“Ever since the Rand’s nose-dive there have been questions and queries as to why our Namibian Dollar should remain linked to the Rand, especially as it seems to pull us down as well.” So says Namene Kalili, Senior Manager Research and Development at the FNB Group. “De-linking a currency, however, is much easier said than done and entails numerous considerations.”
Kalili explained that the Rand, to which the Namibian dollar is pegged has depreciated following the dramatic policy mistakes in South Africa. He advised, that before anyone becomes overly concerned, we should also remember that the dollar has appreciated against most currencies across the globe and the rand is not its only victim. “Essentially the depreciation will pass through in the form of higher prices for certain consumer goods such as consumer electronics and vehicles.”
FNB Namibia has therefore increased their inflation expectations to 5.8% in 2016 and rising to 6.1% in 2017. Kalili: “We expect faster interest rate hikes this year to contain inflation below 6% and reduce aggregate demand. It is possible for Namibia to delink from the Rand, but I do not believe it will be in our best interest. Reason being, persistent dollar strength is likely to depreciate the value of the free float Namibian dollar. Current fundamentals suggest that the Rand is undervalued and is therefore likely to recover from 2017 onwards (see graph below).”
He adds that currencies are determined by a host of fundamentals and market sentiments. Given Namibia’s limited FX reserves, a free float Namibia dollar is likely to be more volatile than the Rand. Event risks such as drought, energy fiasco or struggle kids unrest, would in all likelihood weigh down on the free float currency, leading to more depreciation.
Kalili went on to say that launching a new currency is a long term project, whereby countries need to show the global community that they are able to manage interest rates, inflation rates, balance of payments, government expenditure and economic growth, amongst other things. “Then the country must have adequate reserves to back the currency in circulation. Where our money gets printed and determinants of money supply become important considerations. We also need to consider our trade partners. Trade between Namibia and South Africa, our biggest trading partner, would become more complex as foreign currency translation now enters into the equation. Therefore, this is not a decision to be taken lightly and has to be taken with a long term view.”
Kalili concludes by saying that that he felt Namibia was better off under a linked currency regime. “We do not have the market size to influence the price for our currency, neither do we have the human capital to manage a free float currency.”
He encouragingly stated: “The Rand will recover, it’s only a matter of when, as the fundamentals point to an undervalued Rand. So as traders take advantage of the price advantage, the Rand will appreciate and normalize. Furthermore, markets have now factored in the Zuma effect into Rand pricing and as soon as his term runs out, the currency should normalize.”