technical paper contains information about the characteristics of

Government domestic debt in Namibia for the period 1990 – 2006. The study is limited

only to Namibia since it was very difficult to get comprehensive data on other small CMA

members. Whilst other datasets such as the stock of outstanding debt and its

composition, secondary marketing trading at stock exchange, macroeconomic

indicators, etc, exists for Namibia, it was not possible to obtain information on the trading

over the counter (OTC), holdings of debt by sector, among others. The analysis of the

paper was enriched with the case studies of Poland, Slovenia and South Africa and

sources used in this case were primarily individual IMF country’s reports. The analysis of

this paper is presented in the form tables, charts and text. The main sources of data

collected are the websites, publications and any other administrative records of the

Central Bureau of Statistic, Central Bank, Stock Exchange and Ministry of Finance.

3 Lesotho, Namibia and Swaziland – excluding South Africa


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1.2. Macroeconomic Conditions of Namibia At independence in 1990, the Government inherited an economy characterized by a

narrow industrial base and heavy dependence on the production and export of the

primary commodities, such as, minerals, fish and beef. The Government realized that

such a structure was not conducive for tackling social challenges such as high

unemployment of about 36 percent and income inequality, and as a result, strategies

were put in place to diversify the economy.

The efforts of the Government to diversify the economy bore fruits as witnessed in the

shift from dependence on the primary industry to the secondary and primary industries.

The contribution to GDP from the primary industry which stood at 28.4 percent in 1990

declined significantly to only 20.0 percent in 2005, whilst the share of the secondary

industry increased to the current level of around 18.0 percent from 16.0 percent at

independence (Table 1). Similarly, the contribution from the tertiary industry increased to

53.9 percent in 2005 from 43.5 in 1990.

Table 1 Key Macroeconomic Indicators

��

��

��

��

The Namibian economy is vibrant and underpinned by sound macroeconomic

fundamentals as reflected in healthy growth rate, stable prices, disciplined fiscal policy

as reflected in strong fiscal position and low debt, high national savings and healthy

current account surpluses. As a result, of these sound macroeconomic fundamentals,

the country was assigned a favourable sovereign credit rating of BBB- by FitchRating

agency with rating peers of Croatia and India. The GDP per capita income for Namibia is

around USD3200, whilst income inequality is 0.6 (gini coefficient). The economic growth


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remained strong as indicated in Table 2 driven mainly by mining and manufacturing

activities. As a result of an improved fiscal position (surpluses/ low deficits), total

outstanding debt of the central government as a ratio of GDP has been on a declining

trend since 2005, and is geared to continue declining further due to budget surpluses

projected during the 2007/08 financial year. Nonetheless, these low budget surpluses

bring some challenges to the domestic financial markets, as the reduced role of the

government as the major issuer of debt papers means a deterioration of the already low

supply of these papers to the market.

Namibia has one of the highest positive saving – Investment gap in Africa, averaging

around 5 percent of GDP for the past five years (Table 2). The gross saving alone is in

excess of 30 percent to GDP. These saving surpluses provided a good base for Namibia

to develop its domestic Government securities market. Nevertheless, thus far the

country has been relatively unsuccessful to retain a significant portion of these savings

due to a relative shallow domestic market relative to the South African domestic

markets. South Africa has one of the most sophisticated financial markets among

emerging market economies, and this does not augur so well for Namibia as institutional

investors take Namibian savings and invest them in that country. This trend is costing

the country in terms of the loss of foreign exchange reserves (Rand). During 2006 alone,

the net capital outflows to South Africa amounted to US$1 billion, rising by 42 percent

from the previous year.

Table 2 Other Key Macroeconomic Indicators

Indicators 2001 2002 2003 2004 2005 2006

GDP Real Growth Rate 2.4 6.7 3.5 6.0 4.2 4.6

Total Debt as % of GDP 25.7 25.2 29.1 33.6 31.7 31.7

Inflation Rate % 9.2 11.4 7.2 4.2 2.3 5.1

External Debt as % of GDP 5.6 3.9 4.6 5.1 4.7 5.9

Gross Savings as % of GDP 24.2 27.9 33.3 32.8 31.5 0.0 Saving-Investment Gap as % of GDP 2.3 6.7 4.2 7.4 4.8 Budget Deficit/Surplus as % of GDP -4.3 -2.5 -7.2 -3.6 -1.1 2.2

Reserves (USD mio) 238.0 360.0 300.0 323.0 247.0 421.0 Net Capital Outflows (USD mio) 640 703 1,000


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Despite these huge net capital outflows, Namibia managed to fast build its reserves,

especially during 2006. This was mainly as a result of the substantial rise in the current

account surplus, which was also supplemented by issuing of USD50 million one-year

syndicated loan in the international capital market during 2006. Improved export

performance, Southern African Custom Union (SACU) receipts and the sale of a stake in

a mobile telecommunication company. During March 2007, the official reserves were

around USD1.0 billion primarily due to the receipts from the SACU Pool4. The capital

outflows are expected to continue due to the fact that funds under the management of

the highly developed pension funds and insurance corporations are growing. Measures,

therefore, to develop the domestic capital markets are necessary to expand investment

opportunities in order to minimize capital outflows. Namibia’s ratio of pension assets to

GDP in 2001 was estimated at 60 percent and if life insurance, short-term insurance,

unit trusts and other funds are included it amounted to 80 percent of GDP.

It is worthwhile noting that a well developed contractual savings sector in Namibia has

helped the country to develop its domestic Government securities market as it provide a

stable source of long term demand. According BIS (2002), the pension fund

development in emerging markets go hand in hand with the bond market development.

1.3. Objective of the paper

The main objective of this paper is to discuss the Namibian Government domestic debt

securities market in terms of: (i) the level of development in the Government domestic

debt securities market; (ii) the challenges to the development of this market and how

they might be removed; (iii) lessons and experiences of selected countries that are few

steps ahead and have some similarities to Namibia’s path for financial market

development; and (iv) the roadmap towards developing a robust Government debt

securities market.

4 Botswana, Namibia, Lesotho, Swaziland and South Africa belongs to SACU, the oldest custom union in the

world, established in 1910.


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The findings of this paper will provide insights to the rest of MEFMI member states,

especially those in the CMA that are also struggling with the same challenges as

Namibia. The paper is structured as follows: Section 2 describes the perspectives of

Government debt securities market; Section 3 explains the measures taken to develop

the Namibian capital markets; Section 4 provides the challenges to the developments of

Government securities’ market; Section 5 presents the literature review, focusing on

case studies of selected countries; Section 6 draws key lessons for Namibia, while

lessons for the region are presented in Section 7. Section 8 presents the

recommendations towards a robust Government debt securities market, while Section 9

concludes.


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2. PERSPECTIVES OF GOVERNMENT DEBT SECURITIES MARKET IN NAMIBIA

2.1 Institutional and Legal Framework

The sovereign debt management is the responsibility of the Ministry of Finance (MOF).

This responsibility derives from the Namibian State Finance Act, 1991 (Act 31 1991),

which places the authority on matters regarding the management of public debt with

MOF. In carrying this function, the Ministry is assisted by the Bank of Namibia (BON),

the National Planning Commission Secretariat (NPC) and the Office of the Attorney

General (AG).

2.1.1 Ministry of Finance

The legal provisions for entering into loan agreements are stipulated in the State

Finance Act, 1991 (Act 31 of 1991). The section empowers the Minister of Finance, or

any person authorised by the Minister in writing, to borrow and sign all loan agreements

acquired by the central Government and to furnish guarantees.

Section 29 (1) of the Act stipulates inter alia that the Minister of Finance may borrow at

any time within or outside Namibia. The Minister is also given authority to enter into

agreements with banks or other financial institutions, including the Bank of Namibia, an

international bank or a foreign institution. The Minister has the signing power on behalf

of Government. Furthermore, the State Finance Act empowers the Minister of Finance to

furnish guarantees on behalf of Government. The Act also gives power to the Minister of

Finance to approve the loans granted by the State to any institutions or individuals in

Namibia and to determine the amount and interest rates to be charged on these loans.

2.1.2 Bank of Namibia

The Bank of Namibia (BoN) has a statutory responsibility in sovereign debt

management. In terms of the Bank of Namibia Act, 1997, section 44, the Bank must be

consulted and provide an opinion on all external borrowing by the Namibian Government


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and statutory bodies before a loan is contracted. The Bank is required to pay particular

attention to the timing, terms and conditions and financial expediency of the intended

borrowing.

In terms of the Section 42(1), the Bank of Namibia is entrusted with the issue and

management of the securities issued or guaranteed by the Government. The Bank fulfils

this agency role with respect to the issue, administration and recording of domestic

instruments such as treasury bills and Government bonds. This agency role is duly

reflected in an agreement between the Bank and the Ministry of Finance, entitled

“Agency Agreement for the issue and redemption of treasury bills, internal registered

stock and any other Government instrument”, dated 15 May 1991 and as amended on

24 September 1991. These statutory obligations make the Bank a major partner in

Namibia’s sovereign debt management framework.

2.1.3 Office of Attorney General

The Office of the Attorney General (AG) gives legal opinions on behalf of the Namibian

Government. Legal provisions and policies for entering into loan agreements are clearly

stipulated in the State Finance Act, 1991 (Act 31 1991). As the state’s principal legal

adviser, the Office of the Attorney General is involved in drafting and scrutinising legal

documents related to borrowing and lending transactions as well as the furnishing of

guarantee agreements. The legal officers of the Attorney General are generally also

participating in loan negotiations, and the Attorney General is required to certify to

foreign lenders that all aspects of loan agreements have been carried out in accordance

with the legal provisions of the Namibian rule of law.

2.1.4 National Planning Commission

In accordance with the National Planning Commission Act, 1994 (Act 15 of 1994), the

NPC Secretariat is tasked to make recommendations in connection with proposed

capital and development projects and programs, and to appraise, monitor and evaluate

such projects and programs. The NPC Secretariat carries out this task not only in

relation to Government projects, but also with regard to projects of statutory bodies and

other levels of Government. The practice to date, however, has been that all projects to


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be funded by foreign loans are forwarded to the Ministry of Finance for evaluation and

monitoring.

2.2 Strategy for Public Debt Management

The Namibian Government funds most of its financing needs by borrowing from

domestic sources. This is done for two reasons: Firstly, by borrowing from the domestic

market, the Government intends to contribute to the development of money and capital

markets in Namibia, which were at their infancy at Independence. As a consequence of

this strategy, a healthy primary market in both short-term (treasury bills) and long term

(internal registered stock) Government securities has developed, although trade on the

secondary market remains thin.

Secondly, by raising funds in the domestic market the Government has minimised the

currency risk associated with foreign borrowing due to exchange rate fluctuations.

Foreign loans have largely been limited to concessional loans for infrastructure projects,

and for on-lending to state-owned enterprises and institutions. The advantage

associated with this strategy is that the concessional loans have a long maturity

structure and since infrastructure investments are expected to yield long-term returns,

maturity mismatch is avoided.

2.3 Primary Market Issuance

The primary market practices for non-Government bonds issued in Namibia vary from

one issuer to another. In its role as the agent for issue and management of Government

debt securities, the Bank of Namibia issues Government bonds on behalf of the

Government of the Republic Namibia. Based on annual issued calendar, the Bank of

Namibia invites tenders for Government securities in newspapers, by e-mail and on the

Reuters System. After receiving bids before the deadline at 10:00, the Bank of Namibia

processes tenders in the Dutch auction style and then the Government approves the

tender results. The auction takes place once every month for all the bonds on the run.

The BoN and MoF determine the allotments of the issue immediately after the closure of

the bid whereby the bids are allocated competitively. The whole auction process is


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conducted manually and tender results come out before 16:00 during the same day. This

means that the process at the moment takes a while longer for the results to be

announced, and hence the need to introduce an electronic tendering system to improve

the efficiency in the auction. The settlement takes place 48 hours after the auction.

The main players and holders of the Government bonds are pension funds, commercial

banks, insurance companies, state owned enterprises and asset management

companies. The commercial banks are the major holders of these securities due to the

liquid asset requirements which oblige them to hold 10 percent of their liabilities in liquid

assets. As a result, the commercial banks are holding 90 percent of the liquid assets in

Government securities. Most of these major holders of Government securities are not

engaging in active secondary market trading and thus, they buy and hold to maturity.

The commercial banks and institutional investors mainly buy these securities to match

their respective liabilities. Contributing to the buy and hold attitude is the supply

constraint which is experienced in the market since the beginning of 2006/07 financial

year as institutions are not sure of finding the replacement assets after selling off their

current holdings. Another factor identified as contributing to the buy and hold attitude in

the market is the fragmentation of market into narrow niches, such as pension funds,

banks and retails investors having different investments perspectives. These groups

have different attitudes towards the trading positions and holding of the securities.

2.4 Secondary Markets Activities in Government Bonds

Overall, dynamism of the bond market is determined largely by the extent of trading in

the secondary market. Mohanty (2002) reviewed about 22 countries (emerging market

economies) and concluded that lack of liquidity remains a major obstacle to the

development of securities market in these countries. The market liquidity is defined as its

relative tightness, depth and resilience. Tightness is measured by the bid-ask spread

and it provides the cost for executing transactions. The lower the spread, the higher is

the market liquidity and vice versa. The depth of the market refers to the ability of the

market to handle transactions especially large ones without causing sharp changes in

prices, while resilience is about the speed the price fluctuations recover. The


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measurement used is the market turnover/trade ratio, which is the ratio that measures

the annual transactions to outstanding stock or bond.

There was a noticeable improvement in the secondary market trading activities in

Namibia as reflected in the increased in volume traded, value of transfers recorded in

the Government Bond Register kept at the Bank of Namibia and trade ratio. The volume

of trades nearly tripled to N$1.8 billion in 2005 from N$576.9 million in 2004 and from

only N$12.1 million recorded in 1999. According to the turnover ratio based on exchange

trading data, the secondary market trading in the Government bonds had picked up

significantly since 2002, surging to 7.7 percent from a mere 0.6 percent in 1999. The

increased secondary market trading could be explained by the boom in the equity

market which prompted asset managers to buy bonds in order to balance their portfolio

as per internal investment guidelines. Other factors that explain the increase in

secondary market trading include favourable sovereign credit rating of BBB- assigned to

the country, increased the data coverage, participation by foreigners, and more

involvement by stock brokers.

Secondary trading of Government bonds as can be observed in Chart 1 is still

concentrated more in over-the-counter (OTC) market when compared to trading

activities through the NSX. The concentration of trades on OTC could be explained by

the high dealing charges, which include transaction levy to the stock exchange (NSX),

levy to the regulator and transfer secretary fees for all the dealings conducted via the

NSX. For an example, per each deal, a transaction levy of 10 percent of brokerage is

paid to the stock exchange and a levy of 0.04 percent of the total consideration to the

regulator.


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Chart 1 Secondary Market trading of Government Bonds - Namibia

-

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2003 2004 2005

Bill

ion

s

NSX OTC TOTAL TRANSFERS

Based only on the exchange trading data, the bond turnover ratio in the Government

bonds reached the highest of 31.9 percent during 2005 although it declined to 19.1

percent in 2006 (see Table 3). The direction of trading does not reflect any specially

preference towards either on-the-run or off the run issue. The secondary trading per

instrument seems to have been driven mainly by the preference of shorter maturity. The

most traded bonds are the ones with shorter tenor, while the least traded are the ones

with longer tenor such as the GC24, maturing in 2024. The long dated instruments such

as the GC24 are mainly demanded by institutional investors who mainly need these

assets to match their long term liabilities, and normally obtain these assets primarily from

the primary market. The attitude of buy and hold is highly prevalent in this sector as

institutional investors do not buy these assets to trade.


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Table 3 Bond Turnover Ratio

Bonds Debt outstanding (N$ million)

Annual Secondary Trades (N$ million)

Turnover Ratio (Trades reported /debt outstanding)

1999 1932.9 12.1 0.6% 2000 2168.7 17.3 0.8% 2001 2695.1 24.0 0.9% 2002 3017.5 231.4 7.7% 2003 3527.3 475.1 13.5% 2004 4831.5 576.9 11.9% 2005 5727.0 1826.4 31.9% 2006 6737.8 1288.6 19.1%

Source: NSX and BoN �

The transfer of Government bonds has also been on the rise since 2001. It increased

from N$343.5 million (USD50 mio) in 2001 to N$2.4 billion (USD332 mio) in 2006 (Chart

2). As expected this is reflecting the rise in trading of Government bonds traded on the

NSX.

Chart 2 Direct secondary transfers at Bank of Namibia

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Despite the increase in secondary market trading for Government debt securities, the

attitude of buy and hold is still prevalent in the market and is attributed to the low supply

of debt papers especially from the Government due to reduced financing needs for

2006/07 – 2007/08 financial years.

Although there is a notable increase in secondary trades, it is still not able to generate

sufficient liquidity. With a low turnover ratio averaging around 10.0 percent from 1999 to

2006, it is not significant and not even close to covering half of the amount outstanding

of Government bonds. The illiquidity of Namibian Government debt securities may be

put into by perspective by comparing it with the turnover of South Africa. The market

turnover for Government debt securities in South Africa country amounted to 8.1 trillion

Rand during 2005, covering the amount outstanding of bonds by 18.9 times. The total

trades at the Bond Exchange of South Africa (BESA), amounted to 298 000 during the

2005 as opposed to a mere 150 trades in the case of Namibia, leaving 100 zero trading

days in a possible 247 trading days. It is, thus, clear that despite the rise in secondary

trades and transfers of Government bonds, a lot still need to be done by the

Government/BoN to enhance the desired level of liquidity in the market.

