Namibian Asset Requirement Costs and Benefits

Two separate issues:

• Namibian Asset Requirement

• What type of Stock Exchange does Namibia need?

Reasons for Namibian Asset Requirement

• Prudential requirements• To support the development of the NSX• To promote economic growth and

employment

Prudential Requirements?

• Namibia is part of SACU and CMA• Namibia’s political and economic risks are

tightly linked to those of RSA• Stocks of dual listed RSA companies are not

less risky because they are booked through the NSX

• Prudential requirements should not distinguish between Namibian and other CMA assets, but instead be based on asset class compositions and international ratings

Did it help to develop the NSX?

• A place where Namibian businesses can get money at reasonable costs?

• A place where investors earn on average a return that is higher than the return of a bank deposit?

• A place where trade reflects information?• A place that contributes through effective

financial intermediation to more growth and employment?

The NSX does not work for local companies in current set-up!

• Number of de-listings outweigh new listings• There is hardly any trade in local shares• The local share index has de-linked from the

overall index• No success stories! Those companies that still

operate profitably could have raised the money elsewhere (FNB, M&Z)

• Many investors in local shares have burned their fingers

Economic Growth and Employment?

• Keeping Namibian money in Namibia to foster growth and create employment through lower interest rates?

• Keeping Namibian money in Namibia to foster growth and create employment through lower cost of equity finance?

12%

14%

16%

18%

20%

22%

24%

26%

Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01

South African Average Prime Rate

Namibian Average Prime rate

Cost of equity has been too low to attract voluntary investment

Annual compound returns (initial listing until 31 Dec. 2001) Ln( (Price31Dec2001+Dividends) / IPO Price)Years

-29.6%

4.7%

14.6%

-1.3%

3.7%

-32.6%

-25.7%

6.1%

-15.8%

17.0%

-5.3%

-34.9%

-29.3%

API CIC FNK GDR MAZ NAS NBS NCT NHT NMC NMF PNB SRM

Summary

• Namibian Asset Requirement is more a risk than a prudential requirement

• NSX does not perform its economic role (for local companies)

• There is hardly any economic value in trading dual listed shares

• Namibian Asset Requirement has failed to boost economic growth

What are the economic costs?

• The question is not whether a restriction in asset choice is bad for investors

• The question is: How bad is it?• The government or arbitrary regulations

cannot make better investment decisions in the long run than professional asset managers

0

2

4

6

8

10

12

14

16

18

t1 t2 t3 t4 t5 t6 t7

South African Assets

Namibia Assets

Return on Namibian bond

Return on RSA bond

1998 15% 10%

1999 15% 10%

2000 15% 10%

2001 15% 10%

2002 15% 10%

Average 15% 10%

Comparing Asset Classes

Return on Namibian bond

Return on RSA bond

Return on stock x

1998 15% 10% 0%

1999 15% 10% 5%

2000 15% 10% 25%

2001 15% 10% 30%

2002 15% 10% 5%

Average 15% 10% 13%

Annual return on Namibian bond

Annual return on RSA bond

Return on stock x

1998 15% 10%

1999 15% 10%

2000 15% 25%

2001 15% 30%

2002 15% 10%

15% 17%

0

2

4

6

8

10

12

t1 t2 t3 t4 t5

Index A Index B

0

2

4

6

8

10

12

t1 t2 t3 t4 t5

Stock A1 Stock A2

0

2

4

6

8

10

12

t1 t2 t3 t4 t5

Stock B1 Stock B2Stock B3 Stock B4Stock B5 Stock B6

Estimation Procedures

Average Performance of Namibian Asset Managers

minus

Average Performance of South African Asset Managers

Namibian Portfolio Performance of Namibian asset managers

minus

Overall Portfolio Performance of Namibian asset managers

Returns of Namibian assets of Namibian asset managers

minus

Returns of RSA assets of RSA asset managers

GIPF’s returns on Namibian assets

minus

GIPF’s returns on South African assets

Asset Classes: Estimate not based on 35% of the portfolio but on the share that is made up of primary listings, cash held in Namibia and Namibian government bonds.

0%

5%

10%

15%

20%

25%

30%

35%

1997 1998 1999 2000 2001

Annual Return Namibia Bonds Annual Return SA Bonds

Annual Return Cash Namibia Annual Return Cash SA

1.32%

0.50%

1.75%

3.59%

-1.21%

1.44% 1.36%1.24%

-2%

-1%

0%

1%

2%

3%

4%

1997 1998 1999 2000 2001

Returns on Cash: SA minus Namibia Returns on Bonds: SA minus Namibia

Estimated costs in N$million for Namibian pension funds between 1997 and 2001 through Namibian asset requirement based on 35% of pension fund assets

-235.67

-989.51

-545.36-549.77-645.41

GIPF Estimate

Average Performanceof Namibian AssetManagers minus

Average Performanceof South AfricanAsset Managers

Namibian PortfolioPerformance minus

Overall PortfolioPerformance

Returns of Namibianassets of Namibianasset managers

minus Returns of RSAassets of RSA asset

managersAsset ClassComparison

Estimated annual costs through Namibian asset requirement in N$million for Namibian contractual savings (35% of 22 billion) based on average returns for 1997 to 2001

-96.59

-360.12

-159.10-178.01

-329.79

GIPF Estimate

Average Performanceof Namibian AssetManagers minus

Average Performanceof South AfricanAsset Managers

Namibian PortfolioPerformance minus

Overall PortfolioPerformance

Returns of Namibianassets of Namibianasset managers

minus Returns of RSAassets of RSA asset

managersAsset ClassComparison

Conclusion

• Access to a stock exchange is and will remain important for the economic development of Namibia

• NSX does currently not fulfil its economic role

• The Namibian Asset requirement brings hardly any economic benefits for Namibia, and that at a very high price

Let’s try something else!