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The challenge of a growing Stock Exchange

Interview - September 27, 2015

Tiaan Bazuin, CEO of the Namibian Stock Exchange, sits down with Globus Vision to outline Namibia’s current economic dynamics, and the challenges of the Stock Exchange. 


Where will you be placing your focus regarding policies and specific initiatives moving forward?

Even prior to the election we already had something called the Namibian Financial Sector Strategy where the NSX has a very specific role in trying to deepen and diversify the market.

So in terms of diversification I think we've actually done quite a lot of good things by bringing in a wider selection of investments in pension funds, and bringing in things like exchange traded funds, specifically on the commodities that we have now because that wasn't an investable instrument prior to us bringing that to market.

Our biggest problem has been bringing more local companies to market, and a pension fund regulations really require our pension funds to invest locally.

So if you've got a very successful business - as we have many in Namibia- that are well established, that have a national presence, some of them even a regional presence then they don't necessarily have to raise money, that's usually the first reason companies come to list, so now it becomes a diversification issue.

In South Africa they’ve had the BEE legislation that’s come through various versions and at times questionable as to how successful it's been in achieving the stated goals, but we didn't have any of that.

Now I understand there is some draft regulations coming through along line and I've seen more and more push from government to say ‘we've got this hundred percent foreign-owned businesses, you should allow some Namibian shareholding in those parts of the economy’ and I agree with that, because with such a quality young country you've got a large part of the economy being owned and controlled outside of the country, so I do believe there's a role for the exchange in diversifying shareholding in businesses already operating in Namibia.

Together with that it also brings corporate governance angle into it, where a foreign subsidiary doesn't necessarily apply governance structures the way they should be locally.

That's obviously when you see transfer pricing happening and funds being funneled out of the country through various structures.

If you had an independent board with Namibians on that board, then obviously you've had some Namibian views in all the companies being run.

So last year the NSX, together with the Institute of Directors in Southern Africa (IoDSA), published the Cooperate Governance Code of Namibia, the NamCode, so that took into account not only international best governance practices but it actually amended the current best governance practice documents for South Africa which is King III.

King III contains some South African legislation references and some of our legacy legislation that doesn't go into a lot of detail, on things such as fiduciary duties of directors, so we had to write that in.

The Namcode is now a listing requirement for listed companies on an “apply or explain basis” and more and more I'm seeing that other institutions, everything from pension fund trustees to private companies to close corporations are starting to apply that as well.

So that is a big step forward because when an investor looks at a market, he wants to see best practice in terms of corporate government and also a local document that is in line with legislation.

It gives confidence as well...

Absolutely, investors are very specific on corporate governance and how it should be applied. So that's one of the things we've done to elevate our market.

Now, on the other end of that spectrum there’s basic infrastructure in markets that is still lacking in Namibia.

We've got an electronic trading platform and the dual listed stock inside South Africa go and settle in straight which is the Central Securities Depository (CSD) inside SouthAfrica, that is in STRATE.

Local stocks are still on paper, on a share certificate.

Government bonds are also still on paper, and trading over the counter. So you can't grow a market that way, so the CSD in Namibia has been under discussion for years and we are actually making very good progress now.

So we are at the point of evaluating proposals, we are drafting a regulatory framework as well.

Can we touch on more of the history of NSX and how it became what it is today?

Yes, it started during the diamond rush, as in many other countries. New frontier markets require a market place.

However after the diamond rush it closed down and an actual working stock exchange is really only post independence, that's why we have founder members, that's all local businesses that pooled funds to start an exchange, because of their belief that Namibia should have its own exchange.

Can you tell me now what the exchange represents today and its importance for the future of Namibia?

Realistically the exchange should be the central point for investment coming into the country, and that's part of what we are creating.

After we have launched up the CSD, we can formalize the bond market; we can get foreign investors to actually invest into that market, which they cannot do in the current paper environment.

The local companies have been able to raise money, the stocks trade well, the electronic trading system works, there's nothing wrong with the papers, we simply need to elevate the whole system to international levels if we want real direct foreign investment.