2.5 Government Bond Types

By 1998, 13 Government Internal Registered Stocks with various maturities and coupon

rates were issued, but secondary trading was sporadic. In order to lengthen their

maturity structure, enhance their liquidity and create local benchmark instruments, most

of these bonds were consolidated in 1998 into three major bonds namely GC02, GC05

and GC10 maturing in 2002, 2005 and 2010, respectively. In April 2002, the Government

issued GC07 and GC15 due in 2007 and 2015, respectively. During 2004 and 2005, the

Government added another three bonds on its portfolio in the form of GC08, GC12 and

GC24, respectively. Additional bonds are issued primarily to cover existing gap between

the instrument already in issue .i.e. GC12 to cover the gap between GC10 and GC15.

Furthermore, the government also wants to ensure that they make available benchmark

bonds in all major maturity sectors in order to provide investment avenues for investors


22

in those sectors and provide price reference for private sector bonds with similar

maturities. Currently the Government has six bonds in issue (Table 4).

Table 4 Internal Registered Stocks (IRS) /Bonds

IRS

GC07

GC08

GC10

GC12

GC15

GC24

First issued

date

April 2002

Dec 2004

May 1998

21 July

2005

April 2002

Aug 2004

Maturity date

July 2007

15 July 2008

Jan 2010

15 October

2012

April 2015

15 Oct 2024

Coupon rate

12.50%

8.5%

12.0%

10.5%

13.0%

10.5%

Coupon dates

15 Jan,

15 Jul

15 Jan,

15 July

15 Jan,

15 Jul

15 Apr,

15 Oct

15 Apr,

15 Oct

15 April,

15 Oct

RSA

benchmark

R194

R194

R153

R153

R157

R186

Source: BoN

2.6 The Size of the Bond Market Domestic debt forms the largest part of Government’s debt portfolio. The amount

outstanding in Government internal registered stock (IRS) has been increasing steadily

since the first stock was issued in 1992. IRS increased from N$50 million (USD 7 mio)

or 0.3 percent of GDP in 1992 to N$6.7 billion (USD 930 mio) or 16 percent to GDP by

end of December 2006 (Chart 3 and Table 5). The Government total domestic debt,

including treasury bills and bonds increased steadily after Independence from nothing at

the end of 1991 to 26.3 percent of GDP by end of 2006. The sharp increase in the

domestic debt to GDP ratio has raised many concerns about sustainability.5 Another

issue of concern has been the very short maturity of most of government domestic debt.

This situation has, however changed in the mean time as Government successfully

5 The study undertaken to determine debt sustainability concluded that both domestic and external debt are

sustainable, refers to “Central Government Debt Sustainability” by Zaaruka, Ndove and Tjipe (2004).


23

switch most of it debt from shorter term to longer term instruments. Government’s

foreign debt stock has remained more or less stable since Independence. As a

percentage of GDP, foreign debt increased slightly from 5.4 percent of GDP in 1992/93

to 6.0 percent in 2006. Virtually all foreign loans acquired by the central Government are

used only to finance capital projects.

Chart 3 IRS Outstanding (N$ million)

The total bond market in Namibia stood at N$7.6 billion by end of December 2006, with

Government accounting for 81.4 percent of the total fixed income in the country. The

Namibian commercial banks contributed around 10 percent of the outstanding stock,

while 8.8 percent is taken up by the state owned enterprises (SOEs).


24

Table 5: Government Domestic Debt (N$ Million)

T-Bill As % of Total Bond As % of

Total Total 1991 20.0 100.0 - - 20.0 1992 145.0 74.4 50.0 25.6 195.0 1993 265.0 38.7 419.4 61.3 684.4 1994 262.7 30.6 597.0 69.4 859.7 1995 420.0 33.3 842.0 66.7 1,262.0 1996 992.1 48.7 1,044.6 51.3 2,036.7 1997 1,678.1 58.1 1,212.0 41.9 2,890.1 1998 1,888.3 50.1 1,878.3 49.9 3,766.6 1999 2,430.7 55.7 1,932.9 44.3 4,363.6 2000 2,640.0 54.9 2,168.7 45.1 4,808.7 2001 2,799.7 51.0 2,695.1 49.0 5,494.8 2002 3,516.2 53.8 3,017.5 46.2 6,533.7 2003 4,841.2 57.9 3,527.3 42.1 8,368.5 2004 5,841.5 54.7 4,831.5 45.3 10,673.0

2005 5,117.0 47.2 5,727.0 52.8 10,844.0 2006 4,375.0 40.0 6,577.8 60.0 10,952.9

2.7 Benchmarks

The South African Government securities act as benchmarks to the Government of

Namibia securities as illustrated in Table 4. The Government bonds issued in the

domestic market also serve as benchmarks for various investors in the local market, and

facilitate pricing of corporate bonds and other fixed income securities. However, the

Government securities have not yet established an official yield curve. The average

spread between the Namibian Government bonds and South African Government

benchmark bonds narrowed during December 2006 to 140 basis points from 190 basis

points during the same period of 2005 (Chart 4). This observation is more evident in the

GC15 as the spread narrowed from the high of 200 basis points recorded in December

2005 to 130 basis points in December 2006. The narrowing spreads benefited from a

favourable sovereign long term foreign currency credit ratings of BBB-, allowing

investors to reduce the credit risk for Namibian bonds.


25

Chart 4 Spreads between IRS and Benchmark bonds (2005-06)

Source: BoN

The IMF recently suggested that the country should consider seriously establishing its

own benchmark bonds. Having own benchmarks should be a dream for any country

planning to develop its capital markets and not an exception for Namibia either.

2.8 Investor Base for Government Securities

Generally, the investor base for developed domestic debt markets include commercial

banks, mutual funds, and contractual savings institutions such as pension funds and

insurance companies investing in government securities. This is not the case for many

emerging markets economies (EMEs). Namibia, however, has well established

institutional investors, such as pension funds and insurance companies. Although

Namibia has a well established pension funds and insurance companies, banks

somehow are the largest investors of government papers, holding normally these

securities for liquid asset requirements.


26

Institutional Investors

According to t the IMF (2004), the establishment of local pension funds has made a

particularly important contribution to the development of local securities’ markets in Latin

America and Central Europe, and their role is beginning to be felt in some of the Asian

markets. It emphasized that the establishment of the pension funds are necessary for

the development of the local securities markets and, therefore, it is necessary to have

them in any country that wants to establish a successful securities’ market. Namibia’s

ratio of pension assets to GDP in 2001 was estimated at 60 percent and if include life

insurance, short-term insurance, unit trusts and other funds it amounted to 80 percent of

GDP. As can be observed in Chart 5, the pension assets for as a percentage of GDP are

one of the highest in the world making it a potential market for the development of

Government securities.

Chart 5 Pension Assets as % of GDP

87.3

69.0

60.0

58.2

43.0

41.8

32.6

31.6

20.0

0.2

0.0 20.0 40.0 60.0 80.0 100.0

Netherlands

South Africa

Namibia

United States

Canada

Japan

Sweden

Australia

Botswana

Maxico

Source: Namibia Economic Policy Research Unit

Background of Pension Funds and Insurance Companies

According to the IMF (2006) the systematic pension reforms in Namibia are different

from developing countries. The contractual savings in Namibia are not only well


27

developed in terms of assets under management (AUM), however, its development also

reached critical mass necessary to have a large impact on local market development.

This level of maturity has been reached before independence in 1990. The IMF further

indicated that the only difference between Namibia and most developed and developing

countries is the lack of investing much of AUM in the local markets. About 65 percent of

AUM is invested in foreign assets, similar only to the case of Hong Kong that traditionally

invested 65 percent of its assets in foreign currency to mitigate currency risk under the

pegged exchange rate. In the case of Namibia, the rationale for most of assets invested

outside the country could be explained primarily by the country’s membership to CMA

that eliminates currency risk and close economic links between Namibia and South

Africa. The lack of investment opportunities in the local market has been cited as

another reason for this situation.

The growth of AUM for the pension funds and the insurance sector could be explained

by developments which happened before independence. As one of the few positive

developments from the previous dispensation, the mining companies had put strong

emphasis on protecting and securing retirement income for their employees. This

benefited tremendously the pension funds and insurance companies. In addition, the

civil servants were also covered by a funded pension scheme. After independence, the

vibrant growth of the economy resulted in the emergence of new and larger private

companies which together with an expanded civil service boosted the AUM of pension

funds and insurance companies.

2.9 Composition of T-bills and Bonds

Over the past years, the composition and structure of domestic debt has changed. The

government borrowing strategy which offered more longer dated government securities

and less short-term debt securities over the past two years continued in recent years.

The composition skewed towards the short end of the yield curve has a potential to

cause cash flow problems and a rollover risk for the Government. Therefore, the

borrowing plans of 2005/06 and 2006/07 fiscal years aimed at reducing the proportion of

treasury bills in favour of the bonds. By end of the fiscal year 2006/07, the Central

Government plan to increase the share of bonds as a percentage of total domestic debt

to 63.0 percent from 56.0 percent during the end of 2005/06. During December 2006,


28

with still three months to go before the end of the financial year, the target is anticipated

to be attained smoothly.

Government’s commitment to reduce short-term debt is reflected in the contraction of

treasury bills issued during 2006, declining by 14.5 percent in comparison to the stock

outstanding by end of December 2005 (Chart 6).

Chart 6 Total debt in securities: 2005 and 2006 (N$ million)

0

2,000

4,000

6,000

8,000

10,000

12,000

TB'S IRS TOTAL DEBT2005 2006

As expected, the bonds moved in the opposite direction, rising by 14.9 percent over the

same period.

Government’s fiscal position had improved during the 2006/07 financial year. This

improved fiscal position had an effect on the borrowing requirements for the government.

Consequently, the budget surplus anticipated for 2006/07 financial year led to a low

supply of Government domestic debt securities during the period.

2.10 Strategy for Redeeming Maturing Bonds

In order to ensure a smooth redemption of maturing bonds, a two pronged strategy is

pursued, consisting of Switch Auctions and the establishment an Internal Registered

Stock Redemption Account or Sinking Fund. Under the first strategy, a portion of bonds

was switched into other bonds prior to the maturity of the bond, thus reducing the

outstanding balance. The second strategy entailed the establishment of a Sinking Fund

as a provision to redeem the bond at maturity as it was assumed that some holders


29

would opt not to rollover their holdings into other bonds, but rather receive cash. The

funds for the Sinking Fund were raised through primary auctions and were invested with

local banking institutions. This two-pronged strategy proved to be successful as the

GC05 was redeemed without any difficulties. Funds are also put aside for the upcoming

maturities of the GC07 and GC08, maturing in 2007 and 2008.

The funds on the Sinking Fund are raised by means of Internal Registered Stocks’

primary auctions, whereby 50 percent of the proceeds from each auction will be

transferred to this account. In addition, Government can also transfer excess funds from

State Revenue Fund at any point as circumstances allow. The commitment was also

made that by the end of each fiscal year that the excess balance of over N$250.0 million

should be transferred to this account. So far, the accumulation of funds on IRSRA

exceeded the expectations, with over N$1.8 billion collected by the end of January 2007.

These funds are invested with local banking institutions, earning competitive rates.

2.11 Safe and Timely Title Registration, Transfer and Settlement

Significant milestones in the payment system reform process have already been

achieved, such as the establishment of the real-time gross settlement (RTGS) system

and the setting up of an electronic clearing house. A further payment system reform took

place, namely the cheque clearing and settlement system. The cheque processing

reform was necessitated by the need to improve payment services offered to Namibian

customers through the establishment of a common cheque processing platform and

standards for the banking industry. In this regard, the Namibian banking institutions had

implemented a multi-bank electronic Cheque Processing System (CPS) during 2005.

The CPS entailed the setting up of a shared, centralised and interlinked infrastructure for

the electronic code-line clearing of cheques.

Despite the reform in the Namibia payment and clearing system, there are some

shortcomings observed with regards to debt securities. There is no integral and

simultaneous process for transferring securities from sellers to buyers and for the

settlement of transactions. Transfer of securities ownership takes place at the Bank of

Namibia, while payments are arranged between parties to the transactions. Thus, the

T. Ndove: Technical Paper – Government Debt Securities Market

30

parties to a deal are still subject to default risk or settlement risk of their respective

counterpart. A Book Entry System exists for treasury bills. The objective of the book

entry system is to provide participants in the market for Government securities with a

format for holding securities electronically without physically holding certificates that is

dematerializing the securities. However, the current legislation (State Finance Act) does

not recognize the scriptless issue of IRS securities. Thus, IRS are still issued in

certificates. The process of secondary market transfer remains cumbersome, with

parties involved in a transaction having to apply for a transfer and bring in old certificates

and exchange them for new certificates. As mentioned above, the risk of issuing

certificates to a person not making payments exists. This could threaten market

credibility

2.12 Tax Treatment of Government papers and Other Client Costs

Section (16)(1)(l) of the Namibian Income Tax Act no. 24 of 1981 exempts interest

income, received by or accrued to any person (other than a company) or any external

company not carrying on business in Namibia, from TBs and IRS issued by the

Government or any representative authority or local authority in Namibia. Capital gains

are usually not taxable. However, should a taxpayer’s activity of making capital gains be

of such a nature that it can be construed as trading, it may be taxable. Determination of

the taxability of capital gains should, therefore, be referred to Inland Revenue.

Table 6 Dealing Charges on Bonds

��

��

�� !��"�#� �$ �

%�!&�� $ �

'��&(��)� ��$ �

��&(�� $ �

�� $ �

*+��

,�� $ �

The bond charges include the brokerage rates that consist of a transaction levy of 10

percent for brokerage, which is paid to the stock exchange. The regulator levy includes


31

0.04 percent of the total consideration amount. As displayed in Table 6, the charges for

bonds ranges from 0.030 percent for the transaction above N$ million to 0.065 percent

for up to N$100,000. There is also a value added tax of 15 percent on transfer secretary

fees.

Box 1 Credit Rating and Impacts on Government Bonds In recent years, the demand for sovereign credit rating has gained momentum as more

Governments, public institutions and the private sector have intended to access

international markets to borrow in foreign currencies. The task of a credit rating agency

is to assess the ability of the Government to service its foreign loans and show a

willingness to generate the foreign exchange necessary to meet its obligations. A credit

rating enables many Governments, some with a prior history of debt defaults, to gain

access to international markets. This means that a sovereign rating is most crucial for

the whole country even if the Government itself may not want to access the international

financial markets.

To gain access to international capital markets and attract foreign capital, the

Government of the Republic of Namibia obtained a credit rating in 2005 which was re-

affirmed in 2006 by the FitchRatings Agency. The aim of the rating exercise was to

determine the credit worthiness of the Government, which could then serve as a

benchmark for others in the private sector. Any rating has impact on the entire bond

market in the country. A good rating has positive spin offs as it provides impetus to the

establishment of bond market that encourages more participation from investors,

including foreign investors. A bad rating might impact negatively on the bond market.

However, it is a good thing to provide investors with unbiased and objective opinion of

the relative risk of the issue.

Rating Outcome

FitchRatings Agency assigned Namibia an investment grade of BBB- to long-term

foreign currency rating and a BBB for the long-term local currency rating to Namibia.

Namibia currently has the fourth best rating in Africa after Botswana, South Africa and

Tunisia, among the countries which have been rated. Namibia’s rating peers include

India and Croatia. The rating was underpinned by a stable policy environment and


32

sound macro-economic fundamentals, – a low public and external debt, high domestic

savings and current account surpluses, macro-economic stability and a relatively robust

growth. The country has the advantage of an abundance of mineral resources which

have been well managed and is politically stable, which further supported the ratings.

Prudent management of public finances has resulted in a low public debt burden, which

at 31.7 percent of the GDP at the end of 2006 is slightly better comparing with countries

in the same grade. The country has high domestic savings, and sustained current

account surpluses, which have resulted in low overall external debt. Growth has been

relatively robust, underpinned by value-added enhancing investment and the expansion

of a natural resource output. The country also rapidly accumulated reserves, reaching

the highest level of around USD1.0 billion during March 2007.

The key weakness identified by the rating agency relates to persistent capital outflows to

South Africa, owing to insufficient of domestic investment opportunities in Namibia for its

sizeable domestic savings. Other issues relate to the heavy reliance of the economy on

the primary sector, which accounts for 20 percent of the GDP and 60 percent of income

from exports, leaving it vulnerable to external shocks, the cautious approach to structural

reforms and a “weak administrative capacity”. Social challenges including a high income

inequality, land reform, HIV/Aids and high unemployment, are tougher problems than

those faced by its rating peers.

. Improvements in creditworthiness will hinge on structural reforms to strengthen

domestic investment opportunities and on a deepening of the domestic capital market.

These will strengthen the ability of the Government to deploy savings domestically and

thus help to reduce capital outflows and build reserves. The ratings which Namibia has

obtained in the different categories, as well as the overall ratings of peer countries, are

summarized below.

Impacts of Rating on Capital Markets

The Credit Rating Agencies (CRAs) have been seen by many markets participants as

having a strong impact on both the costs of funding and the willingness of major

institutional investors to hold certain types of instruments. In many countries, sovereign

credit rating is frequently seen as a ‘must have’ for issuing bonds, especially in the Euro


33

Zone (Moody’s). This rating is expected to have positive spin-offs on the economy of the

country, particularly on the bond and equity markets and on the flows from foreign direct

investment. The effects of the rating on the cost of borrowing are reflected in the

narrowing spreads between Namibian yields and counterpart benchmarks in South

Africa as portrayed in the chart 4.


