2016-07-12Staff Report 2 Windhoek A leading Namibian stock brokerage has revised the country’s gross domestic product (GDP) growth rate for 2016 downwards from 4.8 percent to 4.1 percent, and expects inflation to remain unchanged at 6.5 percent. In its Quarterly Investment Strategy for the third quarter of 2016, Simonis Storm Securities (SSS) said they also expect the Bank of Namibia (BoN) to follow South Africa (SA) more closely with regard to monetary policy due to a continued murky economic outlook. “The Bank of Namibia’s monetary policy is to achieve price stability and to maintain the one-to-one currency peg regime with the South African Rand (ZAR). Because of the currency peg regime, Namibia’s monetary policy is technically ineffective and BoN is thus inclined to follow SA’s monetary policy. This leaves the Namibian financial system vulnerable to political and macroeconomic developments in SA, such as the fluctuations of the ZAR and its impact on price stability. Since Namibia is highly integrated into the SA economy, Namibia’s inflation is driven by SA to a large extent, because a large percent of goods consumed in Namibia comes from SA. This has a negative effect on real returns, particularly for longer-term bonds,” reads the SSS report. SSS noted that the impact of financial repression is starting to impact Namibia. For instance, the 10-year government bond yield at the end of May 2016 stood at 10.8 percent, while inflation for the corresponding period came through at 6.7 percent. “This translates into a real return of 4.2 percent compared to the more robust real return of 6.2 percent in May 2015 and 6.0 percent during April 2015,” the SSS pointed out. SSS elaborated that in SA a recession is “probably inevitable” due to challenges of perpetual mismanagement in public office, unstable utilities, corruption, a shrinking mining sector and tight disposable incomes of consumers. “The World Bank and IMF expectation for GDP in SA is now 0.6 percent for 2016. Economists and fund managers believe that the credit downgrade that was avoided is only postponed and some now expect it to eventually happen by December this year,” reads the report. SSS also questioned what effect events in South Africa will have on Namibia. “Well, it was no surprise that the Namibian Stock Exchange (NSX) was stable during the outcome of the Brexit referendum. If only our local market was deeper and more liquid, but as they say be careful what you wish for. As we well know, liquidity creates downside risk. However, on the other hand, any market without liquidity may also be deemed artificial,” states the SSS report. SSS also cautioned that Namibia has a number of problems of its own as a country that seems to plan very poorly. This, they say, is evidenced by the water crisis, a possible bubble in the construction and real estate market, a disappearing Angolan consumer, a precarious foreign reserves position and a high reliance on government spending and mining. “Incidentally, these are the main areas where we believe growth will cushion us from a full-blown recession. Government has communicated that they will consolidate, meaning that fiscal policy may be the only salvation out of an economic contraction, and at the same time certain local mines, particularly gold and uranium mines, will provide the much needed support to keep the economy afloat.” Meanwhile, the World Bank and the International Monetary Fund (IMF) have revised global GDP growth downwards with the IMF now expecting 3.2 percent and the World Bank expecting 2.4 percent. India is now registering the highest economic growth rate amongst major economies, with 7.6 percent expected for 2016. China has been slowing from a high recorded at 14.2 percent during the quarter 4 of 2007 to the current expectation of 6.7 percent for 2016. “Developed market economies are struggling to consistently record growth rates of above 2.0 percent. It would seem that the economic growth that has resulted from cheap money over the last 7 years is no longer, but at the same time stock markets in the United States and closer to home in SA are close to all-time highs and refuse to adjust. This is all happening in a time when central banks are refusing to accept that they may be starting to lose the fight against deflation,” the SSS report continued. “Today, the low interest rate environment is not only driven by macroeconomic factors, but foremost by policy action that helps governments deal with the high sovereign debt burden globally. This is widely known as financial repression. A situation where interest rates are artificially kept low for long periods of time, inadvertently penalising investors and rewarding borrowers,” said SSS. “Without a doubt, the cost of financial repression has been evident in developed economies, where interest rates are maintained near zero, and in some cases at negative yields. Sure enough, we are also starting to witness financial repression rearing its head in emerging markets with southern Africa being no exception. This could be largely ascribed to an acceleration in inflation relative to interest rates, which ultimately erodes real returns. The main question that every investor should be asking is, ‘How long will it be before investors start demanding higher returns on their investments?’” the SSS report stated. 2016-07-12Staff Report 2