So, if you've got the infrastructure building blocks in place you can really create the proper market, and then you can bring everything together because the bonds are listed but they are trading OTC so you need to put some rules in place to actually get the information of all the trades going through.

Thereafter you can create a proper yield curve and build the bond market, which is currently impossible because the information isn’t available.

So yes, having waited so long we can actually leapfrog straight to best practice and the costing is a fraction of what it was ten years ago.

It is clear that more Namibian companies need to come to the market and expand their shareholding base if the liquidity problem is to be addressed, so what’s the strategy behind encouraging more companies to come to the market and what’s the strategy to do so?

First of all, talking to some of these family businesses that have a historic business model that they don’t see the point in changing, we had Bank Windhoek listing almost two years ago.

They raised almost 400 million Namibian dollar in the process to capitalize the bank and the share price started at NAD8,75 Namibian and it is trading at NAD15,5 Namibian now.

That’s with dividends being declared in between. There is no better way to unlock the value in your business and this type of example is what we need to bring across to more potential listings.

What we’re starting to see is that there are various of these business where the primary driver of the business is getting to the point where he wants to retire or exit the business, his kids aren’t necessarily interest in taking over the business, etc, etc and for us to show them that this is a very good way to actually find an exit, not to sell off your whole business but to take it to market and start passing over some of the responsibility by having an independent board, more management control instead of owner control.

So it’s an education process first and foremost and it’s also breaking down some pre-conceived notions that aren’t necessarily true: people think that the process of becoming a listed company is extremely complicated and more hassle than good, however we are slowly starting to see this change.

So it’s engaging with the market and it’s not only the exchange but it’s actually the sponsors, who are there to assist companies in coming to market.

So is it a question of people underestimating the process and the value of it?

They are overestimating the process thinking it’s more difficult than it is and underestimating the value that gets created out of going public.

But now with this more and more discussion about diversification of the shareholding base not only on the BEE side but generally the non-banking financial services regulator has actually said it’s time to Namibianise some of these companies.

If you’ve got these big multinationals that come and open an office/company and employ people, but never open any form of shareholding then it’s just a subsidiary operating in the country. And our economy is full of them.

I was interested in knowing what you think about the local companies in Namibia which operate more or less with majority of shareholding of the government... is that an angle that could be supported for them being listed?

Absolutely. Some of the parastatals are there for strategic importance and they will not necessarily give a cash positive business balance.

That’s when government has to provide that service if the private sector says that it cannot provide that service.

If I look at how MTC started off it was at a time when mobile telecommunications was coming to the world and none of the mobile operators were willing to come and start an operation in Namibia, because population was too small and the country was too big.

So government stepped in and filled the gap. That’s brilliant, they’ve done a really good job, they found a strategic partner that started the company and then they gave us mobile telephony, that’s brilliant.

But, subsequently, that profile’s changed, they went through various interactions with different strategic partners, a second mobile operator started operating in Namibia, which was eventually sold to Telecom Namibia which is also 100% government owned.

So now both operators are owned by Government. That’s clearly not ideal. But the point is something like MTC would be great to list, if you look at the example of Safaricom in Kenya, government owned and listed the companies that gave preference to the actual clients to buy shares and was an amazing exercise, that got hundreds of thousands of shareholders and that introduced a lot of people to the stock market.

Those people then held on to the shares, made a lot of money out of it and could reinvest and they grew their economy in the process, so there’s massive benefits that could be derived from the parastatals for the market, government as well as the public, but that’s a mindset shift.

Especially the 100% government owned ones because people see it as selling off government assets and that’s actually not what it is, if you look at a company that you want to bring to market they only require 20% free float, so you can still own any percentage of the company.

If we look at what just happened in South Africa, their government has been under a cash squeeze now with all the issues of the Eskom, the first thing they could do where the parastatals that were listed, that could very quickly and easily sell off the stakes they had in those companies and raise the money.