34

3. MEASURES TAKEN TO DEVELOP NAMIBIA CAPITAL MARKETS

After independence, the Bank of Namibia and the Ministry of Finance, in conjunction with

market participants, had continued looking into various market development efforts to

improve the domestic financial markets in the country. Measures to develop the financial

markets include the introduction of local investment requirement, membership to CMA,

Sovereign Debt Management Strategy, proposal for market making and the

establishment of the Namibian Bond Association, among others.

a. Introduction of Local Investment requirements/Regulation 28

The local investment requirements was introduced to retain some of excess savings

generated by the economy and to slow down capital outflows to the more sophisticated

markets in South Africa. This regulation is applicable only to the pension funds and

insurance companies since they account for larger outflows to South Africa. It requires

them to invest at least 35 percent of their total assets in the domestic assets. The

outflows which amounted to US$1 billion during 2006 has a negative implications on the

official Rand reserves for the country since when the commercial banks are taking the

funds out they come to the central bank, net purchasing the Rand which form part of the

country’s foreign exchange reserves. Reserves are also used to provide the cover for

the Namibia Dollar in circulation according to the Common Monetary Area (CMA)

agreement.

As a result of the introduction of captive funding, Namibia saw the development of the

domestic debt markets taking shape. This is reflected in the emergence of the stock

exchange, unit trusts, stock broking firms and the asset management industry. However,

as indicated previously, these practices have been done away with in most countries

since it is found to be a stumbling block to financial market developments. The onus is

thus upon the Namibian authorities to develop a vibrant financial markets and gradual

remove the captive funding.


35

b. CMA Agreement To maintain confidence and monetary stability in the economy, the Namibian

Government deliberately assumed membership in the CMA to which South Africa,

Lesotho and Swaziland are also parties. Participation in the CMA was envisaged to

enhance fiscal, exchange rate and monetary stability, which create favorable conditions

for capital market development. This agreement entails pegging the local currency to

the Rand on a one-to-one basis where the Rand circulates in CMA area as a legal

tender, forming the exchange control regime where exchange control policies are

harmonized, and allowing free flow of capital among member countries. By joining the

CMA arrangement, the Namibian authorities chose to align themselves with the

monetary policy of the South African monetary authority.

Namibia’s membership to CMA is, however, associated with a number of challenges that

threatens the development of the local money and capital markets. The subscription to

the CMA has limited the Bank of Namibia’s ability to fully conduct independent monetary

operations, because local institutions hardly seek and obtain accommodation from the

Bank of Namibia. In fact, they often surpass it to obtain accommodation from the parent

banks in South Africa and also place their excess funds elsewhere. This is evident in

the daily outflow of commercial banks’ excess funds to RSA and inflows from that

country to cover their daily long and short positions.

However, it is important to note that the benefits generated from this arrangement

despite the challenges far outweigh the cost. For an example, the CMA arrangement

brings monetary and foreign exchange stability. It is convenient for Namibia to have the

Rand as a legal tender in a sense that most of its cross-border transactions take place in

Rand. Moreover, South Africa compensates Namibia for lost seigniorage for the Rand

circulating in Namibia.


36

Box 2 Implications of the CMA Arrangement on Capital Markets

The CMA arrangement allows for the free movement of capital among the CMA member

states. The outflow of funds to South Africa is more pronounced in Namibia, primarily

because the country has one of the highest saving ratio6 in Africa and having more

South African financial institutions (Namibia was part of South Africa until 1990) than

other members of the monetary union.

The CMA arrangement makes provision for member countries to impose measures in

order to promote local industries with a view to ensure equitable development within the

region. In Namibia, the capital outflows to South Africa on daily basis are in the form of

pension funds, life insurance and unit trusts. These outflows deprive the country much

needed funds for investments.

Recently, a number of concerns have been raised with regard to funds managed by Unit

Trust flowing out of Namibia to South Africa. Unit Trust funds are not subjected to the

domestic asset requirement of 35 percent. The Government introduced local investment

requirements applicable to insurance companies and pension funds to invest 35 percent

of their total assets in domestic assets7. The objective is to retain funds that go out of the

country in the form of contractual savings and make such funds available for domestic

investments. The Unit Trust industry has grown at a tremendous pace over the past five

years and recently money market unit trust funds became popular.

As a result, the Cabinet of Namibia reviewed the previous measures and approved new

measures to slowdown capital outflows. Although the domestic investment requirement

of 35 percent, have contributed to the growth of NSX, the impact of the requirement in

terms retaining national saving in Namibia has not been effective. This is the reason why

the Cabinet reviewed the measures again and adopted new ones.

6 As of 2003, the saving ratio represented about 35% to GDP 7 Regulation 143 under the Short-term Insurance Act no. 4/1998 and Regulation 145 under the Long-term

Insurance Act no. 5/1998, replacing Regulation 34 under the Insurance Act no. 27/1943 (as amended in no.

59/1995); Regulation 28 under the Pension Fund Act no. 24/1956 (as amended in no. 103/1994).


37

The new redefined measures, among others, include the legislation to subject unit trust

management companies to domestic assets requirements of 35 percent as well as

withdraw the tax-free status of returns on unit trust. The institutional investors are also

required to invest up to 5 percent in unlisted securities. The percentage of investment in

dual listed companies that qualifies as domestic investment is reduced to 10 percent

over five years. The introduction of these measures is based on the fact that these

investors hold the largest funds in Namibia.

Empirical evidence shows that only 10 percent of pension funds’ assets can be classified

as true Namibian asset if dual-listed shares and cash placed on deposit at local

commercial banks are excluded from these portfolios (see Nepru 2002). The same study

also found that less then 5 percent of the 35 per cent Namibian portfolio consists of local

equity. The implication here is that only 20 per cent of the total assets of the pension

funds and life insurers are truly Namibian, the rest is invested in dual-listed companies.

A related concern is the tax-free status of the income derived from money market unit

trusts. Generally, income from unit trust funds are not subject to tax as this income come

in a form of dividends that are tax exempted. It is argued that much of the income of the

money market unit trusts is derived from interest income, which is subject to income tax.

Therefore, income earned from money market unit trust activities should be taxable.

International Experience

The international experience on capital controls tells us that with the advent of

globalisation and financial liberalisation, major capital markets in the developed and

developing countries have become free from restrictions on the flow of capital. This was

mainly because it was felt that capital controls are anyway ineffective8 in retaining capital

when economic and or political indicators of one country signal financial or political

problems in the near future.

However, in practice, by the end of 1999, 147 countries out of total of 185 had controls

on directed investment, 125 countries controlled transactions with capital market

8 In fact, it has become clear that capital controls used so far are easy to evade, costly, complex and obscure and supported by large and rigid administrations which lend themselves to corruption (R Schmidt, 2000).


38

securities, 110 countries controlled trade in money market instruments; still 108

countries regulated commercial credits (see IMF Report on Exchange Rate

Arrangements and Exchange Rate Restrictions for 2000). This implies that there is a

paradox between the use of capital controls in practice and in theory. This is so

because although it is not recommended as a good policy prescription in theory, in

practice quite a number of countries have used it and are still using it.

During the Asian financial crisis in 1997 and subsequent crises in Latin America and

Russia, the debate on capital controls resurfaced again. It has evidently become clear

that short term capital was very unstable and the sudden reversal of it was perceived as

having exacerbated the crisis. Against this background, the G7 countries acknowledged

recently the use of capital control in retaining capital outflows (Economist, 1999). It is

argued that capital controls might be beneficial for developing countries where

international capital is very mobile and financial markets are under-developed or in some

cases non-existent.

The latest study by the (IMF 2006) on capital controls argued against their introduction

as they are found to have large costs to the economy in terms of efficiency losses, less

market discipline and reduce capital flows. Despite the fact that the countries are able

create demand for the Government debt papers in the short term the long term effects

hampers the modernization of the financial markets.

c. Liquid asset requirements

Liquid asset requirement compels banking institutions to keep 10 percent of their

liabilities in cash, Government securities and parastatals’ papers guaranteed by the

Government. The primary aim is to satisfy sound banking practices, while the secondary

aim is to assist in developing local capital markets by encouraging the demand for local

financial assets.


39

(d) Sovereign Debt Management Strategy (SDMS)

In the CMA region, only Namibia and South Africa have adopted comprehensive

Sovereign Debt Management Strategies (SDMS), designed to ensure that the national

debt remains both affordable and low risk. The SDMS for Namibia is based on

international best practices, adapted for Namibia’s specific needs and circumstances.

The objective of sovereign debt management in Namibia is to minimise the cost of

government borrowing, consistent with an acceptable degree of risk. This strategy

document intends to serve as an action plan for managing the costs and risks

associated with Namibia’s sovereign debt.

This strategic plan adopts a set of strategic debt management benchmarks based on the

asset and liability management (ALM) approach. Achieving these benchmarks involve

some challenges, in particular, need to reduce the short-term debt and improve liquidity

at the longer end of the domestic debt market. The strategy document identifies areas

for improvement in existing debt management processes in Namibia, based on a review

of international best practice. It proposes strategies to help improve debt management

effectiveness in the following areas:

• institutional and legal framework

• debt management office

• use of strategic benchmarks

• domestic debt markets

With regard to the institutional and legal framework, the document makes two main

proposals. Firstly, there should be clear and transparent guidelines on Government

guarantees, on-lending agreements, and for borrowing by central government and

parastatals. Secondly, existing debt management committees should be re-organised to

improve efficiency and strengthen accountability.

The document recommends restructuring the debt management office according to

international best practice. It proposes establishing a front office, a middle office and a

back office. The front office is responsible for issuing government securities, conducting

loan negotiations, and working with the Bank of Namibia to develop the domestic debt


40

market. The middle office is in charge of risk management and analysis. The back office

is tasked with the maintenance of detailed records of all government debt transactions.

Implementing the new structure requires that qualified and experienced financial experts

are recruited at senior levels in the cash and debt management (CDM) division.

The document also recommends adopting a set of strategic debt management

benchmarks. As quantitative measures, benchmarks encourage a more disciplined

approach to debt management, improving transparency and accountability. The

document proposes twelve provisional benchmarks covering a range of debt

sustainability, cost and risk indicators. The benchmarks are Namibia specific and

consistent with the internationally accepted asset and liability management (ALM)

approach to debt management.

(e) Introduction of Market Making

The possibility of introducing market making for Government securities was one of the

recommendations made at the Namibian Bond Market Symposium hosted by BoN

during 2004. During 2005, the Bank of Namibia conducted a survey among market

participants to obtain their views on the feasibility of market making in the Internal

Registered Stock or bonds of the Government of the Republic of Namibia. The response

was that there was a definite need for market making, to stimulate liquidity and improve

the pricing of Government as the case in South Africa, which also has a similar system.

A number of market participants had, indicated a willingness to play a role in market

making. The Bank finalized a study on the feasibility of market making in Government

debt securities. Other countries’ experiences have been studied and the bank will follow

the best practices to introduce the primary-dealership system in a manner that will best

fulfill the objective of money and capital market development. The proposal for the

introduction of market making in Government debt securities has been approved by the

Ministry of Finance and will be implemented during 2008/09 when Government is

expected to run a budget deficit. In the current fiscal year, it is not possible to implement

market making due to the low financing needs for the Government.


41

(f) Interactive webpage for secondary bond trading

Another effort that the bank made to enhance efficiency and liquidity in the bond market

in Namibia during 2006 was the launching of the Secondary Bond Market Website. The

Secondary Bond Market Website was created to enhance pricing transparency in

Government, semi-Government institutions and corporate bonds. The website is not a

trading platform, but rather an electronic forum for market participants to indicate their

intentions to transact and obtain information about current market activities in all bonds.

Participants submit their bid and offer prices with an intention that interested parties

would call them up to initiate a trade with them. Once a trade is concluded the seller

updates the site with the yield to maturity at which the trade was concluded. In so doing

a reliable database is created capturing all reported deals.

Furthermore, registered users also submit their bids and offer prices thus creating a

platform were buyers and sellers can meet. Overall, the website provides information

about current market activities and is expected to create a reliable database especially

for OTC deals.

All commercial banks and Stock Brokers, as well as the NSX are registered users of the

website. The support for the website from the market is overwhelming as indicated in

number of deals and hits recorded since its launch in mid May 2006.

(g) The formation of the Namibia Bond Association

The Namibian Bond Association (NBA) was established during 2006, an association not

for gain with the authority to advice and determine the development of the market. NBA

is critical in the further development of a formal bond market in Namibia. This body is

working towards a clear framework to ensure equitable, smooth functioning and

transparent markets, investor protection and secure settlement environment. The NBA

covers representatives of the financial market industry that are involved in the bond

market. Among the members are the Bank of Namibia, commercial banks, issuers,

brokers, Namibian Stock Exchange, custody services, investors, and the Namibian

Financial Institutions Supervisory Authority (NAMFISA), just to mention a few. The NBA


42

draws a lot from the Bond Exchange of South Africa (BESA) and BESA pledged its

cooperation to assist further development of the bond market in Namibia.


43

4. IMPEDIMENTS TO THE DEVELOPMENT OF GOVERNMENT SECURITIES’

MARKET IN NAMIBIA

Although the local Namibian bond market has expanded considerably from its infant

stage in 1992, a lot of challenges still remain. Although the local bond market has grown

significant compared to level at independence, a lot is still has to be improved upon in

terms of liquidity, transparency, efficient market trading and infrastructure, number and

size of bonds in the local market. The limited market development is attributed to lack of

active trading, limited supply of bonds, lack of skills, capital outflows and diversity in the

market. These challenges are being elaborated on in more detail in subsequent

paragraphs.

Current Challenges

1. Liquidity9

The Namibian capital market is quite developed in terms of existing infrastructure, but a

number of challenges have remained. For example, there is a need to activate

secondary market trading and improve market liquidity. Although trading activities on

the stock exchange have been rising in recent years, the ratio of bonds traded to

amounts of bond outstanding is still very low.

Lack of liquidity can amongst others be attributed to:

� Domination by large institutional investors who have taken a buy and hold attitude

following large demand for Namibian financial assets.

� Limited number of issuers and narrow range of instruments available in the local

capital market.

� High dealing charges and other client costs are disincentive to secondary market

trading and thus, contribute to lack of liquidity.

9 Liquidity is a measure of ease with which bonds can be traded in the secondary market. It is measured by

the ratio of value traded in bonds to market capitalization or the market value of bonds in issue.


44

2. Transparent and Efficient Trading System

While most of the bonds issued in Namibia are listed on the Namibian Stock Exchange

(NSX), trading remains sporadic and the market is generally illiquid. In addition, there is

said to be high volumes of bonds traded over-the-counter. This segregate the market

such that there are neither transparent price indications in the market nor full information

on volumes and values traded in the market. For this reason, the market has no access

to continuous access to historic and live market information.

3. Shortage of Skills

Most of the bonds in Namibia are said to be part of passive portfolios and are held to

maturity. It is widely believed that one of the reasons for holding bonds in that way is

due to lack of market skills and as a result these bonds are managed from remote

centres where Namibian bonds are not a priority when it comes to trading. This situation

also contributes to lack of liquidity in the market.

4. Limited Supply of Bonds

The number and size of bonds available in the Namibian bond market are limited for

investment opportunities and liquid asset requirements of the commercial banks. This

situation has been exacerbated by the improved fiscal position of the Government, the

largest issuers in recent years, whilst at the same time potential corporate issuers are

more comfortable funding their financial needs with bank loans. This makes it difficult to

generate sufficient liquidity needed for secondary market trading, contributing to low

levels of liquidity in the market. This implies that a number of viable institutions and

companies should be encouraged to issue bonds in the market to increase the number

of available bonds. This would not only increase the diverse number of bonds issued but

may also improve liquidity in the market.

5. Foreign Participants

Currently there is said to be limited foreign participation in the Namibian bond market

which could introduce diversity in the market. Increasing the marketability of Namibian

financial assets could be a solution to attracting active foreign participation in the local


45

bond market. Foreign participation is expected to pick up after the country obtained a

fovourable sovereign credit rating. This should encourage foreign investors to invest in

Namibian bond market and bring diverse views in the local market.

5. Capital Flows

Although the country has a high national saving rate that provides the base for

Government domestic securities market developments, the same savings find its way to

South Africa in form of capital outflows. South Africa financial markets are more

developed relative to the one of Namibia. The challenge facing Namibia is thus, to create

competitive markets to attract local savings to stay home. This is not an easy task given

the free movement of capital within the CMA. The market participants, however, are also

interested in a well developed domestic markets and their interest is demonstrated

through the creation of the Namibian Bond Association, which among others is aimed at

ensuring the equitable, smooth functioning and transparent markets.


46

5. LITERATURE REVIEW

5.1 Case Studies of Selected Countries

The development of debt market is undeniable getting a lot of attention lately, especially

in developing countries. The cases of Slovenia, Poland, and South Africa are presented

here for Namibia and the rest of MEFMI region to draw from their invaluable insights and

experiences. The case studies are heavily drawn from the study undertaken by the IMF

(2002), focusing on steps taken by the countries to improve public debt management

practices in relation to the Guidelines for Public Debt Management. The case studies of

these countries were chosen based mainly on the path they have taken to develop their

markets and the commitment to source funds from the domestic markets. This is

relevant to the Namibia Government debt securities markets. The Governments for all

three countries chosen in the case studies commit to borrow domestically in order to

develop the local markets. This is the same commitment the Government of Namibia

undertook in order to develop the domestic debt markets. In addition, these countries

also introduced a primary dealer system to develop the Government debt securities

market and have also the debt office located in the MoF. These countries also tried to

access the international capital bonds to create diversify their borrowing sources, the

path Namibia already undertaken.

