Rough diamond that’s ready to sparkle

The Namibian debt capital market:

01 December 2020 | Opinion

Windhoek • Ray Auala Jr

The benefits of deep capital markets in emerging economies is known, and a fundamental pillar of this is the bond market.
Although researchers may debate about the impact debt capital markets have on economic growth in developing nations, they cannot dispute that a positive link does exist; a welcome reality when one considers the strides the Namibian bond market has made in recent years in achieving the long-term objective of becoming a world-class capital market.
These are a few notable achievements:
1. The local debt market has 29 corporate and SOE bonds, including one green bond
2. The Government bond market is strong and growing, with 20 bonds (15 fixed-rated and five inflation-linked bonds) with maturities ranging from 11 months to 30 years.
3. Government has exhibited continued commitment to policy deepening by issuing debt on a regular and predictable basis, while employing best efforts to stick to borrowing plan.
4. Despite being a predominately OTC market, the annual secondary market trades recorded by the Namibian Stock Exchange increased significantly from N$0.1bn to N$2.5bn+ since 2015.
It is clear that the groundwork has been laid in unearthing and developing our debt capital market. And just like a diamond, our bond market has required time and persistent stakeholder pressure and collaboration to bring it to the level that it is today.

How can we polish our bond market so that it can be displayed on the global stage?
There are myriad steps and actions one could take to unlock the value in this gem. However, the greatest positive impact would most likely be achieved if efforts were focused towards value-add of the individual market stakeholders in the following three aspects, which would in turn multiply exponentially when carried out collectively through proactive participation; courage to lead; and empowering individuals.

Proactive participation
According to the RMB “Where to Invest in Africa 2020” research report, illiquid markets are one of the biggest challenges in Namibia’s rankings.
Market liquidity speaks to the ease with which local bonds are purchased and sold without meaningful changes to the value of those assets. We believe that at the heart of this is the pricing dynamics and methodology of local paper, thus emphasising the importance for the individual market players to proactively and regularly carry out intrinsic bond valuations.
These should include relative valuation techniques. When opportunity costs are also factored in, true mispricing opportunities will rise to the surface. Once these are identified, the most important step would be for participants to execute the trade(s) that would unlock value. Such proactivity is essential to correcting any market inefficiencies, enabling real-time price discovery.
This approach played out quite well over the last four months in the short end of the local government curve. The previously illiquid 1- to 2-year region of the curve has seen strong price discovery as a direct result of monthly switch auctions by the central bank since August and the elevated secondary market activity for these bonds (N$598m traded year-to-date as at the end of November 2020 – 27% of total secondary market trades for the calendar year).
Reliable price discovery underpins the formation of accurate and dynamic benchmark curves that form the basis of pricing other assets and potential derivative instruments that are purely Namibian.

Courage to lead
With this in mind, it is understandable why liquidity is one of the cornerstones of any developed capital market and is essential to attracting local and offshore participants to the stage.
But it has evolved into a kind of “chicken and egg” scenario in our local space where potential market players will only participate if there are several players already participating. Yet once one fully understands the exponential benefit to the greater market of each of us making that individual “first” move, it can’t help but call us to action – it is true that every path started with a single footprint.
The courage to lead is not just the duty of the market-making trading desks, but also issuers, “buy and hold” investors and the “active” investors.
Whether it is a bank issuing the first Namibian social bond, or a trading desk’s commitment to showing two-way pricing on those social bonds, all stakeholders have a complementary role in the development of our Namibian bond market. As the popular adage goes; “liquidity begets liquidity”.

Empowering individuals
Individually agreeing to the collective objective of creating a world-class local capital market is the first step. However, it is vital to embrace the often-forgotten reality that the “market” consists of individuals trying to navigate their way along the value chain of the Namibian economy.
We need to realize that behind every Bloomberg chat or GC26 brokers note, are people trying to understand their purpose and achieve their own and their corporate aspirations. Thus, the next and most important step is creating the environment that enables individuals to discover and enhance their own talents while determining the best way to align these with the collective goal. This puts the onus on leadership structures of private and public sector organizations, with regulators and policymakers moving to intentionally set up personal development programmes for employees to grow as skilled, independent contributors to the economy in this sector.
Resources can be dedicated towards bursaries; self-realization and development programmes; mentorships programmes; and regional and international secondment opportunities.
Empowerment in this form fuels diversity of thought, which is the bedrock of innovation. And if we can agree that the whole is greater than the sum of its parts in the context of capital markets, and if every individual is given the platform to continuously develop or is given the avenue to become the best versions of themselves, the potential of the collective local market is unimaginable.
This is especially encouraging when one considers that Namibia is the leading country in Africa with respect to the capacity of local investors according to the Absa Africa Financial Markets Index 2020 research report.
Focusing on the value of the individual as a necessity to unlock the true potential of the collective, is how we will best leverage off the solid foundation that has already been laid. Now more than ever the responsibility sits with us to make our gem of a bond market shine.
*Ray Auala Jr works for RMB Trading and Structuring

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