1. Namibian Government Bond Market Background Strategies Outcomes of strategies Government bond market Measures taken Summary

2. Background Namibia in CMA (RSA, Lesotho & Swaziland) – Free flow of funds – Tendency of funds flowing to more sophisticated RSA market (contractual savings) – Banks dealing with counterparts in RSA Poorly developed money and capital markets, poor infrastructure, lack of market activity Challenge to develop local financial markets

3. Strategies to develop local financial markets Fund budget deficit locally – Raise funds domestically – Issue securities to develop markets by forming benchmark issues Liquid asset requirement for banks – Prudential requirements – Encourage demand for local securities Tax incentives, exemptions – Individuals – Non-residents Local investment requirements – 35% of assets to be invested locally

4. Outcomes of strategies Establishment of debt and equity markets Namibian Stock Exchange Stock broking firms Asset Managers Unit Trusts Skills and capacity development Interbank transactions More issues by parastatals

5. Government Bond Markets Bonds issued to fund deficit and develop market First issue, 1992 – Original maturity of less than 6 years – Number of bonds increased to 13 in 1998 1998 trading was still sporadic and market highly fragmented and illiquid Strategy bond consolidation – Buy back and issue new bonds

6. Bond Consolidation (Objectives) Enhance liquidity by issuing few but large issues Reduce cost of borrowing through reduced liquidity premiums Reduce fragmentation and create local benchmark issues reasonably spread across the yield curve Meet market needs by providing alternatives to investors and government as a borrower Benchmark against RSA bonds for price referencing

7. Bond Consolidation (Results) 13 Bonds consolidated into 3 – GC02, 12%, due 2002, 4yrs – GC05, 12%, due 2005, 7 yrs – GC10, 12%, due 2010, 12 yrs All these bonds were listed on the Namibian Stock Exchange (NSX)

8. Current Situation Amount outstanding in bonds N$3.2 bln – Nearly 50% of Government domestic debt securities Most of the trading on NSX and OTC Bonds in issue – GC05-12%, GC07-12.5%, GC10-12%, GC15-13% Challenges – Low activity and liquidity – Lack of market information – Relatively low demand for longer dated securities

9. Reasons for current state of affairs Buy and hold attitude Passive management of bond portfolios – Lack of skills – Remote offices Limited number of alternative issuers Unison view in the market Relatively low amount of debt outstanding Absence of sovereign credit rating

10. Measures Taken (secondary auctions) Bring together willing buyers and sellers Objectives – Establish regular market prices – Create degree of liquidity – Stimulate trading – Facilitate introduction of market makers Success limited – Cyclical market – Unison view

11. Measures taken (switch auctions) Switch from source to destination bonds Objectives – Smooth redemption, alleviate cash flow – Reduce investor rollover risk – Increase benchmark bonds – Lengthen maturity structure Results – Successful, GC02 redemption and increased benchmark bonds

12. Other Measures Book Entry System Frequent primary issues Transparency and Infor – Brochures – Issue calendars – Full auction results Debt Mgt Strategies

13. Summary Initiatives take resulted in some market development – various instruments across the yield curve and ability to fund deficit Competitive and well functioning primary market Challenges – Liquidity – Lack of market information – Relatively low demand at the longer end of yield curve