5.1 Slovenia

Background and Macroeconomic Conditions

Slovenia achieved independence in 1991, a year after the independence of Namibia.

The country experienced budget surpluses before 1997, however, had also been

characterized by hyperinflation. It was only in 1998 that treasury bills with maturities of 6

and 12 months were issued, denominated in local currency. Issuance of these

instruments before 1997 was infrequent due to the surplus recorded on the fiscal

position of the Government and they were indexed to inflation given the hyperinflation in

the economy.


47

Borrowing operations started in the domestic market through short-term borrowing to

manage liquidity, with first Eurobond issue in the Euro market in 1996 and the issuance

of inflation-indexed bonds in 1997. Slovenia experienced budget surpluses before 1997

when small budget deficits emerged. The main objective was to develop a domestic

market primarily using bonds to finance the deficit. Developing the domestic market for

debt became very important for Slovenia in order to ensure timely financing in domestic

currency and minimize risk associated with financing the budget deficit with external

debt. The domestic debt market has been growing and recently the authorities allowed

undertaking of active debt management operations to reduce the overall cost of the

portfolio. Improvement on issues such as tradability of instruments, building of a yield

curve and transparency are given priority with a view to deepen and enhance liquidity of

the secondary market.

Developing a Sound Governance and Institutional Framework

The objectives for debt management in Slovenia are: (a) to minimize the borrowing costs

over the long term with the maturity structure which ensures a sustainable level of risk in

refinancing the debt; and (b) to create a currency and interest rate structure that

minimizes the exposure to exchange rate, interest rate and other risks.

During 1998, Slovenia introduced for the first time, an annual borrowing program of

financing the Government budget deficit, stating among others, strategic and operational

objectives and the targets. The annual financing or borrowing program indicates amount

to be financed the source of financing, the choice of the market, the period whether

short-term or long-term. The strategic objectives identified includes the provision of

sufficient and timely financing of the budget, cost minimization, maximum reliance on

financing in the domestic market, broadening the domestic and foreign investors’ base,

and foreign currency risk, just to mention a few. The operational objectives comprises of

review of the mix between short-term versus long-term, foreign borrowing against

domestic, floating versus fixed interest rates.

Institutional Framework

The Ministry of Finance is exclusively responsible for issues relating to borrowing and

debt management on behalf of the Central Government. These responsibilities are

clearly stated in the in the Public Finance Act. Within MoF, there are three departments


48

responsible for debt management, namely, international, liquidity management and

public debt management. The international department is tasked with sourcing funding

from international financial institutions, liquidity management department for contracting

and managing short-term domestic debt and cash management. The public debt

management department (PDMD) is tasked with the execution of the annual borrowing

program and managing central government debt. This department also provide back

office functions and short-term projections on debt service for budgetary and liquidity

management uses. The PDMD within the Treasury also exercises central administrative

and control functions over debt of public sector entities, whose debt are contingent

liabilities of the Central Government. PDMD is also tasked to interact with the rating

agencies and provide them with all information required. As a core department, PDMD,

approves and monitor all public sector borrowing and government guarantees entered

into by the Minister of Finance.

The three departments responsible for debt management co-ordinate issues among

themselves and share information on regular basis and communicate in various forms

such as through internal committees, and common work. In a view of proper co-

ordination, MoF is contemplating the idea of establishing a separate debt office

responsible with all issue related to the debt management. It can be an independent

office or within the ministry. This separation will enable the centralization of borrowing

and debt management operations, increase responsibility for the executions of

operations, establishment of clear and measurable debt management goals, isolation of

debt management functions from political interference and simplify procedures for

provision necessary resources.

Co-ordination of Monetary and Fiscal Policies

There should be proper co-ordination of monetary and fiscal policies. The central bank is

independent and does not form part of the executive. The Government is not allowed to

borrow from the central bank. Once the financing program is complete, it is discussed

within the scope of fiscal policy documents and also shared with the central bank, but

this is not binding. However, during the preparation of the annual financing program, the

MoF and central bank discuss general liquidity conditions in the economy. Debt

managers between the two institutions also share on Government’s current and future

borrowing requirements, where MoF provides intentions in advance and in turn central


49

bank gives information on market conditions. The institutions meet frequently either

formal or informally to understand the scope of the execution of each others policies. On

formal a level, MoF provides two types of monthly forecasts. The first forecast is for a

period of three months in advance, and consists of day-to-day cash flows and revenue

and expenditure, while the second forecast provide the same information one month in

advance.

Within MoF, regular meetings by the liquidity committee are held on weekly basis. The

meetings of the liquidity committee focus on monitoring monthly liquidity situations and

determine necessary activity versus financing and against budget expenditure

management. Budget, tax and customs, debt management and liquidity management

departments are permanent members of the committee.

Transparency and Accountability

The borrowing plans, its objectives and accomplishments are regularly announced to the

public. The documents in this regard are available to the public, and in particular to the

financial community. The objectives and instruments of the debt management policy are

made public through the annual borrowing plan, and other documents which indicate the

macroeconomic and fiscal scenarios. The information is disseminated on MoF’s website

and other Government’s websites. MoF also distributes a public finance bulletin on the

website that contains data on general and central government and structure of the debt

portfolio on monthly basis. There is also an annual report on debt management,

including information pertaining to the execution of the strategic objectives of debt

management, instruments to be issued, analysis of government debt portfolio, general

and public debt, central government guarantees, and international comparison.

The auction results are disseminated on the MoF website and quotes are displayed on

the Stock Exchange. Quotes on the treasury bills that are traded over the counter are

available through the market markers. This is all done to improve transparency and

contribute to the deepening of the domestic financial markets. The MoF is also trying to

maintain awareness by international investors by making available rating information on

bonds. Transparency, accountability, and reliability in debt issues, as well as market

approach, have been the prime policy objectives of Slovenia. To maintain further the

principle of transparency and accountability, the tax treatment issues of public securities


50

is clearly disclosed in the prospectus of each of the securities and disseminated to the

general public. In addition, debt management activities are audited annually by an

independent auditing film and outcome made public.

Debt Management Strategies

In deciding where to borrow, the main consideration has been to give priority first to the

domestic market on the basis that it does not disrupt the market conditions or crowd out

the private sector. In the foreign market, MoF strives to establish market presence and

establish benchmark for all Slovenian borrowers. Secondary borrowing from foreign

market enables the broadening of the investor base, especially from the Euro market.

Most of Slovenia’s trade, accounting for two-thirds is with Europe and with the Euro

being a potential currency for the country. This makes sense for Slovenia to target Euro

zone to increase its investor base as the Euro is the most exchange risk – neutral

market for the country.

The Ministry of Finance is continuously moving toward a degree of standardization of

domestic issues that is geared to provide the market with necessary supply. At the

moment, instruments issued ranges from 3 year, 5 year variable bonds, and the 10 year

Euro-denominated bonds. Treasury bills are issued in form of 3, 6 and 12 months series.

During 2002, the Treasury issued a 15 year Euro-denominated bond.

Despite this progress, there are some problems constraining the domestic market

developments. These include among others, the capital controls, although finally lifted in

2002. Portfolio inflows were subject to some prohibitive costs that applied to both long-

term and short-term securities without exception. As a result, foreign investors were

discouraged to participate in the Government securities market.

Active Debt Management Strategies

The Ministry of Finance carries out active debt management strategies to reduce debt-

service cost. Among these operations, are the debt buyback operations and call options.

Buyback operations have been conducted in international markets up to 2002, because

of the relative small size and the modest level of development. In the domestic market,

the main instrument has been the call options, considering the overall borrowing

capacity of MoF. Active debt management strategies are practiced regularly in Slovenia


51

to save costs or improve the debt portfolio structure without increasing the amount of

debt outstanding.

Development of the Market for Private Sector Debt

The Ministry of Finance is cognizant of the significance of the Government debt

securities and the role that the benchmark yield curve plays in the economy. They serve

as a basic reference point for pricing of private sector debt. Efforts are on-going in the

international market to expand the investor base. In the domestic market efforts have

had been undertaken to build a domestic yield curve. As a result, the target has been

shifting from issuance of indexed debt to fixed-rate instruments and this is done

gradually. This process started first with the introduction of variable instruments as an

intermediate step toward fixed rate instruments, standardization maturities, and the

introducing of short-term fixed-rate instruments. The next phase was to issue long-term

fixed rate instruments and extending their maturities. A 10-year Euro-denominated bond

was issued in the domestic market, followed by a 15-year Euro-denominated bond that

helps the pricing for other long-term instruments in the market.

Developing the Markets for Government Securities

As mentioned before, Slovenia experienced budget surpluses before 1997, and was

characterized by hyperinflation. It was only in 1998 that treasury bills with maturities of 6

and 12 months were issued denominated in local currency. Issuance of these

instruments before 1997 was infrequent due to the surplus recorded on the fiscal

position of the Government and they were indexed to inflation given the hyperinflation in

the economy.

Things changed, however, from 1997 onwards when the Government started recording

a budget deficit. Slovenia started issuing bonds regularly since 2000 according to the

pre-announced calendar in the key maturities zones of 3 and 5 years locally and 15 and

10 years maturities denominated in the foreign currency and payable in domestic

currency. The spread across the standard maturity zone are necessary to minimize the

roll over risk. During 2002, the Government of Slovenia issued for the first time a 3 year

fixed-rate bond denominated in domestic currency and Government will gradually shift

other maturities into fixed-rate instruments. The introduction of fixed-rate instruments

aims at reducing market risk and developing an identifiable yield curve and enhances


52

trading. It is also a strong believe of the Slovenian Government that the liquid market in

Government securities can only be built by way of fixed-rate instruments.

On-the-run issues are reopened several times during the year in accordance with the

pre-announced calendar until the desired level is reached. Slovenia has three types of

treasury bills, the 3-month, 6-month and one-year bills and these bills aim at establishing

a flexible and cost-effective source of short-term borrowing to finance liquidity shortages

and also have contributed decisively to the move toward nominal rates in the economy

and the creation of money market yield.

Auctions

Securities in Slovenia are issued via the auction process whereby the bonds are issued

by means of multiple-price auction and treasury bills through a fixed-price auction. All

participants bid through primary dealers (banks) that are registered to undertake such

obligations. All sectors can participate in the auctions for both short-term and long-term

papers, except the central bank of Slovenia.

Secondary Market

It was noted by the Government of Slovenia that the development of an efficient

secondary market of Government securities, the first task has been to provide

instruments that can be easily marketable and have simple features and clearly

indefinable cash flow in the market. This goal was achieved as a result of the

implementation of the strategy to normalize the main borrowing instruments. Among

others, this includes the introduction of treasury bills with different maturities and a shift

from inflation-linked instruments, first, toward variable-rate instruments and then to fixed-

rate instruments. This process was carried gradual in phases, simplifying of bonds

formulas in order to avoid the disruption of the market.

The Central Bank of Slovenia (BOS) conducts open market operations exclusively with

the central bank bills, which can deter secondary trading of Government securities.

However, the BOS had a catalytic role in contributing to establishment of over the

counter (OTC) trading in short-term government securities in 2001, i.e. designing of

regulatory framework. The OTC trading in Government bonds started in 2001 and an

increased in the secondary trading have been noted in both types of instruments. The


53

observed rise in OTC transactions can be attributed to the lower costs, resulting from the

lack of brokerage fees and low commissions charged by the depository and settlement

company in that country.

The Government of Slovenia has taken note of the investor’s preferences into account

and their preferences for particular instruments are considered in the preparation of the

annual financing program, within off course the limits of borrowing needs. The Ministry of

Finance in that country maintains frequent contact with the market and monitors financial

market developments. In the market there should a size of issue that ensures a certain

degree of liquidity for investor which does not at the same time cause a refinancing risk.

Clearing and Settlement

In Slovenia, the electronic system is used to settle and clear all security transactions

occurring on the stock exchange. All trades conducted on the stock exchange are

automatically transmitted to the Depository and Settlement Company (DSC), which

clears and settles transactions. The settlement in Slovenia is T+2 on deliver-versus-

payment basis. The DSC’s rules comply with international standards.

Tax Treatment

Given the implications of tax policy on financial markets, Slovenia somehow tried to

strike a balance with the principles of good taxation and the interest of developing

domestic financial markets. The capital gains and interest income from the Government

debt securities are taxed in Slovenia. However, interest income from Government debt

securities are exempted for personal income tax purposes. Profit arising from

appreciation in the price of the security, when sold within three years of its acquisition, is

treated as a capital gain for personal income tax. For taxation purposes on Government

debt securities, both financial and non-financial corporations are treated the same.

Furthermore, no distinction is drawn between current income and capital gains for

corporate tax purposes. Income derived from government securities are not charged

withholding tax for both residents and non-residents. To simply the tax regime further,

the primary and secondary transactions with securities and shares are also exempted

from value added tax.


54

5.2 Poland

Background and Economic Conditions

Poland experienced difficult years following the exogenous shocks of Russia in 2000

and downturn in Germany in later years. This has taken a toll on employment levels, the

fiscal deficit had also widened and the stock on non-performing loans also rose.

Although inflationary pressures were low, allowing cuts in interest rates, the real

exchange rate appreciated. However, the growth prospects for Poland remain strong.

Developing a Sound Governance and Institutional Framework

The new objectives for debt management were incorporated in the strategy of debt

management and the shift is putting emphasis on the goal of cost minimization, from

reducing the cost burden in the three-year time horizon to long-term. The goal of

minimizing debt service cost is achieved through an optimal selection of debt

management instruments, their structure and issue dates. In the new objective, there is

also emphasis to minimize exchange rate risk and the risk of refinancing in foreign

currencies and this is undertaken mainly via lessening the share of foreign obligations.

The Public Debt Department (PDD), a unit responsible for debt management is located

at MoF. The PDD manages day-to-day debt policy, prepares the strategy of debt

management, and cooperates with the Polish and international financial markets in

spheres of borrowing and the development of treasury securities market. There benefits

and drawback for the PDD to be located in the Ministry of Finance. At the early stages of

the development of the financial market in Poland, the PDD has enough instruments to

support the development of the market and prepare efficient legal and infrastructure

environments. However, due to the further development of the market in terms of

sophistication of market participants, the securities’ base increased and various hedging

instruments are available as the new challenges have emerged. These new challenges

need to be addressed with innovative risk management of debt, more flexibility and

active approach of debt management. Given the bureaucratic structure in MoF, the

active debt management approach was hampered. Many countries, especially the

OECD (Organisation for Economic Co-operation for Developed Countries) countries

managed to overcome the bureaucratic in Government by creating separate and

independent debt offices outside Government. Experience from OECD countries indicate


55

that a separate debt office avoid direct intervention in the borrowing policy and able to

minimize debt service cost on the medium and long-terms.

The major operating risk of debt management is the lack of an integrated information

system for debt management. This was caused by the fragmentation of the databases

and not fully compatible with each other. In order to solve this problem, the integrated

debt management system was implemented by the end of 2002.

Coordination of Monetary and Fiscal Policies

In a view of the importance of coordination between monetary and fiscal policies, the

committee of public debt management was established during 1994.The membership to

this committee includes representatives from the MoF, central bank and the ministry of

finance. The committee meets on fixed dates on monthly basis. The committee

discusses monthly plans for financing the state budget borrowing needs, budgetary

situation, and the situation of the money market. The department tasked with liquidity

management is hosted in MoF and the main instruments used are short-term deposits of

surplus cash and issuance of short-term treasury bills.

Debt Management Strategy

The strategies and policies are implemented to ensure that the public debt management

is undertaken in a prudent and predictable way, with the ultimate objective of minimizing

possible threats to public finances and to the economy of the country. Poland is no

exception to that golden rule. To ensure that the country does not become heavily

indebted, a limit on the public debt to GDP ratio was imposed, including special

procedures of what to be done and limit the debt beyond certain levels. The upper limit

of 60 percent was set by the Constitution of Poland.

It is very important to maintain the credibility of public debt management. In order to

keep this credibility intact, the council of ministers submits to parliament the debt

management strategy for the coming three years. Among others, this includes a set of

clear goals of debt management, the assessment of executing the objectives of previous

strategies, and analysis of possible scenarios regarding public debt. The typical risk

which faces the Government with regard to foreign currency debt portfolio is the

refinancing, interest rate and the exchange rate risks. Poland committed itself to the


56

development of the domestic financial markets. Therefore, the policy directive was to

reduce the foreign debt outstanding and financing the Government budgetary

requirements from the domestic market. This resulted in the developments of a large

and stable domestic debt market that reduces the exposure to foreign currency crises

and other undesirable external shocks.


Countries now and then need to carry out active debt management strategy to manage

properly the portfolio for foreign currency debt and domestic foreign currency debt.

Active debt management strategies, among others, includes debt buybacks of the

domestic and foreign debt before maturity, regular switch auctions, swaps transactions

and use of derivates. In Poland, the MoF is planning to conduct swap transactions and

use of derivatives. Buy back options was exercised as well to buy back some bonds.

