Beyond the economic siege

ON 12 March 1933, Franklin Roosevelt said of The Great Depression, “After all there is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people. Confidence and courage are the essentials of success in carrying out our plan.

You people must have faith; you must not be stampeded by rumours or guesses. Let us unite in banishing fear.” Roosevelt’s words are being echoed today.

At a recent symposium on the credit crisis, Robert Bruner, from the University of Virginia’s School of Business, said, “The lack of transparency is the core issue, and when you bundle that with the high degree of leverage, which reduces the flexibility that individuals and firms and whole markets might enjoy, you have the tinder for an amazing bonfire, a big problem.”

The roots of the financial crisis lie in a formula known as the ‘Gaussian Copula Function’, an extremely advanced equation for correlating risks across variables. The equation was rapidly adopted across major markets, and its allure led to huge capital inflows into those markets. However, appropriate use of the Copula Function was misinterpreted and bonds returned results that fell far short of the promise.

Huge amounts of money were lost and, in the absence of clarity on risk, the markets were thrown into panic. What is clear is that managers had difficulty understanding the workings of their chosen financial instruments and investments, and when the gaps in returns started to become chasms, they did not hear, heed or understand the early warnings.

As a result, calls began to emerge for greater levels of supervision as well as a simplification of the financial system. On a practical level this boils down to two core elements of governance: accountability and transparency. Both of these were lacking in varying degrees. In the absence of mechanisms contained in the IFRS method of reporting, amongst others, there was no pressing requirement to accurately quantify the real value of holdings.

And given the extremely complex nature of the assessment of risk, and the complex interplay of collateralised debt across extremely diverse markets to produce unrealistic leverage, managers were not able to understand the real returns on their investments.

The trends towards accountability and transparency which, now more than ever, will incorporate understanding of the nature of the investment are at the root of mitigating against future crises. These trends may also have a positive impact on FDI in Namibia.

In Namibia, we currently see an approach which is symptomatic of the first part of the crisis. Immediate and justifiable concerns include the downturn in demand for diamonds, the fall of copper prices, concerns about employment, and the impact of the crisis on donor-funding and FDI in Africa.

Obviously the debate on whether or not these factors will constitute a local recession needs to be augmented with a renewed, practical focus on job creation, using Namibian financial resources, which can conceivably be far less sensitive to international circumstance. The second and third stages of crisis process, recovery and development of future resilience, now need to be factored into the road ahead.

Taking into account the trends towards accountability and transparency, Namibia offers sound prospects as a destination for bottom-line capital preservation, sustainable returns and top-ofline growth through capital assets, strategies which are currently in demand and which will become more popular in the years which are to follow.

This is supported by current developments, locally and regionally. Locally, we see multi billion dollar investments in uranium mining, infrastructure to support that mining, and manufacturing for the construction industry, in the form of Ohorongo. We also see significant multi billion and million dollar investments in food production and hospitality. Although copper and diamonds are presently not highly profitable, they will be profitable in the long term.

They are now best described as growth opportunities, which they always were in the first place. Regionally, multinational projects such as the Grand Inga project to generate power from the Congo River, and other infrastructure required for regionalisation, point to exceptional opportunities, in which Namibia will be a key player, and from which Namibian investments will benefit, particularly given its key location on trade routes with the region.

Amidst all the doom and gloom globally, Namibia has reasonable cause for optimism and confidence in the future. Therefore, let’s gather courage and take bold steps in taking advantage of the opportunities in front of us. Prospects for Namibia and the region point to a quick study in accountability: the destination is profitable and stable, but in the long term.

The nature of a capital asset as an investment provides for a high degree of transparency: real productivity, through asset formation, is tangible, unlike derivatives. The transparency of a holding in Namibia is also matched by extremely transparent, and supportive, local legislative and regulatory environments.

Although these considerations are not new, the circumstances are. Trends towards accountability and transparency are platforms for real growth upon which Namibia can build. However, the recovery has begun and the window of opportunity is brief, before global capital finds a home in all too familiar settings.

David Nuyoma

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