The Ministry of Finance has entered into a N$6 billion bailout agreement with three commercial banks in an unorthodox arrangement that will strengthen the banks’ control of the debt market and gain an extra yearly interest income of over N$140 million for the next five years.
The exclusive deal has been labeled as one that will further strengthen the commercial banks’ already existing hegemony over the country’s financial sector, putting other interested participants at a disadvantage.
The ministry’s executive director, Michael Humavindu, in confirming the transaction, assured that the ministry’s actions were above board.
He also confirmed that the ministry had to improvise because of a shortfall in the actual revenue collected as opposed to what was initially forecasted. This was also made worse by the recession being experienced by the global diamond industry.
“However, instead of foreign borrowing, we saw an opportunity in the domestic market, that there is enough liquidity in local markets to ameliorate both the anticipated revenue shortfall and the Eurobond shortfall,” he said.
An announcement is imminent, despite opposition in some quarters.
The government is on the clock to redeem its US$750 million (approximately N$13 billion) Eurobond debt obligation due at the end of this month.
However, questions are still being asked about the sincerity of borrowing directly from local commercial banks to fund the deficit needed to fully pay off the N$13 billion bond.
Early this year, the government announced that fully repaying the loan would reduce the amount of money it spends on debt servicing, in turn boosting its internal spending. The government currently spends about N$13 billion yearly in debt servicing and interest payments.
The opposition stems from the fact that the government is deviating from conventional methods of raising funds through issuing bonds and treasury bills on the open market. These processes are usually facilitated by the Bank of Namibia, as the government’s banker and are seen to be transparent.
However, this time around, a request for quotations was sent to the local commercial banks, and closed-door negotiations were held between the government and three commercial banks with the assistance of Bank of Namibia’s financial markets team.
Humavindu, however, insists that the ministry did not handpick the individual banks but only dealt with those who responded to its call for quotations.
The exclusive nature of the transaction has been criticised by members of the financial service sector, who called it “unusual”.
Private placement, as the deal is referred to in the financial sector, seldom occurs between government and commercial banks. Those in the know said it might be the first time Namibia’s Treasury entered into this kind of agreement with commercial banks. The last time government concluded a similar deal was in 2016, when the Government Institutions Pension Fund (GIPF) rescued the government from its liquidity crisis.
At least two financial analysts cautioned that the move will distort and devalue the government’s bond market.
Humavindu insisted that this view was incorrect and that the government has the discretion to uitilise various debt instruments, which will help it diversify and mitigate risk.
Others are also of the view that the deal will put the government directly at the mercy of the banks, who stand to make massive profits from the transaction.
Other critics point out that the banks classify the deal as zero risk weighted, with guaranteed major profits.
However, this deal may come at a cost to the private sector and local economy. This means that as the banks lend money to government for the purpose of repaying the Eurobond, they may have little left to finance major private sector loans and transactions locally.
Treasury officials briefed on the matter told The Issue that the finance ministry is justifying its decision, saying the arrangement offers government more flexibility not offered by going into the bond market.
They said that the arrangement allows government to be in charge of the debt servicing and repayment structure of the arrangement. The agreement will allegedly involve two repayment methods: with the ‘Bullet’, Treasury will repay the loan’s capital amount and its interest in one go. The second method allows for a grace period before the commencement of the loan repayment.
This is in contrast to the bond market, where government will be required to pay interest coupons every six months.
Finance minister Ericah Shafudah was last month quoted in the media, announcing that they were in talks with three banks to find a solution to cover a N$4.3 billion shortfall. She was quoted by The Namibian, saying that the government already had N$8.6 billion of the N$13 billion in its reserves.
It now appears as though the whole has grown by an additional N$2 billion.