They sold all the stakes in Vodacom for a couple of billion. And they didn’t have to go and list a company first so my message in that sense is ‘take the company and list it’, run it on business practice and governance hopefully it will bring the best out of the company in the process and then, if you decide to sell it then you have the option.

So I see it more as a preparatory step and then when you’re in a position when you no longer need to provide a service for a strategic reason, then you shouldn’t be holding on to it.

If you’re looking at the complicated last three, four, five years... How well is the exchange placed to weather storms in the future?

In reference to the financial crash of 2008 if you to look at the banks that are listed, they wouldn’t have had a massive blow because of what happened internationally, because the funding wasn’t coming from offshore and the local market was pretty much going ahead as it was.

We felt an impact on mining, because of the commodity prices that took a knock, we’re still feeling that. If you look at Uranium mines for example there are a high number of potential mines however we only have three active, why?

Because the uranium price went down after Fukushima from $120 to $55, and most of those mines have a survival price of approx. $80. So there’s potential, but that’s outside of our control.

If you look at the tourism sector, I don’t think there was a huge drop in tourism despite how bad it went in other parts of the world.

So I think we were very lucky, but the next crisis is always around the corner and that could be in a sector that hits us directly.

I think there are quite a few countries in Africa that were shielded, by not having an exposure into the toxic debt and the crisis that came out of that.

The lack of international exposure in some respects as well…

Exactly. And our pension funds are very conservative, they didn’t go and invest into some of the black box structured derivative products and everything else that intensified the crash.

In that sense, being a conservative mindset in investing has probably saved us a lot of money in our pension funds.

Another question is the issue of the parity to the rand. A lot of people are saying that it’s not sustainable in the long term, that it’s expensive to Namibia, many question it… What’s your view?

If you look regionally, our economy is very small to carry a currency. Botswana has a strong currency because they’ve got such a massive revenue flow coming from the diamond industry, which is almost secured income, which gives them sufficient foreign reserves and capital reserves to sustain that currency.

If we had to carry our own currency, I suspect it would be easy to manipulate, the rand has been manipulated historically, can you imagine what they could do with the Namibia dollar?

I mean there’s a history of currencies being manipulated in that sense, and unfortunately because once again, we’re a small economy, and any bad news that comes out would have a negative effect on the currency.

But the truth of it is that if you look at the rest of Africa when there’s real good news coming out the currency doesn’t necessarily strengthen much.

So, it’s a slippery slope. Now looking at the rand, unfortunately that seems to be a slippery slope as well mostly, so I expect we’ve got sufficient reserves to keep the parity going.

My personal view is that if we carry our own currency I think it could be very volatile, and that type of volatility is actually quite bad for our economy because we are importing so much and generally for investors to invest they require a stable or at least predictable currency..

So it’s a question of being better with the devil you know…

Probably. I think that the risks that go with carrying our own currency probably exceed the devil we know.

Specifically looking at the Namibian Stock Exchange, where do you see the major challenges?

I think we’ve identified the challenges quite clearly in terms of these infrastructure points being missing, so by implementing the CSD and then formalizing the bond market, we are addressing the major challenges that we can see, because what’s going to happen now is those foreign investors that are already investing in government bonds, through the issue into the Euro bond as well as the two tranches of bonds that Government issued on the Johannesburg Stock Exchange (JSE).

There’s a lot of interest from those holders that they’d like to buy more, so the answer is simply to make our current securities available for them to buy in the format they require it in.

So I think things have been growing slowly in terms of Namibia being on the investors’ map, but through those issuances that government has done and our credit rating having been stable for quite some time now.

We’re in a good position. Let me explain why I am so positive: if you’re an international investor looking to invest in Africa – which all the international investors are supposedly doing- you take Africa as a whole.

Your first step is you cross out the countries that are politically and or economically unstable, so there’s a half of Africa that just got crossed out off that list, from an investor’s perspective that’s true.

So now you start looking at the currencies in the biggest markets, that’s probably what you’re going to analyze next, so you’re looking at Nigeria, Kenya and South Africa.

And would Egypt make it into that…?