Development of the Market for Private Sector Debt

As the practice in many developing and emerging market economies, the debt market in

Poland is dominated by Government securities, accounting for around 90 percent. The

remaining balance of 10 percent is taken up by the corporate debt. The significance of

the private sector debt is acknowledged by the Government and therefore, is developed

through the development of public debt market. It is a basic principle that the

development of the public debt market constitutes a fundamental prerequisite of the

development of the private debt markets.

Developing the markets for Government Securities

The debt management strategy of Poland for 2002-04, stipulates that government

borrowing should be sought mainly in the domestic market. Borrowing in the foreign

market is limited to the refinancing maturing debt.

The increasing significance of minimizing costs, over time determined by the maturities

of debt management instruments with the longest maturity, affected the structure of

sales of treasury securities, especially in 2001. Decisions concerning the choice

between the issuance of short and long term instruments was determined by market

conditions and the predicted future shape of the yield curve. The increase in the average


57

term to maturity is recognized as the main means of reducing the refinancing risk of

domestic debt.

Poland issue instruments, ranging from zero-coupon, fixed rate, floating, etc. The fixed

rate bond was issued for the first time in 2002. Retail instruments are used to back up

sales of wholesales instruments, widen the investor base and promote national saving.

The tasks within this area include the diversification of instruments offered and the

increase in their accessibility to potential investor.

The main maturity bonds issued on international capital markets is constrained by the

existing foreign redemption profile. Until 2001, because of very low funding needs, the

MoF executed only one benchmark transaction a year in the international market, not

exceeding the amount of principal payments. The main reasons for issuing bonds in the

international market are to maintain access to the most important segments of the

international capital market because of possible necessity of refinancing most or all of

the foreign debt in the years 2004-09 and to create a benchmark for issues of Polish

corporate bonds.

Auctions

Treasury bills and bonds are offered for sale in the primary market at auctions organized

and held by the National Bank of Poland (NBP). The detailed information on forthcoming

auction is published on the MoF’s website and on Reuter’s two days before the date of

the tender. The sale and management of retail bonds are handled by a brokerage

house.

Secondary Market

Following below are the main actions taken to increase the liquidity, effectiveness, and

transparency of the treasury securities in the secondary market.

♦ Elimination or reduction of restrictions in the settlement infrastructure, for

example, the implementation of the real-time gross settlement (RTGS) system

and securities borrowing, the reduction of transaction fees and commissions, and

the development of the repo market


58

♦ Support trading on the electronic platform for debt instruments and their smooth

incorporations into the registration and settlement system

♦ Continuation of the policy to increase the depth of the treasury securities market

through sizable issues of different series, which means fewer maturity dates for

different types of treasury securities and an increase in the value in the individual

series

♦ Support of the activity toward elimination of regulations aimed to subject repo

transactions to the system of mandatory reserves and

♦ Introduction of switch operations.

Poland was already in process of introducing primary dealer system when this draft was

forwarded to IMF, by now it might have been introduced. In 2001, the rules governing,

selecting, and properly assessing primary dealers, and an evaluation of the scope of

their rights and duties, were prepared, and verified during meetings with the banks. The

cooperation with the primary dealers will also lead to the identification of risks for public

debt management and the development of the treasury securities market. The process

of monitoring and evaluating the candidates began on April 2002.

It is crucial that a proper relationship with the financial community; between debt

managers and investors. Such kind of relationship ensures effective management of

public debt. This is achieved by way of holding regular meetings with groups of domestic

investors such as banks, brokerage houses, pension funds, investment funds, and

insurance companies. Individual meetings with important domestic and foreign

participant in securities are also held.

Tax Treatment The interest and discount income, and the income from the sales of Government debt

securities undertaken by legal entities are subject to income tax. That is the rate of

income tax applicable to income realized by legal entities in the same year as the one

income was obtained. For individuals, income from the sale of securities other than

bonds issued by MoF is subject to personal income tax. In addition, withholding tax of 20

percent is charged on individuals for income or discount on all securities issued by the

MoF. The nonresident legal entities are also taxed as the resident entities when buying


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Government debt securities in the domestic market, unless there is a treaty signed

between that country and Poland to avoid double taxation. If no treaty signed, then the

nonresident entities are charged the withholding tax rate of 20 percent and income tax

(for either bonds or treasury bills), the same rate as the one charged on their income the

same year. On the other hand, foreign private persons and residing outside Poland are

liable to tax only on income from work done within the territory of Poland.

5.3 Special Case Study of a CMA Member - South Africa

Background and Macroeconomic Conditions

The South African government securities market has undergone through various

development phases since the late 1970s to achieve the level where they are today. The

bonds were initially issued at par three or four times a year, normally to match with the

date of maturing bond. Several investigations of the market were commissioned and the

findings on the needs for the market highlighted the need for changes. A broad

consensus was formed among the market participants to commit for market

developments. As a result, the first bond issued at discount in South Africa was in 1981

by a public entity. The Government started issuing bonds as well, but there was no

separation between issuing to finance Government spending and open market

operations.

The key market participants in the mid 1980s established a forum to engage the

Government on some issues or concerns in the market. Among this concerns were the

captive funding as pension funds and insurance companies were obliged to invest part

of their funds in Government bonds, Government guarantees bonds and homeland

bonds. The market participants were also concerned about small amount being kept in a

particular bond and some of which were illiquid. The National Treasury or MoF

responded positively to the market concern with the abolition of prescribed assets

requirements as it was a stumbling block to financial market developments since the

issues were not based on market rates. In addition as well, the National Treasury

consolidated several small issues to create benchmarks in the 5, 10, 15 and 20-year

maturity zones. Some public entity as well started making two-way prices in their bonds.

The authorities also noted the need for self regulation by the market is more desirable


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and a right thing to do. This culminated into the forming of Bond Association of South

Africa (BESA) for clearing and settlement among members. Other institutions are such

as Central Depository and the introduction of Primary Dealers in Government debt

securities.

The government introduced a macroeconomic framework program of philosophies and

principles in order to bring total debt to manageable levels. South Africa's pursue

prudent and sound macroeconomic policies which resulted in a stable exchange rate,

low inflation and low debt levels. Under the Growth, Employment, and Redistribution

(GEAR) Strategy it is committed to moving ahead with other key structural reforms.

Developing Sound Governance and Institutional Framework

The public debt office was established and referred to as the Asset and Liability

Management, located in the National Treasury. This office is empowered with all the

resources and was given a new structure. The office is able to recruit the best skills

available in the South African financial markets. The new debt office was divided into

new identified priority areas, namely, liability management, asset management, financial

operations and the strategy and risk management. The National Treasury is responsible

for designing the annual borrowing plan, but consults the Reserve Bank (SARB) for

inputs. However, the reliance of the National Treasury to the technical advice from the

SARB is not as much as before given the technical experts the National Treasury

managed to build up. SARB’s role changed as well from being an issue, settle and

market-making agent in Government bonds to the one of conducting auctions of

benchmark bonds according to a fixed borrowing plan.

Co-ordination of Monetary and Fiscal Policies

In South Africa before market reforms, there was no separation between issuing to

finance Government spending and open market operations. Recently, however, there is

clear separation of activities between the two, and the inherent conflict of interest is well

understood. The National Treasury issue to finance the budget deficit, while the SARB

issue its own instruments for open market operations. The two institutions however, co-

ordinate their activities and have a formal working relationships via different committees.

This close co-operation was also evident during the discussions of the integrated

approach on inflation targeting and the issuance of inflation-linked bonds.


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The National Treasury and SARB established a good relationship with the investors,

both at home and internationally. Maintaining this relationship with the investors is one of

the top priorities in promoting the South Africa bond market. Given its significance, the

investor relations program is run by the top management at the National Treasury and

SARB. It worth noting that investors relations is practiced at all levels and before the

decision is made of what of instruments to be issued the National Treasury consults the

key market participants about their views which are taken into account both in South

Africa and abroad.

Debt Management Strategies

During the 1990s, the Government of South Africa was experiencing high budget deficits

and naturally, the debt servicing costs shot up. This situation led to debate in the country

on the sustainability of the Government’s debt servicing costs. Furthermore, the interest

was also high and the average maturity of the Government debt portfolio was due within

five years. This means a two legged problems in form of the financing of net new deficit

and the financing of the existing debt stock in the environment of high interest rates.

There was a great fear of South Africa falling into debt trap, and thus, the urgency for

prudent debt management.

The announcement to review the entire debt management policy was announced during

the budget review in 1996. As a result, a framework on philosophies and principles to

manage public debt, cash, and risk was developed and approved by parliament. This

framework identified strategies to be followed to achieve the prudent debt management.

Following suggestion in the framework, a public debt office was established, named

Asset and Liability Management in the National Treasury. The objective of debt

management shifted as well from strategic to tactical debt management. Tactical debt

management focuses on active debt management, whereby the outstanding stock of

debt and its composition is actively managed to reduce the cost of debt to within

acceptable risk limits.


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The objective of debt management in South Africa since 1996 was based on strategic

debt management policy. The strategic debt management focuses at the overall design

and the implementation of the debt management program. This issues ranges from the

design of primary issuance and debt instruments and the provision of liquidity. So far,

the practice in South Africa with regards to the strategic objectives has been

accomplished and the needs in Government securities market evolved. The focus

should be aimed at tactical debt management, an active management of the existing

portfolio with a view to reduce debt servicing costs, avoiding unwanted bundling across

the yield curve and consolidate illiquid securities when the chance presents itself.

The tactical debt management approaches introduced includes debt consolidation

(switches), of bonds, debt buy backs, inflation-linked bonds, stripping of Government

bonds and swaps. Debt consolidation was launched to reduce the fragmentation of

bonds on the yield curve and smooth out the maturity profile. It was introduced to

minimize the refinancing risk, especially easing the pressure at the short end of the yield

curve where there was a concentration of maturing debt. The number of small

outstanding issues with high coupons was converted into larger liquid bonds with low

coupons.

The National Treasury as well focused on reducing the debt service costs in the medium

and long term. Small, illiquid, high-coupon bonds of less than R1 billion and ex-

homeland bonds were purchased back from the market. The Government also realized

the need to reduce the long-run cost of debt, subsequently, responded by introducing

inflation-linked bonds. These bonds matches well the institutional investors long-term

liabilities, provides as well an objective measure for inflationary expectations. And act as

benchmark for other issues.

Development of Market for Private Sector

The development of the market for the private sector was done jointly with the

development of Government debt securities market. Institutions established to this effect

are such as Bond Exchange of South Africa, Universal Exchange Corporation, etc.


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Auctions

The National Treasury introduced a fixed borrowing program, which is conducted by

SARB on behalf of the treasury. The annual borrowing program is announced to all

markets participants in timely manner. The announcement to the market participants

covers information on the extent of the borrowing requirements, auction dates, maturity

structure and size of issues, and the instruments on offer. An announcement on what

instrument to be issued is done seven days before the weekly auction.

Achievements in South African Secondary Government Securities Market

The implementation of a new debt management approach in South Africa brought in

some remarkable successes. The liquidity in the bond market improved significantly,

reaching new high record levels. The comprehensive reforms introduced in the domestic

markets managed to make the Government debt securities in South Africa among the

most sophisticated and developed bond markets in the emerging market economies.

The total South African bond market turnover increased from R 5 trillion during 1997 to

the highest of R11 trillion in 2000, before declining to R 8.1 trillion by end of 2005. The

notable decline resulted from the relative attractiveness of equity investments compared

to the bonds. Another indicator of liquidity secondary market, the proportion of total

market turnover for South Africa increased to 91 percent in 2000 from a mere of just 55

percent during 1995. The resilience and the sophistication of the South African bond

market was demonstrated during the 1997-98 financial market crises when South Africa

was one of the few countries to issue and fund in the longer-dated bonds.

The yield curve is well developed and the bonds are issued over the maturity horizon of

the curve. The introduction of the new debt management approach also resulted in a

diversification of fixed income instruments, including floating, variable, fixed variable and

inflation-linked bonds. Other notable achievements include the transfers of market

making, trading and investment risks to the appointed Primary Dealers, active cash

management, the establishment of institutions such as BESA, etc. The appointment of

the primary dealers reduced refinancing risk for the government, improves liquidity and

efficiency of the government bond market and also created clear and transparent price

formation. Other benefits of the primary dealership in South Africa are the improved

analysis and research in the government bond market.


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Challenges in South African Government Securities Market

The South African government is faced with the challenge of upholding an efficient,

transparent and liquid bond market in environment of declining borrowing needs. The

decline in the supply of government papers is generally interpreted as a decrease in the

liquidity of the bond market in many emerging markets. The National Treasury went

around this challenge without sacrificing liquidity in the market. They used active debt

management tools such as debt switches and buybacks as well as the introduction of

inflation-linked bonds just to mention the few.


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6. EXPERIENCES REVIEWED AND KEY LESSONS FOR NAMIBIA 6.1 Good Attributes to be Emulated by Namibia

Slovenia Slovenia is a young, small and open economy similar to Namibia in many ways.

Although Slovenia is one year younger than Namibia, there is a lot to learn from

Slovenia experience in money and capital market developments. On the macroeconomic

front, Slovenia experienced hyperinflation in the 1990s and in order to provide security

for investors seeking protection against inflation, the Government started issuing

inflation-linked bonds (ILBs). Inflation-linked bonds, however, are not only issued to

guard inflation, but these days are integral part of active debt management strategies.

Experience indicated that countries that introduce ILBs managed to reduce the cost of

borrowing since the yields on these instruments are substantially lower in comparison

with nominal bonds. The long-term overall financing cost for the Government could,

therefore, be lowered. This will augur well for the Government which is trying to reduce

high spreads between the nominal bonds of Namibia and their respective benchmark

instruments in South Africa. These instruments are also renowned for their capability to

diversify funding sources as it increases the investors base the one thing the Bank and

the Government have been working to improve since independence.

As the case of Namibia, Slovenia also funds its budgetary requirements from the

domestic markets and minimizes risk associated with funding the budget deficit with

external debt. This undertaking helped to develop the domestic market and reduce

reliance on foreign financing. MEFMI countries which want to develop and deepen their

domestic debt markets should learn from this experience, but off course, the analysis

has to be carried out to determine the right mix between domestic and foreign funding.

Christensen (2004) argued that the extensive use of domestic borrowing might not be

desirable, especially when domestic interest rates are higher than foreign rates. This can

as well get complicated by shallow financial markets and narrow investor base.

Therefore, countries which want to rely on domestic financing have to be wary of the

potential repercussion to the economies. Namibia as Slovenia is already funding its

borrowing requirements from the domestic markets and has taken the necessary steps


66

to avoid severe implications on the economy. The important lesson here is the

broadening of investors’ base via the development pension, insurance and retirement

funds, where in Namibia these institutions are well developed, accounting for about 80

percent of GDP.

Annual Borrowing Plan/Program

One of the most important facets of debt management is the announcement of the

borrowing in advance. The annual borrowing program in Slovenia is detailed, containing

information about the operational and strategic objectives. This information is

disseminated to the market. This something Namibia should consider incorporating in its

annual borrowing plan because what is disseminated at the moment does not cover

strategic issues.

Co-ordination of Monetary and Fiscal Policies It is argued that policy co-ordination and separation is a prerequisite especially in cases

where the central bank is involved in developing the bond market in order to avoid

potential conflict of interest. Normally, the Government is concerned with the

minimization of cost of borrowing, while the central bank is about price stability. The

central bank of Namibia is heavily involved in the development of money and capital

markets, and thus there should be a clear separation. The experience from Slovenia

indicates that there is a clear separation between monetary and fiscal policies. In

addition, the Government is not allowed to borrow from the central bank. The MoF draft

the annual borrowing program and it is shared with the central bank. To consolidate the

co-ordination between monetary and fiscal policies, the bank and MoF discuss the

general liquidity conditions during the preparation of the annual financing program.

Furthermore, debt managers share information on the current and future borrowing

requirements which is provided by MoF, and market conditions by the bank. This kind of

relationship represents a good co-ordination between monetary and fiscal policy, and

therefore is something Namibia can emulate. Currently, the Government of Namibia is

allowed to borrow from the central bank, and although government has not made use of

this right yet, it has the potential to generate into conflict of interest.


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Despite the fact that the Slovenian domestic market is relatively young, the country has

made significant progress with regard to transparency. As pointed out already in

previous sections, the documents on borrowing plans, its objectives and

accomplishments are regularly disseminated to the public. Information of underlying

macroeconomic and fiscal scenarios is also communicated to the public. The

communication tool has also been used to make available rating information on bonds.

Namibia and rest of MEFMI region should be cognizant of the fact that communicating

and engaging the investors and public should be at core of their efforts to develop the

local domestic debt market and improve transparency.

Active Debt Management Strategies Nowadays, most of developed countries and some of the emerging market economies

are pre-occupied with managing the outstanding stock of debt and its composition in

order to reduce debt service cost of debt. Countries use different approaches to conduct

active debt management, in including, debt consolidation, debt-buy backs, issuing

inflation linked bonds, stripping of Government bonds, swaps, and call options. Slovenia

conducted buy back operations up to 2002 and this was undertaken mainly in the

international markets. The restriction of buy back operations to the international markets

was due to the fact that the development in the domestic market is relatively modest.

The active debt management strategy carried out in the domestic markets is call options.

In Slovenia, there is a law which regulates the criteria to be used for active debt

management and any strategy can only be allowed to be conducted after evidence or

proof of cost savings or improvements in the debt portfolio without increasing the current

amount outstanding.

