Chart of the Week
The Namibian secondary bond market has grown substantially over the last few years, as the government increased overall issuances, and the higher domestic asset requirement (Regulation 13) pushed investment firms to increase their allocations to Namibian assets.Liquidity measures the ease with which investors can buy and sell bonds in the secondary market, and the ratio of the volumes traded to the total nominal outstanding gives an indication of how liquid a market is.
Historically, secondary market activity in Namibia has been limited, and this is driven by several factors, says Cirrus Capital fixed income analyst Panduleni Shaduka.
Firstly, the bond space has historically been dominated by a few large institutional investors, who adopted a buy-and-hold strategy for Namibian financial assets. Second, the amount of debt outstanding and the government’s issuance was limited. In 2015, the total nominal and inflation-linked bonds outstanding totalled N$15.3 billion, marking a limited universe of investable assets.
Further, the vast majority of secondary trading is done over-the-counter (OTC). This results in a lack of price transparency and a lack of accuracy on volumes and values traded in the entire market. The nature of the market was not conducive to secondary market trading.
In 2019, the total debt stock (IRS and ILBs) increased to N$38.1 billion, and the overall volume traded in the secondary market increased by 287.0% y/y. This was a function of the increase in the domestic asset requirement to 45.0% and increased issuances.
From 2020 to 2022, debt issuances grew due to the first Eurobond redemption, a wider budget deficit and Air Namibia’s closure. This period saw the debt stock grow by over N$20.0 billion to N$68.0 billion by the end of CY ’22.
The increased issuance addressed a key issue: if I sell now, will I be able to re-enter the market?
From 2017 to 2023, secondary market trading in absolute terms increased by 48.7% per year, with a record N$3.1 billion traded in 20’22. 2019 also marked the highest liquidity ratio in recent years (’03 liquidity ratio of 11.0%) at 6.6%, followed by 2020 and 2022 at 5.5% and 4.6%, respectively.
In addition to increased issuances, the improved liquidity in the market has been marked by a more diverse pool of institutional investors in the market, both local and offshore.
In 2023, the overall value traded was N$2.7 billion, the second highest on record, following the N$3.1 billion traded in 2022.
Thus far in 2024, a total of N$1.8 billion has crossed the market, which is the highest on record at this point in the year.
As the Namibian Stock Exchange (NSX) aims to formalise the market with the introduction of its bond trading system in a bid for more transparency and accurate pricing, the slow adoption of the system may see secondary flows slow in the short run, but the system is likely to increase appetite for bond trading in Namibia and encourage foreign players in our market in the long run.