Finance Minister, Calle Schlettwein, has warned that the strengthening US dollar could lead to a further hike in fuel prices and increased economic instability.
The rand and the Namibia dollar have been on a losing streak in recent days, registering a six-month low.
Last week, the Ministry of Mines and Energy, announced that fuel prices would be increased by 60 cents per litre, citing in part pricing under-recoveries by importers.
A further increase in the price of fuel will likely have a domino effect in the economy as it leads to high transport costs which in turn lead to an increase in most prices of food.
Schlettwein also fears that a stronger dollar will make the importation of essential goods and services more expensive.
“Basically, there are two effects,” Schlettwein said. “On the positive side, if the dollars gets stronger, then our exports will benefit. They will get more income for the same volume, which is paid in US dollars. On the negative side, imports will become more expensive. Fuel is one of the examples that will hit the consumer, and consumables that are in dollars will be affected.
“Currency volatility is bad whether it goes up or down because it increases instability in the economy and that is not what you want.
“Unfortunately, being a country that imports a lot and produces little, the imports side will be hit. But to a certain extent we will be shielded from the impact because we are in the Common Market Area and 70 percent of our consumables come from South Africa and these, apart from fuel, are shielded. What will become more expensive are larger items like vehicles.”
Commenting on the effect of a stronger US dollar on Eurobond servicing, the finance minister said the coupon repayment on the bonds was hedged.
The government first issued a debut US$500 million, 10-year Eurobond in October 2011, which was followed by a second bond worth US$750 million in October 2015.
“We have two Eurobonds. We have taken part of the proceeds of the last Eurobond. We did not convert that into Namibia dollars, so that is invested to pay for the first Eurobond, so that does not need to be hedged because it was never converted. But we hedged the coupon payments, so it is hedged on both bonds.
“The second point is that we have a natural hedge in place. Most of our exports goods are in US dollars, so that mitigates that risk. But we said for cash flow purposes, we should hedge the repayments so that there is no volatility, and that we are not caught by surprise.”
Schlettwein ruled out a Eurobond listing, but said there was a possibility of listing a bond on the Johannesburg Stock Exchange in future when market conditions improve.
“At the moment, we do not want to borrow too much. I think our borrowing is relatively high. We still have good opportunities in the domestic market. We do not want to deprive our domestic market of that opportunity,” he said.
“For now, we want to limit our borrowing in the domestic market and South African markets so that we do not to expose ourselves to unnecessary foreign exchange risk, but once we have gained some fiscal space, the open market may become an option again.”
Responding to a question on whether the domestic market has confidence in the government’s ability to repay loans given its tight financial situation, Schlettwein said the trust in government debt instruments was growing.
“At the moment, the liquidity situation is stable. The domestic market has regained some confidence and we are okay, but the confidence is not very deep, but we should not take that as being out of the woods.”
According to the 2018/ 2019 budget speech, which Schlettwein delivered in March, the total debt stock for 2017/18 financial year was estimated at N$74.5 billion, equivalent to 43.3 percent of GDP, relative to the national threshold of 35 percent, and an increase from 42.6 percent in the 2016/17 financial year.
Debt servicing costs stood at 8.8 percent of revenue, compared to 8.6 percent in the 2016/17 financial year and the threshold of 10 percent of revenue.