This lesson from Slovenia is one of the most important best practices of debt

management that a country like Namibia can immensely benefit from. So far, Namibia

has only used debt consolidation in 1998 to lengthen maturity structure, enhance

liquidity in these bonds and create local benchmark instruments. However, during

2007/08 fiscal year, MoF and the central bank have committed to buy back the most

expensive Government bonds. The buy back option is made possible by the improved

fiscal position of the Government. However, as in the case of Slovenia any active debt


68

management strategy should only be carried out after evidence of cost savings in the

debt portfolio.

Secondary Market

The development of a vibrant secondary market for Government debt securities is

identified as one of the most difficult aspect for domestic debt market development. It is

argued that to have a successful secondary market, the participation of key market

players is very crucial. If the key market players are not involved in the whole process

and give blessings to Government’s actions than the efforts could end up yielding no

satisfactorily results.

One of the good attributes of Slovenia’s secondary market development is the way the

instruments are designed. The first task was to provide instruments which are easily

marketable, have simple features and clearly identifiable. This objective was achieved

and resulted in instruments of various maturities on the yield curve. The secondary

market trading was helped immensely by the increased number of trades undertaken via

OTC. The OTC trading picked up because of lower costs, resulting from the lack of

brokerage fees and low commissions charged by the depository and settlement

company.

MEFMI countries, in particular Namibia, should note that high brokerage fees and

commission hinder secondary market trading. In Namibia, complaints have already

surfaced with regards to high brokerage fees and other client costs charged by the stock

brokers and the stock exchange. A study is necessary in Namibia to review these

commission and fees and to the extent they are hindering secondary market trading.

In addition to develop the domestic markets, efforts are on-going in Slovenia to build a

domestic yield curve. This serves as a basic reference point for pricing of private sector

debt. Namibia should undertake as well to construct its own yield curve.

Tax Treatment

It is argued that the taxation of financial instruments has significant implications for

financial market development (IMF and Worldbank 2001). Poor tax policies can be a

stumbling block to a well functioning financial markets and inappropriate tax system may

hamper the emergence of new financial instruments. The IMF and Worldbank further


69

noted that authorities responsible for tax issues and financial market developments

should communicate regularly in order to adopt tax policies that are compatible with

financial market development, while at the same time not compromising principles of

good taxation.

In Slovenia, interest income from Government debt securities is exempted from paying

tax. For taxation purpose on Government securities on both the financial and non-

financial corporations are treated the same to simplify the taxation. The same treatment

goes for current income and capital gains for corporations where no distinction is drawn

either for tax purpose. All the primary and secondary transactions are exempted from

value added tax. The tax incentives are generally used to promote the long-term bond

market, especially in developing countries where the debt composition is skewed toward

the short-term. These incentives however should be managed in consistent manner;

otherwise they may distort the prices and lead to inefficient resource allocation.

In Namibia, the Income Tax Act no. 24 of 1981 exempts interest income, received by or

accrued to any person (other than a company) or any external company not carrying on

business in Namibia, from treasury bills and bonds issued by the Government or any

representative authority or local authority in Namibia. Capital gains are usually not

taxable. However, should a taxpayer’s activity of making capital gains be of such a

nature that it can be interpreted as trading, it may be taxable. This might be subjective to

personal interpretation and difficult as well to draw a clear line between what constitute a

trading activity and which one does not. The determination of the taxability of capital

gains should not only remain with Inland Revenue officials, but be clearly stipulated in

policies. The Slovenian lesson of giving similar treatment to both income and capital

gains for corporate could be useful in simplifying taxation in Namibia. In addition,

Namibia might also review the valued added tax of 15 percent on transfer fees for bonds

as the case for Slovenia where no VAT is charges on listed securities.


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Poland

Institutional Framework The Public Debt Department located in the Ministry of Finance is faced with some new

challenges. Due to sophistication of market participants new needs have emerged and

require to be addressed with innovative, flexible and active debt management

approaches. The location of the debt unit at MoF hampers this office to address those

challenges effectively given the bureaucratic structure at the ministry. Experiences from

some countries indicate that the creation of separate and independent office is a best

way to overcome bureaucratic structure.

In Namibia, the debt unit, Cash & Debt Management division is in the Ministry of

Finance. However, at the moment this office is also faced with challenges and a plan is

underway to restructure the office in line with international best practice. The debt unit is

planned to be divided into three sub-divisions: a front office, a middle office and a back

office.

Co-ordination with Monetary and Fiscal Policies A very good lesson from Poland is the way the debt management with monetary and

fiscal policies are coordinated. The public debt management committee was established

to coordinate monetary and fiscal policies. This committee includes members from MoF

and the central bank. The meetings of the committee are held on monthly basis and the

main areas covered include the monthly borrowing needs, the budget situation and the

development of the money market.

In Namibia, to facilitate proper co-ordination between monetary and fiscal policies, the

MoF and BoN have set number of committees, namely:

Cash Flow Committee

The Cash Flow Committee, which comprises members from the Bank of Namibia and

the Ministry of Finance, co-ordinates Government cash flow trends, prepares cash flow

forecasts, and agrees on the domestic borrowing program and calendar.


71

The Committee has recently developed a model based on the past revenue and

expenditure data to project the Government’s cash flow positions. The cash flow

projections are updated on a weekly basis and are presented to the committee every

month. The Committee also collects information on the implementation of budgeted

projects, as well on regular debits and credit transactions, such as typical tax and salary

payments dates. This information serves as input into generation of cash flow

projections.

The Hedging Committee

The Ministry of Finance and the Bank of Namibia have also established a Hedging

Committee to co-ordinate the hedging of Government external loans (where appropriate)

in order to neutralise exchange rate risks of foreign currency denominated loans.


As the case of Slovenia, Poland exercises some active debt management strategies to

manage the existing debt portfolio. Among these strategies undertaken includes debt

buyback, switch auctions, some swap auctions and derivates. Namibia has undertaken

some of these active debt management strategies as indicated under the discussion for

the case of Slovenia.

Developing the Market for Government Securities

In the process of developing the Government debt securities market, the Polish

Government committed itself to the development of domestic financial markets. The

policy directive was, therefore, to finance the Government budgetary requirements from

the domestic market. This decision bore fruits as the country today has a large and

stable domestic debt market which enables the reduction of exposure to foreign currency

crises and other undesirable external shocks.

Poland also participates in the international capital markets, but because of very low

funding needs, MoF executes very limited transactions per year. The reasons for the

participation in the international capital markets is not because Poland needs funding but

to maintain access to the most important segments of the international capital market

and to create a benchmark for issues of the corporate sector.


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The path Poland choose to develop the markets for Government debt securities is the

same one Namibia has committed herself too. For an example, it is also a policy

directive by the Namibian Government to finance budgetary requirements from the

domestic markets. This process also has worked well for the Namibia since today the

country has a stable and reliable domestic market where the Government can reliable

finance its requirements. Namibia has, nevertheless, a lot to learn from the experience of

Poland especially with regard to what determine the issuance of short and long-terms

instruments. In Poland this is driven by market conditions and the predicated future

shape of the yield curve.

The presence of Poland in the international capital markets also stands out as one of the

very good examples for Namibia to follow. During August 2006, the central bank

accessed the international capital markets, through issuing a syndicated loan facility for

US$50 million. This idea is echoed by leading European banks as there are number of

investors in Europe who are looking for exposure to countries with credit rating of BBB-.

The success of Poland is encouraging since Namibia is also in the process to borrowing

from the international bond market to establish its name in market and for benchmarking

for the private sector.

Secondary Market Developments

Various measures were introduced by MoF and the central bank in Poland to develop

the secondary markets. However the notable one where Namibia can draw lesson from

is the introduction of the primary dealer system in Government debt securities. The main

reasons for the primary dealer system is to improve liquidity in Government debt

securities (in particular), improve the secondary trading by quoting continuous two way

prices that could lead to the price discovery process in the market and prepare the

foundation for transparent continuous trading in the future. The Primary Dealer System

is expected to develop the Government debt securities market.

The Government of Namibia is also considering introducing the Primary Dealer System

in order to develop deep and liquid markets for Government securities. This is of critical

importance to the Government since it could reduce the cost of Government debt. Thus

far, a market survey was carried out where the majority of the respondents indicated a


73

definite need for market making for Government securities in the country. A paper in this

regards is finalized by the central bank and been approved by MoF.

The development of the repo market as in the case of Poland will go along way in

improving the liquidity in Government debt securities market. However, this will face

some challenges given the CMA arrangement where commercial banks in Namibia can

easily get funds from their parent companies in South Africa. The current practice in

Namibia is that only one commercial bank which has majority Namibian ownership is

using the repo.


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South Africa

The location of a Public Debt Office

The South African Government adopted a framework of philosophies and principle to

manage debt, cash and risk. This framework recommended the debt office to be located

in the Ministry of Finance, referred to as the National Treasury. The new office, Asset

and Liability Management (ALM) is empowered with resources it requires to operate

effectively. The debt office is tasked with variety of functions, which is divided into front,

middle and back offices. The ALM is endowed with the best skills available in the South

African markets.

The public debt office in Namibia also falls under the Ministry of Finance. The Cash and

Debt Management (CDM) division within the Asset, Cash and Debt Management

Directorate will be restructured in line with international best practice. Namibia has learnt

a great deal from the South African case study especially because of historical

connections, membership to CMA and proximity. As in South Africa, the public debt

office in Namibia is planned to be divided into three sub-divisions: a front office, a middle

office and a back office.

Transparency and Accountability The National Treasury and the Reserve Bank (SARB) regards the establishment of good

relations with investors locally and abroad as one of the top measures used to develop

the domestic money and capital markets. In a view of the importance of investors, the

top management at SARB and National Treasury run this program. Road shows are held

at the beginning of every the year informing and is used as an opportunity to seek inputs

from the local and international investors about the borrowing program for that specific

year. Always before the auctions takes place the key segment of the market is consulted

to give their opinions.

This is one of the far reaching experiences Namibia can adopt in its markets. However,

given the urgent needs to create investment opportunities in the financial markets and

stem out capital outflows, the investors relations program should be used as one the

priority tools to develop the local money and capital.


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Measures Taken to Maintain Liquidity in Face of Low Financing Needs

At the moment, the supply of debt papers in the Namibian market is very limited. In this

connection, Namibia can learn a lot from South Africa that faced the same dilemma not

so long ago. South Africa managed to reduce the supply of Government papers in line

with the Government’s financing needs, without sacrificing liquidity in the bond market.

This was achieved by carrying out some of the active debt management strategies such

as debt consolidation or switches of bonds, debt buy backs, inflation-linked bonds and

strips. Namibia already adopted some of these measures such as debt consolidation

and plans are under way to introduce buy back option during the 2007/08 financial year.

For inflation linked bonds; the paper is finalized and just awaiting to be adopted at the

right time.

Success of Reforms in South Africa

The reforms undertaken in the South African domestic financial markets brought

remarkable success in a short period. The developmental initiatives resulted in improved

liquidity, bond market turnover, development of yield curve, just to mention a few. The

adoption of a new debt management approach has propelled South Africa to be among

the most sophisticated and developed bond market in emerging market economies.

Therefore, given the closeness of the two economies, Namibia can learn a lot from the

success of South Africa. Namibia should refine these approaches for its own case.


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6.2 Lessons to be Avoided by Namibia

Slovenia


In Slovenia, there are three departments responsible for the co-ordination of debt

management. As a consequence, the responsibilities of execution of operations and any

other debt management operations are blurred. The MoF is, therefore, contemplating on

introducing a separate debt office which will deal with all issues related to debt

management. This idea is a general problem for many countries which have many

players involved in debt management. Therefore, the idea of having a separate and

independent debt office is a lesson for countries to embrace, especially when the current

setup is plagued by political interference, lack of adequate resources and lack of

resources. Namibia has a separate debt unit similar to the Asset and Liability

Management at the National Treasury of South Africa. The proposed structure and

remuneration of staff is not yet fully implemented. The current office experiences a high

staff turnover and relies heavily on the central bank for technical support.

Debt Management Strategies Despite significant progress, there are some problems constraining the domestic market

development in Slovenia. These include among others, the capital controls, although

finally lifted in 2002. Portfolio inflows were subject to some prohibitive costs that applied

to both long-term and short-term securities without exception. As a result, foreign

investors were discouraged to participation in the Government securities market. In

Namibia there is no capital controls on the portfolio inflows, however, the country has to

be wary of their implications on financial markets in case it may be considered in the

future. This is also a lesson for the rest of the MEFMI region to take note of.

Poland


The major operating risk of debt management in Poland is the lack of an integrated

information system. This resulted from the fragmentation of the various databases which

were not fully compatible with each other. In order to solve this problem, the integrated

debt management system was implemented by end of 2002. Namibia should also avoid


77

installing various databases which are not compatible with each other. Currently, the

domestic debt are recorded in excel worksheets at both MoF and the central bank. The

plans are in the pipeline to record data on domestic debt in the Commonwealth

Secretariat Debt Recording and Management System (CS-DRMS) which is already

recording foreign debt. In addition, a shared network will be developed to link the bank

and the debt unit at MoF to allow real-time sharing of debt-related data, with appropriate

controls to ensure data integrity.


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South Africa

The abolishment of Captive Funding The reliance on captive funding characterized most of Western Europe and some

English speaking countries until the 1980s and 1990s for South Africa. Although

developed countries moved away from that, captive funding is still prevalent in many

developing countries, including Namibia. The South African Government abolished

captive funding as requirements for pension funds and insurance companies whereby

these institutions were obliged to invest part of their funds in Government bonds,

Government guarantees and homeland bonds. The prescribed captive funding was

meant to guarantee the demand for the public debt securities. Although this process

contributed somehow to keep savings home, at the same time it was a stumbling block

to financial market developments since the issues were not based on market conditions

or interest rates. The market participants campaigned vigorously against captive funding

in which the Government responded positively to the demands.

Following the persistent outflows of capital to the developed South African financial

markets, the Namibian authorities introduced captive funding to the pensions funds and

insurance companies. As in South Africa, this has been credited with the developments

of the Namibian Stock Exchange, asset managers, unit trusts, and stock brokers.

However, as argued by the IMF (2001), in order to develop a sound and vibrant demand

for Government securities, policy makers need do away with reliance on captive funding

of Government needs. The option is to draw from voluntary sources of funds that offer a

better reflection of true cost of financing and prevent distortion of resources. However, in

the case of Namibia, this will be a gradual process where the Government will have to

develop the financial markets first. If lifted without creating competitive products in the

financial markets, this could exacerbate the capital outflows to South Africa which in turn

could deplete further the country’s official reserves. The authorities in Namibia should,

therefore, aim at creating more investment opportunities which are competitive for

Namibia investors and keep the huge savings the country generate at home.


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The issuance three-legged bonds

In South Africa, as early 1998, the Government debt policy was not designed to improve

the marketability of Government debt. A new and separate bond was issued for each

funding requirement. Meaning that these distinct bonds for each funding requirement

have different own terms and conditions. It also worth noting that once issued they were

not re-opened again. This led to the issuance of a large number of bonds with small

nominal amount outstanding that contributed to the lack of liquidity.

The National Treasury after consultations with the market participants decided to

consolidate these bonds and replace with four new three-legged issues10. The three-

legged instruments was aimed at increasing marketability of Government stock and

competitiveness of the Government as a borrower in the capital markets, and create the

benchmark yield curve. The three-legged bonds’ unintended side effect was the making

of bullet bonds more illiquid, although have large nominal outstanding amounts. This

unfortunate effect made only the three-legged bonds liquid and thus, the Government

was forced by the circumstances to keep issuing only the three-legged bonds.

The three-legged instruments are priced on the mid second leg, meaning that the three

maturities on the yield curve have the same price and this compromise price efficiency.

A number of investors in the South African market have indicated to the National

Treasury that the time of three-legged bonds is long gone since it is impacting negatively

on the price efficiency and discovery. The other main problems facing the National

Treasury with regards to these bonds is that there only two year gap maturity between

most of these three-legged bonds and the Treasury will not able to issue them again. As

a result, the National Treasury has taken a decision to split these bonds into bullet

bonds.

This is a good lesson to MEFMI countries, especially Namibia which aspiring to follow

the comprehensive program of reforms that South Africa introduced. This is also

supported by the global trend which is leaning to bullet bonds due to their price

efficiency. The objective of increasing liquidity can be achieved with bullet bonds.

10 A bond with three maturities


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7. THE NAMIBIAN EXPERIENCE - LESSON FOR THE MEFMI REGION

The rest of the MEFMI region could learn a great deal from the initiatives implemented

by the Namibian Government and the Bank of Namibia to develop the local domestic

securities’ market. At independence in 1990, the bond market in Namibia was non-

existent and the only financing source available was from the urban-based commercial

banks. The Government needed reliable and sustainable financing sources to redress

social inequalities inherited from the previous dispensation, such as, poverty, high

unemployment, income inequality and building of infrastructures. As a result, some

measures and policies specifically for the Namibian situation were designed and

adopted. All these initiatives were aimed at developing the local capital market where the

Government intended to finance its borrowing requirements.

Among these measures introduced by Namibia which is a good lesson for the MEFMI

region are, inter alia:

1. The Sovereign Debt Management Strategy. To meet its obligations, the Cabinet

adopted the Sovereign Debt Management Strategy (SDMS) during 2004, which is

designed to ensure that Government debt levels remain measurable, affordable,

sustainable and of low risk. The SDMS is based on the international best practices, and

was adapted for Namibia’s specific needs and circumstances.