Probably as well. Egypt was also off the ride a bit when things were unstable, but things are going well. Actually I know some of the people at the exchange and things are actually going really well, so include them in that, that’s fine.

So if you’re comfortable with the currency, then you are starting to look at actual investments, and that once again we are in a lucky position because we’re pegged to the rand because all of a sudden we wouldn’t make the list of the big economies that the investors would focus time on analyzing.

But now that they are already comfortable with currency risk on the Rand, now they can look at Namibia in the same breath and that’s definitely helped us from the interest perspective.

And now they start looking at more of the technical dynamics of the market and they say “this is a paper-based by system, we can’t do that” so we fix that, then they can play.

So this is serious potential in terms of growing this market and doing more.

We met with the Minister of Finance Mr. Schlettwein last week; he mentioned the focus needs to be now on the development of value addition across sectors, and as an example, he mentioned how, on the fishing industry, you don’t build engines and boats, you don’t have an industry which builds fishing nets, food packaging, ready meal markets to export, etc. so do you agree with that and where would you specifically like to put a focus on?

Of course he is right, the beneficiation and the manufacturing side of our economy need to grow. The unfortunate truth is some of the products don’t really allow for that.

If we look at breeding cattle and mining uranium, I am not sure what beneficiation really gets added in the place of origin?

So yes, I’m sure that there is a scope for that in various sectors. I believe tourism can grow a lot and more services can be delivered from Namibia.

So improving the sectors you’ve got, like tourism, focusing on customer service and developing the sector, trying to stay with your niche.

I’m sure in some of these sectors there’s been improvements that have been done and we should continue to encourage that, absolutely.

I believe we can also leverage off our location and if look at some of the projects like the harbor expansion this is clearly where an opportunity lies.

Our market is very small so it’s difficult to put up manufacturing sectors with big factories just to supply our own market.

That’s always going to be tough, so I agree with what he would like to see, I think it’s not that easy in all of the sectors.

Where would you highlight the alternative sectors, exciting sectors, which you think could be developed from the point of view of investment?

Our financial sector is highly developed already. There’s always room for growth in terms of new services and products.

The tourism side is growing at a fast pace and I’m sure the things that we can do to grow that side of it, specifically the international tourists coming in.

Over the last couple of years we’ve seen these five-star lodge resorts being built and being run successfully, and these tourism groups being created, then tying up with similar places in Botswana and South Africa and creating this regional  trips for international tourist.

Obviously there’s a lot of scope in that, and that’s where regional integration comes in as well when you are trying to make your ease of going cross border and doing this kind of trips more and more.

I think there’s certainly huge scope in that, and that industry as it grows creates employment and that’s a big driver.

Is developing a logistics hub likely to have a long-term benefit for Namibia? And what’s the local effect for the country’s neighbors, as well?

Our location has benefits we can certainly use to our advantage. Looking at the harbor expansion in Walvis Bay, we become an alternative to South Africa and if we are more accessible than they are, and that does not only go for the port itself, it actually goes for transport cross country as well, then you’re getting to a position where you can benefit from that, and the port expansion is just the first step into that: if you have rail infrastructure and road infrastructure that supports that; because in other countries there are problems infrastructure and transport.

That in itself is one of the big infrastructure projects that we need to complete. And that’s once again where the exchange plays a role.

We’ve just had the IFC bond program approved for Namibia. So they can issue bonds on the NSX for Namibian projects based on their balance sheet instead of government having to issue guarantees for every project, that’s a huge difference.

And the IFC hasn’t been doing this in lots of African countries and once again it goes to our credit rating and stability, that’s they are willing to look at doing it for these big infrastructure projects in the country.

And that’s a way to mobilize captive capital, to do something good for the country again. So that’s one example of where exchange would play a role.

Some of these projects can probably stand on their own two feet in terms of having ring fenced cash flow and then needs to be packaged properly so you could list that as well.

So the exchange needs to be the focal point in terms of where investors come to find an investable asset and where projects should be able to come to find funding.