2. The CMA Agreement. In order to maintain confidence and monetary stability in the

economy, the Namibian Government deliberately assumed membership in the CMA to

which South Africa, Lesotho and Swaziland are also parties. Participation in the CMA

was envisaged to enhance fiscal, exchange rate and monetary stability, which create

favorable conditions for capital market development. By joining the CMA arrangement,

Namibian authorities have chosen to align themselves with the monetary policy of the

South African monetary authority.

3. Domestic Investment Requirement. The 35 percent domestic investment

requirements applicable to insurance companies and pension funds was introduced to

retain funds that go out of the country in the form of contractual savings and make such


81

funds available for domestic investments. It contributed significantly to the development

of the stock exchange, stock broking firms and the asset management industry Namibia.

South Africa also introduced captive funding at early stage of development and in a

number of developed countries such as Singapore; the domestic investment requirement

for pension funds is still present. With various measures in place to develop the

Government debt securities market, the authorities in Namibia will continue monitoring

these capital controls. They could be deregulated partly or fully when the implications of

capital outflows no longer poses severe danger to the country’s financial stability and I

particularly the country’s foreign exchange reserves. It should, however, be noted that

although captive funding create captive demand for the Government debt papers, the

IMF (2006) argued that it hampers the development and modernization of the financial

markets.

(4) Well developed Pension System

Namibia is blessed with a well developed pension system, which at more than 60

percent to GDP is one of the highest in the world (see Section 2.8). As pointed out

already in this paper, the developed pension system goes hand in hand with the bond

market development. Due to well developed institutional investors, Namibia managed to

generate saving surpluses that enabled the country to establish a reliably source of

funding the Government financing requirements. According BIS (2002), Chile has a well

developed pension system which is credited with making that country being the most

developed capital market in Latin America. Without a well established pension system in

Namibia, the strides made today in developing the domestic market could not been

possible.

(5) Commitment to Borrow from Domestic Markets

As evident in the cases of Poland, Slovenia and South Africa, the borrowing from the

domestic debt market enable countries to develop their domestic markets. At the same

time, it also enables countries to reduce external debt related risk and create

contingency borrowing source for future needs. The domestic debt markets in Namibia

could not have been at this level if it was not for the Government commitment to borrow

from this market. However, as indicated already, the country need to have a well


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developed pension system and thus, other countries in MEFMI region with less

developed pension system should undertake the necessary pension reforms.

(6) Guarantees for Parastatals Bonds. In a view of encouraging the issue of non-

central Government papers and development corporate bond market in the economy,

the Government provides guarantees on debt issued by the state owned enterprises

which have good balance sheets. This strategy realized benefits as witnessed in an

increased bond issues by the State Owned Enterprise. Furthermore, given the lack of

debt papers in the market, this initiative increased somehow the supply of debt securities

in the market and also lifted the pressure off the Government as the largest issuer in the

market.

(7) Sovereign Credit Rating.

Namibia was assigned a favourable sovereign credit rating during 2005 which was

reconfirmed in 2006. FitchRatings has assigned the Republic of Namibia a long-term

foreign currency rating of BBB- and a long-term local currency rating of BBB, in the

same peer group as Croatia and India. The good rating provides impetus for the

establishment of a well functioning market as it gives investors unbiased and objective

opinion on the relative risk of the bond issue. As a result of that credit rating, the high

credit premium attached to Namibia decreased and promoted Namibia’s reputation in

the international market as credible borrower. The credit worthiness of Namibia was

reaffirmed by the launch of the first international Namibia Dollar bond by the European

Investment Bank in March 2006 and over subscription in the syndicated loan contracted

by the BoN in August 2006. BoN is also planning to issue a bond during 2007 in the

international capital market, following in the footsteps of Poland, Slovenia and South

Africa.

(8) Debt Consolidation. As the experience from South Africa indicates, Namibia also

had fragmentation of bonds on the yield curve and these instruments were of small

amounts and short maturities, and illiquid. In order to lengthen their maturity structure, to

enhance their liquidity, create local benchmark instruments and easing the pressure at

the short end of the yield curve, most of these bonds were later consolidated in 1998 into

three major bonds namely GC02, GC05 and GC10 maturing in 2002, 2005 and 2010,


83

respectively. Consequently, the secondary market trading improved and Government

was able to issue long-dated securities with around 20 year maturity.

(9) Easing the Pressure on Short-End. The composition of the Government domestic

debt was strongly skewed towards the short end of the yield curve. This has a potential

to cause cash flow problems and a rollover risk for the Government. The Government

borrowing strategy was reviewed and aimed at issuing more of longer dated government

securities and less short-term debt securities over the past two years, continued through

2006/07 financial year. In a period of two years, the Government strategy worked

beyond the expectations as the share of long-dated Government papers rose

tremendously to 61.3 percent by end December 2006 as opposed to the share of only

42.1 percent during December 2003.

(10) The IRS Redemption Account. The borrowing plan for 2006/07 made a provision

for the creation of the permanent Internal Registered Stock Redemption Account

(IRSRA) that will be used for the redemption of maturing bonds. This account was

initially created on the back of the successful redemption strategy of the GC05 that

matured in 2005. The immediate bond which has to be catered for is the GC07, maturing

in July 2007. The borrowing plan for 2006/07 fiscal year projected that at least N$600

million or 50 percent of the N$1.2 billion outstanding for GC07 will be transferred to the

IRSRA by the end of the fiscal year. These funds are raised by means of Internal

Registered Stocks’ primary auctions, whereby 50 percent of the proceeds from each

auction will be transferred to this account. In addition, Government can also transfer

excess funds from the State Revenue Fund at any point as circumstances allow. The

commitment was also made that by the end of each fiscal year, the excess balance of

over N$250.0 million should be transferred to this account. So far, the accumulation of

funds on IRSRA exceeded the expectations, with over N$1.8 billion already collected by

the end of January 2007. These funds are invested with local banking institutions.

(11) Debt buy-Back Operations. Given the improved fiscal position during the period

of 2006/07 – 2007/08 financial years, the MoF embraced the opportunity to buy back

some of its outstanding expensive domestic debt in order to reduce the financing cost of

these debt. The debt buy back option have been exercised by many countries and as

the case studies indicated, South Africa, Poland and Slovenia use this option to actively


84

manage outstanding stock of debt. South Africa has undertaken successfully this option

to buy back its most expensive and ex-homeland debt to reduce the debt service costs.

The Government of Namibia has already committed funds during 2006/07 financial year,

which is ending during March 2007. The buy back program provides the Government

with new means of actively managing the stock of its outstanding debt. The bonds to be

targeted are those with current market prices lower than the prices when these bonds

were originally issued.

(12) Access to international Capital Markets. As discussed already, the Bank of

Namibia and Namibia at large have established a good credit record as credible

borrowers in the international capital markets after the contraction of a syndicated loan

during 2006. There is so much excess liquidity in the world today which is also looking

for assets to buy in emerging market economies. The country stands to benefit from

these encouraging developments. Testimony to these favourable developments is the

over subscription of a US$50 million 364-day loan syndication debut facility contracted

by the BoN during 2006. After the maturity of the syndicated loan during August 2007,

Namibia could continue showing presence in the international debt markets via issuing a

bond with a longer maturity.

By issuing a bond Namibia is able to augment the level of the foreign exchange reserves

when and as such a need arises. This is expected as well to have positive spinoffs on

reducing the spread between Namibian Government bonds vis - a - vis the South African

Government benchmark bonds. Some benefits realized when issuing a bond are such

as establishing repayment history and independent benchmark for future issues by the

Government and potential issuers in Namibia looking for long-term financing. MEFMI

countries can learn from this experience and borrow in order to establish their names in

the international capital markets.


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8. RECOMMENDATIONS TOWARDS A ROBUST GOVERNMENT DEBT SECURITIES

MARKETS IN NAMIBIA

The development of a robust Government debt securities’ market is very complex

process and depends on the maturity of each country’s financial sector. The consensus

has been reached that each country has its distinctive characteristics and, thus, would

choose a different path to develop its market. Macroeconomic and financial sector

stability is vital prerequisite for the building of efficient markets for Government debt

securities (IMF 2001). It is further noted that it is also a prerequisite for an efficient

government debt securities’ markets to have a credible and stable Government, sound

fiscal and monetary policies, effective legal and regulatory framework, market

infrastructures, efficient clearing and settlement and a liberalized financial system. If any

of the basic requirements is missing then the priority should be to implement them.

The Government debt securities market has gone a long way in Namibia since

independence when it was in effect not-existent. The achievements achieved should,

therefore, be developed further for the country to increase avenues for sourcing much

needed financing from the domestic market for the public and the private sector, and

reduce any dependence on external financing. A vibrant, efficient and robust financial

market is expected to enable Namibia to create investment opportunities that could

reduce capital outflows and in return result in the removal of captive funding. Following

below are the key recommendations for Namibia to develop robust and vibrant

Government debt securities market.

8.1 Sustaining Stable Macroeconomic Environment

The development of a Government debt securities market can be more successful if it is

accompanied by a consistent macroeconomic environment. Fabella and Madhur (2003)

noted that in general bond markets and in particular corporate bond markets have

developed at faster pace in countries with stable and predictable macroeconomic

environments. Therefore, any investor, foreign or domestic is willing to invest their funds

in the market which is characterized by stable inflation and interest rates, credible


86

exchange rate regime, and prudent and sustainable fiscal policies. A country with

prudent macroeconomic environment is expected to have lower funding costs over the

medium and long terms, better then the ones with imbalance macroeconomic conditions.

According to the IMF (2001), Government should entice the investors to invest in

Government securities by showing ability to prudently manage its fiscal affairs. On cases

where Government is found not to have the ability to manage its fiscal affairs prudently,

investors perceive a high default risk and as a result, the cost of financing for

Government rises. The same goes for volatile inflation, when it is high it affects the

nominal securities yields.

To maintain confidence and monetary stability in the economy, the Namibian

Government deliberately assumed membership in the Common Monetary Area (CMA) in

order to enhance fiscal, exchange rate and monetary stability, which create favorable

conditions for capital market development. In this arrangement, the exchange control

regime and the policies are harmonized. By joining the CMA arrangement, Namibian

authorities have chosen to align themselves with the monetary policy of the South

African monetary authority. In addition, the Government also introduced sound

macroeconomic policies that resulted in a stable macro economic environment as

indicated under the section 1.2 of macroeconomic conditions of Namibia.

The Government of Namibia should continue to maintain a sustainable and predictable

macroeconomic stability that is conducive for the financial markets development.

8.2 Developing the Government Bonds Markets

The financial crisis which happened in late 1990s highlighted that the over-reliance on

bank lending for funding requirements render the economy vulnerable to the risk of a

failure in the banking system. Therefore, the availability of an active and efficient bond

market provides an alternative means of raising debt capital (Bank of Namibia Annual

Symposium, 2004). The mature bond market offers a wide range of opportunities for

funding the Government and the private sector. Among these opportunities or benefits of

the mature markets include avenue to provide the domestic funding of the budget

deficits, the transmission and implementation of the monetary policy, increase overall


87

financial stability and intermediation, just to mention a few. The global experience points

out that before the benefits of developed domestic markets are realized some basic

elements should be present. These elements that the market should have include the

number of issuers, investors, intermediaries and the robust and safe infrastructures (IMF

2001).

Despite the fact that the Namibian bond markets are reasonably developed with regards

to existing infrastructures, some challenges still remain. Among these challenges is the

unsatisfactory trading in the secondary market which leads to low liquidity.

The following measures could contribute to the improved trading in the secondary

market and thus, improving liquidity in the Namibian Government debt securities market.

(1) Improving Trading Transparency

According to Mohanty (2002), the lack of liquidity remains a major obstacle to the

development of domestic bond markets in many emerging market economies. In

Namibia, the lack of liquidity has been identified as one of the key challenges facing the

bond market development. The low liquidity is reflected in limited trading taking place

either through the stock exchange or OTC relative to especially the South African

market where the country’s capital go to looking for investment opportunities. For that

reason, the secondary market in Namibia is not efficient since the investors are not able

to exchange assets at a fair value in the shortest time, although there a least degree of

settlement risk. Another factor identified as contributing to lack of liquidity in the market

is the fragmentation of market into narrow niches, such as pension funds, banks and

retails investors having different investments perspectives. These groups have different

attitudes towards the trading positions and holding of the securities.

The trading transparency (availability of sufficient information) for an example seems to

be lacking and that is why the market experiences divergence views about the market’s

activities. Hence, the information on market activities should be available to all players at

reasonable speed and cost.


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(2) Use Regional Bond Markets

Though, there are arguments that the benefits in domestic bond market for small

countries like Namibia may not be realized, innovative ways have been used in other

small countries such as Slovenia, Taiwan and contributed to the development of the

market (Mohanty 2002). One way is to allow the entry of foreign banks and securities

firms in the financial sector which results in competition. The foreign entities increase

supply of papers, diversifying investment opportunities for domestic investors. The other

alternative is to use regional bond markets to issue or buy bonds in the region. At the

moment, Namibia as a member of the CMA, can issue bonds and have them listed

(corporate and sovereign) on the Bond Exchange of South Africa (BESA). These

benefits have now been extended as well to the rest of African countries (BESA Press

Release, October 2006).

(3) Credit Rating

One of the calls from the market was for the Government of Namibia to obtain a

sovereign credit rating. A good rating stimulates the development of a well functioning

bond market; attract foreign players and the markets become more efficient. The

Government of Namibia responded positively to the call and sought a sovereign credit

rating in 2005. FitchRatings Agency assigned a sovereign investment grade of BBB- to

long-term foreign currency rating to Namibia. This rating has been reconfirmed again

during 2006. The assessment for credit worthiness for the Government should now

occur annually, and the authorities must be working to improve weaknesses identified in

the previous rating outcomes in order improve the next rating. Multiple rating from either

Standard and Poor’s and Moody’s should be sought to enhance the credibility of the

rating.

(4) Establishment of NBA

The establishment of the Namibian Bond Association (NBA) by the market participants

during 2006 is expected to enhance liquidity in the secondary market. A regulated bond

market with well defined frameworks by the market itself for organized trading and

stability should improve liquidity. This association should be tasked with the formulation

of the requirements for issuing entities, qualification requirements for traders in the bond

market and other aspects of regulating the market. As pointed out earlier, a well


89

resourced NBA will work together with the Government and the Bank of Namibia to

ensure a smooth functioning and transparent domestic debt market.

(5) Increasing of Debt Papers in the Market

The volume in Namibia has been low and is even lower now given the budget surpluses

anticipated from 200/07 – 2008/09. This situation also contributed to low levels of

liquidity experienced in the market and as a result, buys and hold attitudes persist in the

market. The supply constraints should discussed further between the Bank of Namibia

and the Ministry of Finance where alternatives will be found to supply debt papers

especially to the market to cater especially for liquid asset requirements for commercial

banks and creating investment opportunities to capital outflows. According to Fabella et

al (2003), several countries such as Hong Kong, China and Singapore issue

Government debt papers regularly, although neither issue to finance fiscal deficits. The

main aim is to issue for the market development and the development of the yield curve.

Alternatively, as indicated from the lesson of the case study, South Africa managed to

reduce the supply of Government papers in line with the Government’s financing needs,

without sacrificing liquidity in the bond market. This was achieved by carrying out some

of the active debt management strategies such as debt consolidation or switches of

bonds, debt buy backs, inflation-linked bonds and strips.

The other option to increase the supply of debt capital in the domestic market is the

existing potential corporate bond. The central Government dominate the fixed income

market, however, the corporate bond market is geared to come in the market and tap the

huge savings in the domestic market as longer as measures are put in place to enable

them to enter the market. The interest from the corporate world is there at witnessed by

new issuers to the market. The potential for corporate issuers is big given investment

opportunities such as the gas exploration and other infrastructural developments. The

market also has excess liquidity which outflow to South Africa on daily basis.

(6) Market Making

During its annual symposium on “Challenges Facing the Bond Market in Namibia

(August 2004)”, the introduction of market making function in Government debt

securities was among the recommendations made as a tool to take the Namibian

Government bond market into new heights. The paper on Primary Dealer System has


90

been finalized by the Bank of Namibia and MoF has approved the proposal.

Implementation of the Primary Dealer System in the Government debt securities in

Namibia is planned for 2008/09 fiscal year. This system plays a very important role in the

market; improve liquidity in Government debt securities, improve the secondary trading

by quoting continuous two way prices that could lead to the price discovery process in

the market and prepare the foundation for transparent continuous trading in the future. In

the primary market system, Primary Dealers are much closer to the market to articulate

the needs better than the authorities.

(7) Dematerialized of Bonds

The delivery system should also be reviewed and revised, and replace physical scrip

with electronic or dematerialized scrip for bonds. The Government is in the process to

amend the State Finance Act to allow the incorporation of bonds into the Book Entry

System where they will be dematerialized as the treasury bills. To develop the bond

market further, there also plans to link the Book Entry System to the settlement system.

(8) Introduction of Inflation Linked Bonds

The experience from the South African case study indicate that the National Treasury

managed to decrease the supply of Government paper in line with lower Government

financing needs, without sacrificing liquidity in the bond market. The introduction of

inflation-linked bonds (ILBs) was one of the initiatives taken to maintain the liquidity

levels in the market. This is very good lesson for Namibia since the Government of

Namibia is also faced by lower borrowing needs and thus, reduced supply of

Government papers. Since the introduction of ILBs in South Africa, the markets have

also been calling for their introduction in the Namibian market. The calls from the

markets are justifiable given the recent spectacular growth in these instruments

worldwide. The lack of liquidity, high cost of borrowing base are some of the major

obstacles curtailing the development of the current domestic bond market in Namibia.

Global experience tells us that countries that introduce ILBs managed to reduce the cost

of borrowing since the yields on these instruments are substantially lower in comparison

with nominal bonds. Developments in South Africa show that the introduction of the ILBs

complemented the nominal bonds and not treated as substitutes. This means that the

ILBs are regarded a total different asset class for diversification and inflation protection

purposes and therefore they are not competing with nominal bonds.


91

This will augur well for the Government which is trying its utmost best to reduce high

spreads between the nominal bonds of Namibia and their respective benchmark

instruments in South Africa. These instruments are also renowned for their capability to

improve liquidity or tradability of the bonds. In addition, ILBs also diversify funding

sources as it increases the investors base the one thing the Bank and the Government

have been working to improve since independence. Therefore, Namibia is likely to

benefit from the ILBs given that the timing for their introduction is right.

Global experience indicates that for any country to issue the ILBs successfully, the key

precondition is to have a well developed pension funds, insurance industry and other

institutional investors. Namibia has one of the highest ratios of pension assets to GDP in

the world and this advantage makes a strong case for the Government to introduce

these instruments and entice further the institutional investors to invest their funds locally

instead of continuous transfers of funds outside the country. Furthermore, the country is

faced with the challenges of developing the bonds market and this requires an active

debt management strategy with tools such as issuing inflation-linked bonds in order to

uphold and develop an efficient, transparent and liquid Government bond market. The

ILBs are also expected to suit the portfolio of some Namibian investors whose attitude is

to buy-and-hold since they provide cover for inflation uncertainty.

(9) Standardisation of Documents

The other important tool Namibia should undertake to develop the entire bond market is

the standardisation of documents required from entities wishing to issue bonds. This will

shorten the whole process and make it simpler to issue bonds.

The developed bond market in Namibia will go along way to create investment

opportunities which is currently flowing to South Africa. The country savings would have

huge impact on the development of the economy if these funds are invested in the

country.


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8.3 Improving Corporate Governance

As the Government is busy designing reforms to develop the debt securities market, it is

important as well to make provision for the dissemination of relevant and timely

information about its activities as indicated in the case studies of South Africa, Poland

and Slovenia. This information may include Government finances, debt portfolio,

borrowing strategy and information on the primary and secondary market activities. By

doing that it strengthens the Government’s credibility as investor would have information

on the level of Government indebtness and that help to reduce uncertainty. To facilitate

this process, it is better to have a regulation or policy on disclosure for the debt office.

The regulation could touch on issues such fair and equal access, audit and internal

control procedures, and disclosure.

In Namibia, the lack of sufficient information on market activity to all players at

reasonable speed and cost has been identified as one of the contributing factor to the

attitudes of trading against holding strategies. MoF is currently in the process to design a

policy on transparency, accountability and disclosure. In order to ensure general access

for all players in the market, all issuers, intermediaries and settlement agents need to be

involved to disclose information on their respective activities. If this cannot be done on

voluntary basis, one of the regulators, say the Namibian Bond Association may step in to

enforce the timely dissemination of information to all market players. In addition, steps

should also be taken to review the current debt issuance and operations, and ensure

that they are transparent.

8.4 Institutional and Legal Framework

As pointed out in section 2, the responsibility of debt management lies with MoF,

assisted by Bank of Namibia, the National Planning Commission and the Office of the

Attorney General. The State Finance Act, 1991 (Act 31, 1991) highlights these

responsibilities. According to the Namibia Sovereign Debt Management Strategy or

SDMS (2004), a sound debt management requires an institutional structure that provides

clear accountability and responsibility for managing debt with clear documenting lines

and co-ordination of information flows among the various units. It also requires well-

trained and adequately compensated staff with the necessary financial and economic


93

skills to carry out their responsibilities effectively. Moreover, the debt management

framework needs strong support from political leaders and from senior management at

the highest levels (SDMS, 2004).

In Namibia legal mandate that spell out various responsibilities seems to be satisfactory.

The State Finance Act of 1991 is under review to close some loopholes and improves on

some stipulations of the Act. The SDMS sets out series action plans that should be

implemented to improve the current set up of the institutional and legal framework. The

current debt management office in the Ministry of Finance is restructured in line with

international best practice as displayed in diagram 1 below.

Diagram 1 Proposed Structure of Debt Office located at MoF

CDM Division

Debt Management(Front Office)

Risk Management

(Middle Office)

Financial Operations

(Back Office)

Domestic Foreign Cash Flow Analysis

Risk Analysis

Debt recording

and Analysis

IT Support

Source: MoF

However, since the adoption of the SDMS in 2004, the proposed structure is not fully

implemented due to some delay. The speedy implementation of the SDMS should be

considered as the top priority by the entities tasked with its implementation. Namibia can

learn a lot from the experience of the South African debt office which implemented more

the similar structure. In South Africa, the new office, Asset and Liability Management,

located in the National Treasury is empowered with resources it requires to operate

effectively. The debt office is tasked with variety of functions, which is divided into front,

middle and back offices and is able to perform its functions mainly due to its skilled staff.


94

This debt office provides better condition of service, including competitive packages that

enable to retain the employees.

The Bank of Namibia and MoF ought to work towards improving the co-ordination of

work better. Among others, a network of real-time sharing of data should be developed.

The risk debt-forecasting model at MoF and at the central bank be utilized and staff in

the middle offices be trained since will provide more accurate forecasts .i.e. future debt

service obligations, impact of potential new borrowings, etc. Attachments of staff

between the two institutions should also be encouraged to improve better understanding

of strategies and operations in both institutions.

8.5 Tax Treatment

The taxation of financial instruments has implications on the demand of financial assets

and the development of the financial markets. The central bank and the Ministry of

Finance should co-ordinate properly so that the tax policies introduced should be

compatible with financial market developments. In Namibia, the interest income accrued

from treasury bills and bonds issued by the Government to an individual other a

company is exempted from paying tax. The same tax treatment applies to external

companies not carrying on business in Namibia. In addition, there is no capital gain tax

in Namibia. However, should a taxpayer’s activity of making capital gains be of such a

nature that it can be construed as trading, it may be taxable. Determination of the

taxability of capital gains should therefore be referred to Inland Revenue. There are

some similarities of Namibia tax treatment to advanced emerging market economies. In

Slovenia, individuals are also exempted from paying taxes on Government debt

securities. In Poland, however, income from the sale securities other than bonds is

taxable.

Despite the fact that at different market forums, the taxation of financial assets has not a

pressing topic, the authorities, however, has to consistently review its tax policy on

government debt securities. For an example, MoF and the Bank of Namibia should be

cognizant of the fact that various tax incentives might be used specially to target certain

financial assets to stimulate their developments. Some countries have used them to


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unlock demand for long-term bonds. Some countries have specifically made bond

transactions subject to lower taxation relative to other sources of financing and

consequently, companies issue bonds to finance their investments. These tax incentives

have to be employed diligently as they can also a source of problems to the

development of the market. If not employed properly, it could result in distortion of prices

which in turn may lead to inefficient allocation of resources.

8.6 Broadening Investor Base

According to Biekpe (2004), the development of sustainable and independent bond

market requires among other things, an adequate institutional investor base. The study

by the IMF (2004) has reaffirmed that the significant contribution the local pension funds

has on the development of local securities markets. The way how to broaden the

investor base has been a challenge for countries, especially the developing countries.

The strategy in many countries focuses on promoting institutional investors and

attracting foreign investors to the Government bond market (Mohanty 2002). Namibia

financial system is one of the most sophisticated on the African continent, dominated by

commercial banks and, insurance and pension funds. In fact, Namibia’s ratio of pension

assets to GDP in 2001 was estimated at 60 percent and if include life insurance, short-

term insurance, unit trusts and other funds it amounts to 80 percent of GDP, one of the

highest ratio in the world. As pointed out early, the challenge facing Namibia is how

entice institutional investors to invest their funds in the local capital market, instead

somewhere else in the CMA.

With regards to foreign participants, their participation has been sporadic. This

development was attributed to lack of credit rating and limited supply of debt securities.

After, Namibia obtained sovereign credit rating, the interest is picking at a fast pace. The

picking up in the interest in Namibian assets by foreign investors is reflected in the over

subscription for the syndicated loan facility contracted by the Bank of Namibia during

2006. This appetite also fueled by the launch of the first international Namibia Dollar

bond by the European Investment Bank (EIB) during March 2006.

What Namibia needs to do to cater for this new demand is to supply more bonds, either

corporate or/and sovereign. For the development of the bond market and take


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advantage of foreign interest in Namibia assets, the Government may come in and see

whether can issue more bonds, even though not for financing the fiscal deficits. China,

Hong Kong and Singapore are number of countries are issuing bonds regular even

though is not financial fiscal deficits. This contributed tremendously to the development

of the respective local bond markets. A number of Namibian public and private sector

and commercial banks are geared to issue new corporate bonds from 2007 onwards and

this expected to take off burden on the Government as the largest issuer of fixed income

instruments. There are mega projects in the pipeline and these entities indicated that

financing will be through the issue of bonds. In addition, the Government may also

introduce inflation linked bonds (ILBs). These instruments are also renowned for their

capability to diversify funding sources as it increases the investors’ base. The ILBs are

also expected to suit the portfolio of some Namibian investors whose attitude is to buy-

and-hold since they provide cover for inflation uncertainty

8.7 Needs for Reforms – Sequencing

The sequencing of different steps of reforms in developing the Government debt

securities market is not based on universal principal of application, but chiefly on each

country specific circumstances. Before deciding on the different market aspects to be

introduced, the appropriate sequencing initiatives should be driven by the country’s size

of the economy, competition, sophistication of the market and investors, investor base

and the development of the financial sector (IMF 2001). According to the IMF, in order to

establish a successful and efficient Government debt securities market some basic

principles should be present. These prerequisites include a credible and stable

Government, sound fiscal and monetary policies, effective regulatory, legal and tax

infrastructures, a smooth and clear settlement arrangement and a liberalized financial

system.

Namibia has most of the basic prerequisite necessary for the development of successful

of Government securities market. For instance, there is a stable Government, sound

fiscal and monetary policy (CMA), efficient regulatory, legal infrastructures, liberalized

financial sector and a sound settlement system. The country is also able to issue long

dated instruments, with a longest maturity of around 20 years. The key challenges facing


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the Namibian Government domestic debt securities market among others; are the

development of deep and liquidity secondary market, creating sound investment

opportunities to stem out capital outflows and direct these funds into the development of

local markets, and supply of enough debt papers to the market. The sequencing of

reforms should focus on those afore mentioned challenges.

The case of Namibia is unique and requires a different approach. The market making

has been approved by the Government and its implementation is scheduled for 2008/09

fiscal year. The market making together with other measures such the buy back

operation planned during 2007 is expected to improve liquidity in the secondary market.

Given the strong appetite from both local and international investors, the current supply

levels have to increase to help the curb the capital outflows which are leaving the

country to seek investment opportunities somewhere else. As a result of this unique

situation, all the key three challenges, namely the supply constraint, lack of liquidity and

measures to reduce capital outflows have to be introduced concurrently as introducing

one at a time might not improve the situation. For an example, by tackling the supply

constraint alone will not stop capital outflows as investors will still opt to take their funds

to a more developed and liquid capital market in South Africa. Alternatively, the solution

to stem out capital outflows could not be realized if not tackled together with improving

the supply of debt papers in the market and provide investment opportunities for these

excess funds. Simultaneously as well, the development of deep and liquid market would

not be possible without supplying the market with enough papers sufficient to generate

trading in the secondary market and solving the supply constraint. Consequently, all

these three challenges are intertwined and have to be engaged together.


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9. CONCLUSION

The Government debt securities market for the Government of Namibia has evolved in

different metamorphoses since independence. At 1990, it was a country where there

were no bond and equity markets present and the source of financing was chiefly the

commercial banks’ funds. After the introduction of various measures and policies to

develop the financial system, various institutions, such the Namibia Stock Exchange,

stock brokers, unit trusts, emerged. Nowadays, both the Government and the private

sector are able finance their borrowing requirements from the domestic bond and equity

markets.

Although Namibia has one of the most sophisticated and developed financial systems in

Africa, the country is faced with some policy challenges to develop a vibrant and sound

Government domestic debt market. These key challenges among other include the

development of deep and liquidity secondary market, creating sound investment

opportunities to stem out capital outflows and direct these funds into the development of

local markets, and supply of enough debt papers to the market. This technical paper

proposes various recommendations that could assist in developing the financial market

in Namibia. The country has most of the basic prerequisites needed for the development

of an efficient and robust Government domestic debt market. For instance, it has a

credible and stable Government, stable macroeconomic environment, sound fiscal and

monetary policies, well established contractual savings, liberalized financial system,

investment grade, among others.

As a response to the capital outflows, the Government introduced the domestic

investment requirements on pension finds and insurance companies, which is set at 35

percent of their assets. This is not a recommended good policy, although many countries

are using it in practice according to IMF (2002). The IMF (2006) argued that capital

controls have large costs on the economies of the countries that introduced these

measures. These costs are reflected in terms of efficiency losses, less market discipline,

reduced capital flows and hampering the modernization of the financial institutions. The

authorities in Namibia are familiar with these shortcomings of captive funding. Thus, the

rationale for putting in place measures to develop the financial markets. The authorities

in Namibia should continue monitoring the implications caused by captive funding and

determine the appropriate actions to be taken. Lifting captive funding without creating


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competitive instruments in the financial market could exacerbate the capital outflows to

South Africa. In turn this might have negative implications on the financial stability for the

whole economy as official reserves are expected to decline. Many countries in Western

Europe and some English speaking countries including South Africa introduced captive

funding in the early stages of financial market developments. Although, this created

captive demand for domestic Government bonds it was found to be a hindrance to the

market development as the debt issues were not based on market conditions. As a

result, most of the countries that introduced captive funding have done away with it in

order to develop a sound and vibrant Government debt securities market.

Despite the arguments that the benefits in domestic bond market for small countries like

Namibia may not be realized, there are innovative ways introduced successfully in other

small countries such as Slovenia, Taiwan and contributed to the development of the

market in these countries (Mohanty 2002).This has spurred Namibia on to go forward

and develop its market, especially given the well established pension funds and

insurance companies which gives long term demand for debt papers. Namibia is

therefore privileged to have these comparative advantages of contractual savings and

should take advantages of them.

The experience from the case studies of Slovenia, Poland and South Africa benefited a

lot the case of Namibia. All the three countries have so many similarities to Namibia. For

an example, all the three countries introduced captive funding during the early stages of

the developments of their respective Government debt securities markets. In addition,

they have Primary Dealer System to improve tradability of these papers, debt office

located within MoF and most importantly, they are committed to fund the Government

budgetary requirements from the domestic markets in order to develop the domestic

markets.

Although the local bond market has grown significantly compared to the level at

independence, a lot is still left to be desired in terms of improving liquidity, transparency,

efficient market trading and infrastructure, number and size of bonds in the local market.


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Issues for Further Research

This technical paper among others has highlighted the current practices in the Namibia

Government domestic debt market, addressed the current practices in domestic

Government debt markets in Namibia, the needs of this market, the impediments to the

developments of the market. It also proposed measures of how these impediments

might be removed. During the discussion however, some of the issues were covered,

but not sufficiently, and thus, the paper generated some areas which need to be

explored further. These areas are such as the construction of Namibia’s own yield curve

for benchmarking local debt papers and the remedial measures for the supply constraint.

A study is also need to be undertaken to review the current commission and fees

charged by the stock brokers, stock exchange, settlement banks, etc, and the extent that

these charges are hindering secondary market trading.


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10. REFERENCES

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Bank of Namibia (2004). 6th Annual Symposium Publication, “The Challenges for the

Development of Namibian Bonds Market: Lesson from the Smaller Economies”,

Windhoek, Namibia.

Bank of Namibia (2005). “Marketing Making for Government Debt Securities”, Windhoek,

Namibia.

Biepke, N. (2004). “General Policy Environment for the Development of Bond Market: Lesson for Other Developing Countries”. University of Stellenbosch, South Africa. Biepke, N. (2003). “African Capital Markets. Legal and Governance Framework”, Capital Markets Training Manual for UNECA. Bond Exchange of South Africa (2006). Press Release: “Inward Listings – Gateway to Raising Capital in Africa”, Johannesburg, South Africa. Broker, G. (1993). “Government Securities and Debt Management in the 1990s”, OECD, Paris. Christensen, J. (2004). “Domestic Debt markets in Sub-Saharan Africa”, IMF, Washington, Fabella, R and Madhur S (2003). “Bond Market Development in East Asia – Issues and Challenges”, Asian Development Bank. Harun, D. (2003). “The Development of Debt markets in Malaysia”, BIS Paper no 11, Basel, Switzerland. International Finance Corporation (2000). Papers presented at South Asian Debt Market Symposium in Sri Lanka in October 1999. IJG, (2004). “Breakfast Briefing Note on Namibian Treasury Bill Arbitrage”, Windhoek, Namibia. IMF, (2006). “Financial Sector Assessment Program on Namibia”, Windhoek, Namibia. IMF, World Bank (2002). “Guidelines for Public Debt Management”, Washington. IMF (2000). “Report on Exchange Rate Arrangement and Exchange Rate Restrictions”, Washington. IMF and World Bank (2001). “Developing Government Bond Markets”, Washington.


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